Take it from here

If the future of Scottish law firms is to be shaken up with new market entrants, partners and principals need to prepare their businesses to succeed in a different market place. The first article focused on how to measure value so that the owners of the business can be confident that their investment is creating wealth for them. However, deciding on the required financial return does not build a business strategy. The return is the product of implementing a good business strategy well. In this article I will look at the tools and techniques available to begin building a business strategy. Identifying a suitable strategy is the first step in growing a profitable business with the financial returns that create wealth for its owners.

Many organisations produce a regular strategy and then file it away. Having done “strategy”, the owners and managers can then get on with the important job of answering client calls and dealing with matters. Successful strategic planning should, however, work out where a business is and where it wants to be, and then generate a strategic plan to move the business from A to B. This is done through a five stage process of diagnosis, options, evaluation breakthrough, planning and implementation.

Before we examine the tools, it is worth looking at how an organisation can integrate its strategy within the organisation. The typical case of an annual strategy document that spends 11 months in the top drawer, to be pulled out at the end of the year when it’s time to write the next one, is a great example of how not to do this.

There are three types of strategy integration: top-down, bottom-up and horizontal. As the names suggest, the top-down strategy has goals, agendas and even specific strategies set by the managing partner and management team and passed down to the business units. The bottom-up strategy has the managing partner or management team co-ordinating the strategies that have been created by the business units and middle managers. A horizontal strategy is one where there is a genuine interchange of ideas between the business units.

Within law firms the bottom-up strategy has been historically used but without the co-ordination of a management team. Hence individual partners have built strategies for their areas with no cross-firm co-ordination. This can, and usually does, result in firms where different areas of the business are actually pulling the firm in opposite directions. For example, a conveyancing practice area starts automating its processes using case management and workflow tools to build a high volume, low cost business model which works for it but may directly contradict the private client strategy of strengthening client relationships to build a low volume, high cost select service model. Unless explained well, the two strategies could undermine each other and confuse potential clients.

More and more firms are, however, moving towards a top-down model with centralised control of the strategy by an executive body or management team. The success of this relies upon the partners or principals being able to separate out their roles of owner from worker, and the management team providing sufficient feedback and information to the owners to enable them to spend most of their time in worker mode delivering the strategy that they are given.

So let’s assume that the integration process at your law firm is effective and successful. How do you build that strategy? The following details the five steps involved and gives you tools that can be appropriately used in each stage. It is worth pointing out that there are a number of different tools, none of which are adequate on their own. Each has its drawbacks and benefits and none are perfect. By using more than one tool in each category (or even all of them), you can view the problem from more than one direction and therefore build a more rounded strategy.

Diagnosis: the starting point

This involves understanding the current position. Here the organisation gets to look at key strategic issues, opportunities and threats across the corporate portfolio. New avenues for development are considered. The position of the business is then assessed by looking at “value gaps” within the organisation.

Porter’s Five Forces

For each of the following categories of competitive force identify where pressure may come from:

• The threat of new entrants to the market place, who could they be and what could they offer that you don’t.
• The possibility of substitute products or services that could make yours redundant.
• The power of customers determining what you deliver and how much they will pay.
• The power of suppliers determining what is available for you to base your product or service on and how much you have to pay for it.
• The competition within your industry between existing market players (including yourself).

When analysing the forces look not only at what is currently happening but try to imagine what may happen over the next three to five years. This analysis will provide a picture of the competitive pressures on your business that you will need to deal with.

Growth drivers

This analyses the factors that will influence the growth in total market demand. Through discussion identify the external forces that will cause the market to grow and those that will cause the market to shrink. Once you have identified what is likely to change the total market size, you may be able to build a strategy that takes advantage of these.

Competitor profiling

Compare your business performance in five key areas against specific competitors. Increase this tool’s effectiveness by asking your clients for their opinion. The key areas are perceived brand strength, product/service performance and value, innovation effectiveness (delivering real results from innovative new services), systems, and skill base. For your business and each specific competitor score them on a scale of 1 (very weak) to 5 (very strong) for each key area. By comparing the scores for each organisation you can compare performance and then try to work out what they or you are doing right (or wrong), and what you can change to out-compete them.

Gap analysis

For any measurable aspect of your business (e.g. profitability or fees), chart the recent history and future projections against time. Do this for segments of your business and add in your strategic requirements. Step back and compare the different measures and find the gaps. Once these gaps are found, work out why they are there and what you need to do about it. For example if you want to increase turnover by 21% per annum for the next five years but your average increase over the last year has been 11%, you need to work out how you can get the extra 10%. By looking at the turnover growth by practice area you could find that three of your businesses are growing by 18% whereas the fourth is static. You therefore need to do something drastic with the static business and work out how to increase the others by only 3%. This allows you to focus change on specific measures or business areas.

SWOT analysis

Look at your organisation’s strengths and weaknesses, and the opportunities and threats facing it. Then work out how to maximise the advantages arising from your strengths; and minimise the effects of (or deal with) the weaknesses. Similarly look at the opportunities available and threats arising and decide what you can do with them.

GE grid

This tool compares the performance of business units within your organisation (it could even be applied to partners and their specialisms). Draw up a grid showing market attractiveness against competitive position (see figure 1). Place each of your business units onto the grid. Obviously those with strong competitive positions and high market attractiveness are units that need to be developed and encouraged, whereas those with low competitive positions and low market attractiveness need either to be disposed of or their position dramatically moved. For those units in between you need to work out what you can do to improve performance of the units.

