Firm Strategy: Understanding Industry Dynamics

Editor’s Note: This post is written by an advisor to law firms who has written extensively about the legal industry. It is the first article of a two-part series on how law firms are becoming more industry focused.

By Patrick McKenna, Law Firm Consultant, McKenna Associates Inc.

Let’s look at what is now happening in advanced education and specifically with the long revered MBA degree as an example of what is happening within our own profession.

Last year about 87,000 Americans wrote their Graduate Management Admission Test (or GMAT), an aptitude exam generally required as part of an application to MBA programs. That compares with 127,000 in 2010. Applications from students have been in a decline following the economic crisis and competition for a smaller pool of students has been raging among the hundreds of MBA schools across the continent. This rampant marketing and competition for students has raised questions about what a sustainable model for MBA programs might look like.

The generalist MBA, wherein students select a specific discipline, be it finance, operations or marketing in which to specialize, is being seen to be outdated such that schools are finding that they increasingly have to differentiate themselves. And finding ways to meaningful differentiate usually means asking the client – in this case those who hire the end product of graduate education mills, to find out from them what they need. The response? Increasingly corporations are expecting their MBA graduates to indeed specialize, but not so much in traditional disciplines but in specific industry sectors – like mining, retail, health, real estate and so forth.

The world of management education is changing. General programs are not good enough. As one business dean expressed it, “this shift will mean an end to the conventional ‘cookie cutter’ MBA, where all students learned the same basic business skills. The two-year MBA with some opportunity for industry-specific specialization is becoming the gold standard.”

Let’s compare what is going on in management education with what is going on in the legal profession. Today many firms would assert they have embraced having a smattering of industry groups in their firms. Nevertheless, it is interesting and informative to look at what some of these groups may actually signal to clients about the firm’s industry knowledge and competence. For example:

• It is not whatyoucall the industry, it is what the client calls itself that is most important.

When you think about the various options available for stimulating revenue growth, one of those options is driven by the preponderance of various industries that are located in your particular market footprint. That said, I am always surprised by the lack of knowledge some professionals display in understanding which industries often have a prevailing influence in their particular locale. In fact, in a number of recent meetings (after having done the required homework myself), I’ve asked partners to tell me, “What particular industry concentration or ‘industry cluster’ is your city, region or state focusing attention and fiscal resources on developing?” A short period of stunned silence is then often punctuated with some wild guesses and sometimes a few manage to guess correctly.

When we think about industry clusers we naturally imagine the car manufacturers of Detroit, computer makers of Silicon Valley, aircraft manufacturers of Seattle, financial services in New York, and the movie makers of Hollywood; but industry clusters are more than just a collection of companies in the same industry. Industry clusters are actually a geographical proximate group of interconnected companies with associated institutions in a particular specialization – all linked by networks.

In other words, while some locality can have an industry group, for example the Napa Valley vineyards, what would make this group a cluster would be the presence of upstream and downstream specialists. Using the example of the Napa Valley vineyards, this would include upstream manufacturers and suppliers of herbicides, pesticides, and irrigation, harvesting and processing equipment – while downstream would include manufacturers and suppliers of winemaking equipment, bottles, labels and corks. The associated institutions would then include government departments (including export), educational and research organizations, plus other related industries like tourism and hospitality.

The challenge that arises from all of this can often manifest itself in really understanding what specific industry you are really working in and how you are communicating your expertise to the market.

For example, in one particular firm I was recently engaged in working with, as I examined the various clusters in their market, I noticed that one of the top three industry clusters was “Photonics” which included data transmission technologies, laser processing and spectroscope analysis. When one examined the firm’s web site you could not find a single mention of anyone having done work in the “Photonics” industry. When I raised this point later in our strategy sessions, I was informed that the firm had a long history of serving a number of major companies in the . . . “Optics” industry.

Now, you’re welcome to call it the Optics industry, but if I, as the client, call it the Photonics industry and am proud of being an active member of the New York Photonics Industry Association – you might see how you and your firm could be perceived to be irrelevant!

