Strategy 101
Neil May, executive manager at Hogan Lovells, demystifies the process of creating a firmwide strategy
Many law firms are faced with the challenge of making strategic choices in an uncertain world. When making a critical business decision, what you should do will in part depend upon how you ascribe value to what you do and your firm’s purpose or mission. This is a good place to start when thinking about firm strategy.
Google sees its purpose as being to organise the world’s information and make it universally accessible and useful. GlaxoSmithKline says it is in business to improve the quality of human life by enabling people to do more, feel better and live longer.
Many mission statements, alas, are corporate waffle, failing to provide any cohesion, sense of common meaning or, fundamentally, be energising. A mission statement should represent the best within you, include your contribution to the world and inspire those working with you – it is not there to impress anyone else.
After establishing your mission, you should move on to your vision, which should express what you want to be and what you want to achieve. Your values should state what you believe in and how you will behave.
Values are true only to the extent that you are willing to take action against behaviours that are counter to what you espouse. Living up to your values and dealing with big billers who may be less perfect in other ways can be a challenge.
Strategy is simply a grown-up word for ‘how’: how are we going to get there? This should lead to some kind of plan, which should focus on those key actions that will make the most difference – it should avoid becoming a huge wish list.
So, taken together, it should be clear what your firm is seeking to do, what businesses and areas you want to be in, the basis on which you will compete, your desired scale and profile, how you need to be structured to do this and how you need to behave in order to succeed.
Achieving alignment
In high-performing organisations, all of these aspects tend to be tightly aligned, with a small number of clearly identified criteria against which progress can be monitored.
There is some danger that excessive alignment can lead organisations to become systemically so interconnected that change is difficult, and so responding to a changing environment could be a challenge. However, that is far less of a problem for most law firms.
There are various ways of measuring alignment, one good one being McKinsey’s 7s framework. This includes strategy, structure and systems (which tend to be easier to define and be influenced by management) and staff, skills, style and shared values (which are more cultural and therefore more tricky).
Applying the model to its creator, we can say McKinsey’s strategy focuses on board-level and high-impact issues. As a result, the structure incorporates:
- functional, geographic and client teams;
- systems focused upon contributions to clients and intellectual capital;
- skills which include high levels of analytical and technical competency;
- staffing which has heavy on-the-job coaching founded upon highly selective recruitment and an up-or-out approach (including ‘out’ into future clients); and
- a style which is team orientated with absolute, rigorous one-firm commitment.
The whole is aligned with the organisation’s mission, which is to help clients to make distinctive, lasting and substantial improvements to their performance and to build a firm that is able to attract, develop, excite and retain exceptional people. Is it any surprise that it is successful?
Competitive strategy
Harvard Business School’s Michael Porter proposed 30 years ago that the structure of an industry determines the nature of competition and average firm profitability. However, with the right strategy, an organisation could obtain good profits even if overall industry profits are poor.
Given that the legal industry is undergoing significant change and that there are once again proponents for splitting auditing from other non-audit services, industry issues are topical.
But while a structure-conduct-performance model suggests supply and demand determine the structure of markets, which in turn determines the resulting competitive conditions and hence performance, it doesn’t really get us much further forward in terms of why some companies do better than others. Some of the most important stuff remains hidden inside the ‘black box’.
For modern firms, strategy can be thought of as a systematic approach to creating competitive advantage that is sustainable in the long term. It is about making choices – both with regards to what you will do and what you will not do. There are three key aspects of this:
- the context in which the strategy takes place;
- the content of the strategy itself; and
- the process of strategic change (the implementation).
Assessing where you are now requires an analysis of the business and economic environment, of sector and competitor trends, client trends and business profiles and performance in order to identify the big themes to which you need to respond. You probably know these, but it helps to make them explicit and explore the extent to which you all agree. Who are your key clients, what are the key services you can provide and which segments of the market are the best to focus upon?
In identifying where you want to go, you will need to consider both your vision and the market opportunities. Since predicting the future is uncertain (even Kenneth Galbraith said the only function of economic forecasting was to make astrology look respectable), it may be useful to consider a range of futures or scenarios.
The concept of scenario planning was developed most notably by Shell in the 1970s when it set out to consider what might happen with different prices of oil. When the oil crisis led prices to rise rapidly, Shell was able to respond and to profit in a way its competitors were not because it had already thought about and debated how that future might play out.
This logically brings you to how to get there, or how to identify ways to close the gap between where are you now and where you want to be. Which aspects are critical to your success, what are the external and internal barriers you must overcome, and what are your competitors likely to do? This is your strategy.
