Tag Archives: Michael Porter

A light sprinkling of vertical strategy

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Think of a law firm in the top fifty in the UK or US. Got one? Ok. Now think about how they go to market. I’m going to guess their market strategy. Think really hard. Visualise their website. Hold, on. I’ve nearly got. Think a bit harder……. They’re vertically focussed, right? Right!

The vertical strategy contained a handful of technology, some property, a bit of pharma and of course plenty of financial services

These days pretty much every large law firm has a vertical market strategy. Ten years ago, it would have all been about the practice areas – who has the biggest and best litigation practice. Now, it’s all about the sectors.

And let’s be clear, there are great reasons for doing this. Back once again to our old friend Michael Porter and his great book Competitive Strategy (see last week’s post for more detail on this). One of the strategies set out in the book is for organisations to focus on a narrower section of the entire market, rather than address the market as a whole.

So law firms often segment the market (i.e. narrow it down) for legal services in a number of ways – for example, firstly they may make a distinction between consumers and business clients, then perhaps a particular size of organisation (for example large listed organisations or small owner managed businesses) they wish to act for, and then maybe geography (a particular country or City).

In reality, many of these decisions may be made without much conscious thought – a very small firm may not have the resources to undertake a particular type of work, or have the resources to serve clients outside its immediate “catchment area”.

However, the chances are, a firm will often still find itself with plenty of competitors, and will see the need to differentiate itself further. It can be difficult to demonstrate that its skill in a particular work type is higher than a rival firm, so thoughts frequently turn to a sector focus – “if we can show our clients and prospective clients that we know more about their industry than firm X, then that will put us in a much stronger position”.

At its most basic, I think this is sound reasoning – a vertical focus is not the only way to differentiate, but if done well it can provide the client real benefit.

Now often the initial vertical segmentation is driven by the make up of the existing client base, rather than market opportunity. Perhaps the firm already acts (because of reasons lost in the mysteries of time) for three airlines, and so decides to position itself as a travel sector specialist.

This approach certainly has benefits, particularly if the existing clients are well known brands and are referenceable. The firm will undoubtedly have to deal with conflict and competitive issues amongst clients, but once established as a genuine industry specialist, the benefits undoubtedly outweigh these type of challenges.

Another, perhaps more scientific way of approaching verticalisation is to assess the fit between the firm’s resources and the market opportunities. For example, which industries have the greatest need for the firm’s core skills (be they compliance work, complex litigation, volume property work etc.)? Of these sectors, what are market growth rates? Which are the most competitive in terms of legal service provision? What are the upcoming triggers in the industry for legal work?

However the firm gets to a vertical strategy, my challenge is to ask how deep the specialisation really is.

How much industry expertise do you have? Really?

One observation that I’d make, both from my experience in law firms and as corporate counsel, is that there are some firms whose vertical strategy only runs skin deep.

To me, if you are a firm that focuses on the technology sector, all the lawyers in that sector group should have a genuine understanding of (and even better, a real interest in!) that sector.

The reality is often a little different.

It’s often only the lawyers whose practice is most relevant to that industry that really understand the sector issues. So for example, staying with the technology example, it’s the IT lawyers who know what’s going on in the sector, and perhaps in the travel sector it’s the aviation lawyers who have their fingers on the pulse.

But what about property lawyers who are supposed to know about the media sector? Litigators in the financial services sector? I.P lawyers in the property sector?

Often the insight, the passion is just not there.

Scratch the surface, and all the expertise that’s trumpeted on the website and in the collateral dissolves. The sector focus is just pretty wrapping paper on the same old firm.

There are often plenty of reasons for this too. Perhaps rather than being recruited to work into a particular practice area, the fee earners have been shoe-horned into a sector group (“ok, you need to join a sector group, which one will it be?” or “Right, we need two property lawyers to join the financial services sector group”).

Alternatively, maybe the firm still remains structured internally around practice areas, so lawyers identify more strongly with their colleagues in those teams, than with clients in a particular sector. Financial metrics, reporting lines and performance management may also remain driven by practice areas, and so encourage behaviours which are inconsistent with the sector strategy.

Whatever the reason, a client looking for genuine sector expertise won’t be fooled for long.

But don’t get me wrong, some firms do get it right.

I try to avoid mentioning places I’d worked in the blog, but the UK firm  Olswang really did implement the sector strategy very well. And to give the article some balance, I was chatting with the Financial Services lead at Bird & Bird last week, and while he was a trained technology and outsourcing lawyer, he really impressed me with his knowledge of the F.S. industry, his contacts and what was going on in the market.

So what can firms do if they want to go beyond a skin-deep vertical focus? Investing time (yes, non-chargeable) with clients is a great place to start, because they are the ones that will really understand their industry. Actively working with/in trade associations works, trade publications should be required reading, and vertical training (even better if clients will come in and run sessions) can make a huge difference.

One big question the firm needs to answer is what they will do with clients and prospects that are not in their chosen sectors.

Will the firm continue to service and grow this mix of “miscellaneous” business, or will it begin to act only for clients in its area of sector expertise? In the current climate I suspect more firms will choose the former, although arguably the latter will give a sharper edge to the focus.