Choosing between options

By now you should have a number of strategic options available to the business. For example you may have one option to close down a department, another to invest in the same department. This part of the process allows you to make an informed choice between multiple competing (or non-competing) strategic options. To do this you need to create a strategic options grid (figure 2). In this you list the options along the top of the grid, and down the side you list the following criteria: strategic attractiveness, financial attractiveness, implementation difficulty, uncertainty and risk, and acceptability to stakeholders.

For each strategic option score each criterion from 0 to 3 (zero being lowest and 3 highest). Some of the tools already listed can provide background information that can help inform the score.

For strategic attractiveness use SWOT, growth drivers, five forces, competitor profiling and GE grid analysis. For financial attractiveness use value and cost drivers (see below). For implementation difficulty use the difficulty over time curve; for uncertainty and risk use the uncertainty/importance grid; and for stakeholder acceptability use the stakeholder grid (all below). The option with the highest score is the theoretical best option.

Value and cost drivers

Value drivers are any factors, either internal or external, which either directly or indirectly generate a cash inflow. A cost driver is any similar thing that generates a cash outflow. Identify the value and cost drivers within the business and business units to identify where cash comes from and where it goes. Then see how you can maximise the cash generative drivers and minimise the cash depleting ones.

Difficulty over time curve

Essentially this is a subjective view of how difficult a strategy will be to implement over time. The curve can be plotted for just one constraint within the business strategy (like cash resources) or for the whole implementation. Cash resource is quite easy to generate and compare objectively. If, for example, one option had no cash inflows for five years and then large cash inflows based on the income generated by a series of large and uncertain projects, the cash resource required can be plotted against time, and required cash can be a proxy for difficulty. Running a business with no cash and uncertain future inflows is difficult, and certainly more challenging than running one that has steady regular income.

Uncertainty/importance grid

This is a straightforward graph plotting certainty against importance. An option that generates a certain but unimportant outcome can be compared effectively against one that generates an important but averagely certain outcome. Again plotting all options on this grid allows you to score the options in the strategic options grid.

Stakeholder grid

Finally, this tool allows you to chart the attitude of stakeholders against the influence that they have on the outcome. This enables you to compare different options in terms of the ease with which they can be implemented, but also allows you to identify actions that you could take to increase the success of the strategies (see figure 3). For example, if you believe that your strategy will be received badly by a section of your staff who have a high ability to influence its success, you need to work hard to explain the strategy and get them to accept it.

Evaluations breakthrough

Now with multiple different strategic options documented and compared objectively, the organisation has to “bet the farm” on one of them. Any options with zero scores in the strategic options grid should be discounted, and if the analysis has been honest and full, the option with the highest score should be the one that you select as the strategic direction for the firm.

This can however result in difficult operational decisions. Deciding to pull out of one area of the business that generates significant fees because it does not fit the long term strategy is hard, but the clarity and focus that the process above delivers makes the choice available to management clear.

Planning the reality

Now that a strategy has been decided on, it is time to begin planning how it will be implemented. This section comes down to good old fashioned project management. Work out what needs to be done by whom and when, what relies on other stages to be completed and where the critical path lies. Get this documented someway and ensure that the plan is regularly reviewed and delays or problems are dealt with quickly and efficiently. Project management is an art which can be successfully bought in to ensure that the strategy is delivered on time.

Implementation

Implementing the strategy begins by revisiting the difficulty over time curve along with the stakeholder grid. Implementation means that any problems identified by these two tools need to be solved. Re-using these tools throughout implementation will enable you to ensure that the original issues identified by them are being dealt with and that no new problems are rearing their heads.

The strategy will not deliver economic value unless there is some form of control over it. Controls over the strategy should check that the strategy is being implemented, and that once implemented it is proving effective. To monitor strategy implementation it must be broken down into smaller chunks to monitor and control. This can be as basic as project management with milestones and deliverables. Other tools available include “from-to analysis” and the balanced scorecard.

From-to analysis

With the current organisation clearly in mind, decide whether it is “not-so-good” (1) or “near excellent” (5) for key sub-compartments of the strategy. These sub-compartments are organisation specific but could include things like organisational structures, behaviours, cost base or client focus. For those that score low, work out how you can shift them further up the scale and closer to Balanced scorecard.

A balanced scorecard uses the key sub-compartments of the strategy and builds medium term plans around these with a review and feedback mechanism. The aim is to look beyond pure financial measures to other control dimensions.

In summary

Following the above steps and applying the tools described should enable you to develop a business strategy and implement it. If your strategic thinking is good, then this strategy, well implemented, will deliver true economic value and create wealth. More importantly, a good strategy will enable your business to thrive in difficult and competitive times and a really good strategy could even redesign the competitive environment in which you and other law firms compete. It is probably true, however, that a poor strategy well implemented is more effective than a great strategy poorly implemented, and so, having created a great strategy for your business, you must ensure that it is delivered effectively. The tools detailed above can monitor the implementation of the strategy to ensure that management know it is happening, but they do not actually turn a strategy into something that makes money. This is done by converting a set of strategic goals into operational objectives.

In the personal development domain, neurolinguistic programming enables people to exhibit the behaviours they want to exhibit. Amongst its many techniques is modelling, whereby you find a person who is successful at what you want to be successful at, and copy their behaviours and methodologies. In this way you avoid making mistakes that they made and speed up the process of becoming successful. In business, benchmarking is a similar process. Find an organisation that does something that your strategy requires you to do well and then copy their results. This is easier said than done. If your business wants to deliver superlative client service, compare your client service to other organisations that deliver excellent client service. This can help managers responsible for delivering operations know what they have to improve to deliver the strategic objectives identified. Next time I will explain the advantage of benchmarking and how to go about it, as well as identifying some sources of benchmarking data.