The New Definition of a Good Year

Today’s AmLaw Daily includes a briefing by Dan DiPietro and Gretta Rusanow, chairman and senior client advisor, respectively, of the Law Firm Group at Citi Private Bank, on Citi’s report on law firm finances in 2011.  Key points include:

• A drop in demand for transactional services in the second half of the year.
• An increase in profits per equity partner of 3.3%, compared to 7.4% in 2010.
• Revenue growth of 4.1% in 2011 resulted from “moderate rate increases, a modest shortening in the collection cycle and a slight increase in demand.”  As law firm consultant Jerome Kowalski notes in his analysis of the Citi report, firms were aggressively collecting their accounts receivable to capture revenue in 2011; moving into 2012 with less A/R in the pipeline makes the prospect of continued weak demand all the more disconcerting.
• Rates increased at a faster rate than in 2009 and 2010, but below historical increases, although realization likely decreased, offsetting rate increases to some extent.  Collection cycles decreased by 1.3%.
• Expenses grew 4.4%, with the bulk of the increases in compensation (salary increases as lawyers became more senior, and bonuses).  The increase in overhead expenses included long-deferred IT and other infrastructure upgrades.
• Head count grew “slightly;” the number of equity partners grew “marginally.”

Citi’s assessment is that, all told, 2011 was not a bad year for firms, and might well be “the new definition of a good year for the legal industry at least for the foreseeable future.”  While the Citi report is not a source of great optimism, at least we know where we stand at present.

Using Competitive Intelligence for Business Development

A major use of competitive intelligence by law firms is to support business development.  Business development CI activities are often in the form of nimble “tactical” uses that can help firms capture new opportunities as they become known, but also include longer-term initiatives that can help firms predict how best to position themselves to capitalize on opportunities that are expected to arise.  (Law firms can also employ competitive intelligence productively in order to inform strategic decision-making on subjects like geographic expansion, merging with other firms and developing new service offerings; strategic uses of CI will be discussed in a future post.)

Business development CI can include:

• Developing intelligence in preparation for attorneys’ business development meetings with existing or potential clients, and providing written or oral briefings encapsulating that intelligence to attorneys.  These briefings may include information about these organizations’ businesses and industries and existing or anticipated legal, regulatory, competitive and other issues, as well as biographical and personality profiles of these organizations’ executives.
• Identifying potential low-hanging fruit in terms of prospective clients, i.e., those potential clients who need the firm’s services (or perhaps even its unique or rare expertise) with respect to an issue, have a positive opinion of the firm and are not currently represented regarding that issue.
• Identifying clients, legal issues or high-value engagements where the firm may gain an advantage from moving first, early or quickly into a particular industry or line of service.
• Learning the opinions of clients and prospective clients about the firm and its services and/or its closest competitors and their services.
• Anticipating changing needs of key clients and client industries for new legal services by analyzing those industries and where they are headed in the next few years in terms of growth, competitive, legal, regulatory, political and other issues.
• Locating viable lateral partner groups and responding to approaches from groups of lawyers who desire to move to the firm.
• Supporting the firm’s RFP response process.
• Supporting the development of competitive pricing structures and alternative fee arrangements.
• Identifying competitors and their strengths and weaknesses.  (While this is obviously important information for law firms to have, I caution against an excessive focus on the competition.  Law firms are already very conscious of what their peers and would-be peers are doing in many respects, and—notwithstanding the presence of innovative firms in the marketplace—many firms remain reluctant to pull ahead of their peer groups in terms of significant changes in service offerings, pricing, process improvement, etc.)

Of course, acquisition of the intelligence needed to provide these business development support services requires a robust CI function that effectively draws on internal firm databases and other materials, information obtained from third party vendors and an aggressive and proactive approach to gathering intelligence from firm attorneys, members of its marketing department and library services department, and reliable providers of information from outside the firm, like clients and referral sources.

Based on my own experience working as a transactional lawyer in large law firms, I find the idea of using in-depth CI analysis to better understand clients’ industries and the trends expected to shape them in the near- to medium-term intriguing.  In addition to its direct business development value, I believe that such intelligence could also be supplied to attorneys for client relationship purposes.  Alerting clients to anticipated trends that are likely to have a significant impact on their businesses, whether or not those trends involve legal issues, could only enhance the firm’s relationships–and the credibility its attorneys–with these clients.