Meanwhile, by not focusing your attention on the right industry “label” you may have just missed opportunities for marketing your competence into other states like Michigan, Colorado, Arizona, Florida and the Carolinas where there are other active Photonics industry clusters. But then I suppose you could explore prospects in New Mexico, the only state that I could identify that had an active “Optics” Industry cluster.

MAKE NO MISTAKE: what label you attach to your industry group matters.

• As all industries eventually mature they naturally fracture into multiple sub-industries.

Some years back I had the opportunity of working with a Technology Practice Group to help the partners develop a strategic plan and direction for growth. Not too far into what had been scheduled to be a four-hour working session, I discerned that five of the partners served software developers; three others focused much of their attention on cable television companies; four were developing expertise with companies in the digital publishing space; and the remaining five spent their professional time working with telecommunications operations. Each of these were operating under the same marketing umbrella (Technology) but were actually sub-groups in entirely different industries.

News Flash: You cannot develop a strategic plan for an industry group if you don’t all serve the same kind of clients.

Today, this same situation is true with numerous industry groups. To be provocative – I would strongly advocate that there is no such thing as a Health Care lawyer!

A blog post that got a fair pit of attention recently announced: “Want to Expand? 5 Hot Legal Practice Areas to Consider for 2015.” It advised lawyers that: “Changing technology, government policies, and legal environments mean that there are more opportunities than ever to expand your practice into new areas. Here are just a few ideas to get you started.” And number one amongst it’s hot areas to consider was . . . Health Care.

The way some firms define and describe their industry groups is really quite interesting. If you look at Health Care by way of example, and examine various law firm websites, you are likely see a description that reads something like this:

We offer clients the advantages of both a concentrated practice in health care law and a business firm with broad and varied areas of experience. Our Health Care practice enjoys an outstanding reputation for its knowledge in health law and its leadership in the health law community. Our strength lies in the ability to understand and keep pace with the numerous changes in the health care industry and to work creatively with clients to achieve workable solutions. We offer a comprehensive approach with many inherent advantages. Because we are familiar with how health care is delivered and financed, we can respond quickly to the business and financial needs of our health care clients and to the practical realities they face.

Our experience encompasses a wide range of matters of concern to the health care industry, including:

Business Transactions

Integrated Delivery Systems

Contracts

Managed Care Relationships

Health Care Provider Financing

Restructuring and Reorganization

Tax Advice for Tax-Exempt and For-Profit Entities

Antitrust

Fraud and Abuse

Medicare, Medicaid, and Third Party Reimbursement

Employment Issues

Credentialing and Accreditation

Certificate of Need

Patient Care and Operational Issues

Medical Malpractice

It sounds both comprehensive and convincing. The only small problem is that Health Care, as an industry, has fractured into numerous distinct sub-industries (witness my earlier example with technology) as it has grown and matured, each of which is comprised of companies who believe they are unique.

Take for example the industry of professional services and the sub-industry known as the legal profession. If some service provider held themselves out to be the renowned expert in professional service firms, your first question would be, “Yes, that’s fine, but what do you specifically know about law firms?” Then if that same renowned expert began to tell you about how they employed their smarts in marketing to the advantage of some major accounting firm, even though you might admit that the tactics were equally applicable, you would still inquire as to what experience they have had serving a law firm like yours. You reject any notion that being an expert in an industry as broad as professional services, or even marketing leadership in the accounting sector, is sufficient.

Isn’t it fascinating how the mindset we bring to the table as purchasers of professional services is so completely different from the mindset we exhibit as sellers of professional services?

As sellers, we appear to be quite content with telling the marketplace that we are Health Care lawyers with little regard for what our clients are looking to buy. And in this instance the Health Care industry is fragmented into dozens of sub-industries. Therefore those lawyers who develop a specific expertise in areas like personalized DNA-based medicine, mobile health appliances, stem-cell bio ethics, e-health information systems, or lithotripsy services and then effectively market that specific expertise will become the go-to providers and achieve a significant strategic advantage over those attorneys who simply claim to be health care lawyers.

MAKE NO MISTAKE: in most industries you need to be very specific about the sub-industry that you are targeting to serve.