A dangerous strategy for companies that do not really know what to do is to seek greater size by mergers. This can lead to unfocused diversification: you become bigger, but not better.
Instead, you should focus on those areas in which you have a competitive advantage. As Philip Kotler said, “your company does not belong in markets where it cannot be the best”.
Alas, real life may not be so simple. If you are to obtain competitive advantage it is likely that you will have to challenge the way things are done, including behaviours, and significant shifts are not easy to achieve.
Differentiation, such as through quality or superior client service, requires an unfailing focus and level of commitment to become real and then requires the client to conclude that you stand out markedly compared to your rivals.
In Simply Better, Patrick Barwise and Sean Meehan proposed that clients rarely buy because what you offer is truly unique, but rather because it is a little better or a little more convenient.
If a buyer can’t perceive any material difference, he will simply buy the cheapest or the first one that comes to mind. This suggests that improving mere ‘hygiene factors’ – such as those myriad touchpoints with clients that affect overall client service – can have a significant benefit.
Barwise and Meehan said that the level of performance on the basics can vary enough between competitors to dominate all other sources of differentiation. A heretical thought, but could unique selling propositions be mythological?
In a similar vein, Jim Collins and Jerry Porras in Built to Last suggested that success comes from enduring values that form the basis of innovation and execution year after year and is rarely due to the creation of a revolutionary new product.
Implementation challenges
Having analysed where you are, decided where you want to get to and identified what you need to do, we arrive at the vexing issue of implementation. Professional service firms are not alone in struggling with this issue.
In one survey of Times 1,000 companies, 80 per cent of directors said they had the right strategies but only 14 per cent thought they were implementing them well. One reason is probably that talking a lot is often mistaken for doing a lot.
In addition, sometimes short-term results make a longer-term focus hard. This is a familiar cry about quoted companies being driven too much by quarterly results. But we should also recognise that, in partnerships, remuneration tends to reflect shorter-term contributions and, if current compensation is not reasonably in line with the market, you suffer the risk of losing people.
Another reason may be that planning processes can sap energy and the only action that results is to put the plan in a folder, put the folder on a shelf and get back to work.
Some would argue that, if you are getting better business, increasing client satisfaction, increasing productivity and building skills, then you have all the strategy you need and, if you are not doing these, what are you wasting your time on? This rather ignores where you want to get to in a changing world and assumes you are fundamentally better now than you were a few years ago.
The metaphor of the boiled frog (that if put in a hot environment it reacts instantly and jumps out, but if the environment gradually gets hotter it does not perceive the danger and is cooked to death) highlights strategic drift. This underlies much crisis management, where the environment changes more rapidly than an organisation and a tipping point is eventually reached requiring radical (and generally painful) action if it is to survive. Sometimes it is only when organisations have a burning platform that they are able to overcome organisational inertia and the pain of change.
Planning horizon
How long should your planning horizon be? This varies in industries, but there is little doubt that the world we face now is different to that of five years ago.
Your strategy therefore needs to set the direction and key steps. But remember that the plan is supposed to be your servant and not your master: it is not set in stone. If the future has become more discontinuous, then planning should reflect that.
There is undoubtedly a need to undertake forward planning and yet, conversely, there is also a need to keep the benefits of collegiate entrepreneurship. This reinforces the need for plans to have a limited number of critical tasks – life will fill up the remaining space quite easily.
As Stephen Covey eloquently puts it, the main thing is to keep the main thing the main thing: anything less than a conscious commitment to the most important is an unconscious commitment to the unimportant.
Tom Peters advises that instead of planning, planning and planning, find projects that people will put their hearts and souls into. And, why would you want people working for the firm who don’t want to be remembered by what they’re doing right now?
People first
Finally, remember that strategy is created by people and it is delivered by people, not by committees.
When I was doing my MBA, our strategy professor brought in a board member of a major drinks company. He talked about their plans to expand a product in Europe, gave us some basic data and set us off in teams to recommend what to do. We applied the tools and frameworks we had been learning and came back with our recommendations.
“Very interesting,” the speaker said. “I went for Spain.”
Spain? We all looked at our analysis: it didn’t look like the leading contender to any of us, so what had we missed?
“I knew a guy there I trusted greatly and if he could get it to work in a market like that then we could get it to work anywhere,” he said.
It was a well set-up lesson for the class.
Perhaps as Tom Peters says, leaders don’t create followers: real leaders create energised, autonomous leaders throughout the organisation. And engagement with what you are trying to build is surely the key to success.
neil.may@hoganlovells.com