Perhaps a half-way house is to draw a distinction between reactive and proactive pursuit of business.

So, to finish, have a think about your market strategy. Are you vertically focussed? If so, how deep does the strategy run? Could it be deeper? Are the sectors the right ones? Look at your competitors websites and collateral – are they the same sectors?

And if you are vertical to the core, give yourself a pat on the back.

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Can your clients say goodbye?

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Regular visitors to this blog will know I’m a big fan of Michael Porter’s work, and have a genuine belief that all business people should read his two books (Competitive Strategy and Competitive Advantage). Competitive Strategy provides a framework for analysing industries, and helps the reader think about how attractive their marketplace is.

Wisto & Partners' client wanted to make sure the message was fully understood

One of the determinents of this attractiveness, are the presence (or absence) of “barriers to entry”.

If a market is particularly profitable, the high profits will attract new entrants who will join that industry and increase the competitive intensity of the market (ringing alarm bells any UK lawyers?!). This ultimately reduces profitability across the industry. Barriers to entry are factors that stop these new entrants, or at least make it more difficult for them.

One of the most obvious barriers to entry, is of course regulation. The legal profession has benefitted from this in most countries for many years, and only now as the cold wind of deregulation blows through town, do we see this barrier to entry crumbling.

However, this isn’t the barrier to entry I want to consider  today.

Rather, let’s spend some time thinking about “switching costs”  – essentially these are one-off costs that a buyer (i.e. law firm client) faces when switching from one supplier’s product or services to another’s.

Now on the face of it, the concept might seem  more relevant to industries other than legal services – for example if you were switching your CRM (customer relationship management) software from Oracle to Microsoft. There you might have data migration costs, systems integration challenges, and user training issues.

However, it was another book, Information Rules by Shapiro, that got me thinking about how the concept of switching costs could apply to legal services.

The situation I want to investigate is not whether or not a client wants to stop using a particular law firm or not (see some of my previous posts on client relationships or quality for factors that might influence THAT decision), but if they do make the decision to say goodbye, how hard is it for them to actually make the switch.

At the lower end of the spectrum, where the relationship between clients and law firm is pretty transactional, there are very few switching costs. The client takes their business elsewhere (probably not even telling the previous law firm), gets the minor hassle of identifying a new firm, making contact, and then after engagement letters and anti-money laundering checks are complete, they are up and running.

Another fairly unsophisticated, but surprisingly effective tool at the lower end of the spectrum, is the classic smaller firm technique of being named as the registered office of a company (possibly supported by company secretarial activities). Not a major block to an advisor move, but certainly another layer of inconvenience. There are plenty of similar examples for consumer based law firms (for example, retaining a copy of the client’s will).

Moving up a level, where the relationship with a corporate client covers multiple services, and includes a large degree of interaction, this can definitely make a move more difficult, particularly if both the legal team and business people (for example the HR vice president) at the company instruct the firm.

It might be that this type of broad relationship benefits not just the law firm, but also the client, in that the larger volume of work underpins significant price discounts. Subsequently trying to move one work type to a new firm could put those enterprise-wide discounts at risk. These broad relationships provide even stronger ties (higher switching costs) if the relationship is multi-jurisdictional.

Many firms try to achieve this type of model, but a much smaller proportion really do it effectively, frequently lamenting their failure to cross-sell and up-sell. Perhaps the notoriously protective attitude of many partners to their clients (and the firm cultures that support these attitudes) contribute to this, or maybe it’s the siloed nature of many larger firms that makes providing a truly integrated services to clients challenging, but either way, experience suggests it’s not as easy as it should be.

The other large switching cost that might cause a client to think twice about a move, is the depth (as opposed to the breadth) of the relationship with the law firm.

If the firm has made a large investment in understanding the client, this can be difficult for a new supplier to replicate. Here I’m not just talking about understanding the way in which the client works, but also things like their commercial models, their decision making process (formal and informal), the personalities involved, their history, their competitors and their products.

If this is done well (and both in private practice and in-house, I have seen firms do this VERY well), then this is a benefit which should be carefully weighed up before a relationship is terminated – it’s not the type of information that a new firm could harvest in an “investment in a new relationship” (such as spending two days on-site with the client, notionally free of charge).

Another area of potential switching costs can arise from technology and documentation ties. If a law firm provides a useful extranet for a client, or hosts a large number of important documents (having perhaps scanned and indexed them for the client), then a move may put these benefits at risk. Greater technical integration (such as access to time recording systems, maintained and automated precedent banks) offers clients higher benefits but may also increase switching costs.

So in my view, switching costs are alive and well in the legal profession, even if they are not recognised as such. With one critical barrier to entry being swept away in the UK with the full implementation of the Legal Services Act, it’s maybe time for law firms to look at the concept of switching costs a little more closely.

The one caveat I’d say, is that often creating switching costs requires an investment by a law firm. To know whether that investment makes sense, the firm really needs an understanding of the likely return from that client, and the concept of “lifetime customer value” is not often applied in the legal profession, but that’s a topic for another post….

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