Further reading

Those desiring more detailed information on specific business development activities that law firm CI can support should take a look at chapters 1 and 8 in Ann Lee Gibson, Competitive Intelligence:  Improving Law Firm Strategy and Decision Making (2010).  There is also a series of interviews with law firm CI practitioners on Dr. Gibson’s blog that touch on different aspects of using CI to help law firms obtain new clients and sell additional services to existing clients, linked below:

http://lawfirmci.blogspot.com/2008/09/ci-pro-interview-with-bill-fiora-of.html

http://lawfirmci.blogspot.com/2008/09/ci-pro-interview-with-christopher-batio.html

http://lawfirmci.blogspot.com/2008/09/ci-pro-interview-with-jan-rivers-of.html

http://lawfirmci.blogspot.com/2009/04/ci-pro-interview-with-emily-c-rushing.html

The above-referenced chapters and practitioner interviews have been very helpful to me in  conceptualizing a consolidated suite of CI business development uses for this post.

Chapter 7 of Seena Sharp’s Competitive Intelligence Advantage (2009) provides a more general discussion of how CI can be used to capture more business opportunities, such as:

• Uncovering “unknown” clients–i.e., those who do not conform to the firm’s existing notions of its typical client profile.
• Changing the organization’s client base by selling up to a higher segment of clients.
• Analyzing how best to increase business in four dimensions:  (1) selling current services to current clients, (2) selling current services to new clients, (3) selling new services to current clients and (4) selling new services to new clients.

Cognitive Biases

Law firm lawyers are smart people.  They figure out difficult issues where the stakes are high and advise clients who have a lot riding on getting the right answer, typically under significant time pressure.  In addition, lawyers who lead and manage law firms also have hard-won experience with strategic, tactical and operational issues that comes from guiding and running a complex business.  Why then would a law firm’s decision-makers need CI practitioners to perform competitive intelligence on behalf of the firm?

Part of the answer is resource allocation:  law firm leaders possess finite amounts of time and mental energy.  While they may often know much of the information needed for a CI analysis on any given topic affecting their firm, they may simply not be in a position—due to the demands of client matters and day-to-day firm management activities—to marshal a sustained analysis on the topic in a comprehensive, rigorous manner.

Perhaps more significantly, law firm leaders lack training in recognizing and overcoming cognitive biases that can adversely affect their analysis of business issues.  As CI experts Craig Fleisher and Babette Bensoussan note in Chapter 2 of their foundational CI book Strategic and Competitive Analysis:  Methods and Techniques for Analyzing Business Competition, poor decision-making can result from cognitive biases that impair effective business analysis (sometimes even when adequate information—including from CI efforts—is available).  These include:

• Escalating Commitment – Occurs when decision-makers increase commitment of resources to an initiative in the face of mounting evidence that it is not succeeding.
• Groupthink – Arises when a group of decision-makers follow a poorly-chosen strategy without closely examining the assumptions that underlie that course of action.  This is obviously a particular concern in the law firm context, where group discussion and consensus is needed for decisions that require the approval of partners or of an executive committee.
• Illusion of Control – This can occur when a leader overestimates his or her ability to exercise control over outcomes, perhaps influenced by a recent run of good luck.
• Prior Hypothesis Bias – Affects decision-makers who are over-invested in their beliefs about the correlative or causal connections between variables and who consider or discard evidence selectively depending on whether or not it confirms or contradicts their beliefs.
• Reasoning by Analogy – This comes about when decision-makers use simple analogies to understand—and in the process oversimplify—complex issues.  Given the importance of analogy in legal reasoning, this has the obvious potential to arise—and pass unnoticed—in law firm decision-makers’ analysis and deliberations.
• Representativeness – This results when decision-makers generalize from relatively small–and unrepresentative–sample sizes (for example, by relying on only those samples within their personal experience) about larger events or groups of people.

In Chapters 9-13 of his book Psychology of Intelligence Analysis, CIA analyst Richards J. Heuer , Jr. describes a number of other cognitive biases that can impair effective analysis of information for decision-making purposes.  Some of these are:

• A bias in favor of causal explanations of events.
• A tendency to view the actions of other organizations or groups as the result of centralized direction.
• Overestimating the importance of inherent personal qualities and underestimating the significance of external factors in understanding a person’s actions.
• Overestimating our and our organization’s effect on the decisions and actions of others.
• Forgetting that correlation does not mean causation.
• Overestimating the likelihood of occurrence of events similar to those with which we have personal experience.
• Allowing the starting point for analysis to serve as a drag or “anchor” on further thinking.
• Insufficiently precise identification of the level of uncertainty with respect to potential outcomes.

While a detailed discussion of the cognitive biases described by Fleisher and Bensoussan and by Heuer is of course beyond the scope of a blog post, I believe the above lists should give a feel for how easily these biases can affect the thinking of even the most intelligent decision-makers.  Competitive intelligence practitioners can, by surfacing and challenging hidden assumptions, and conducting rigorous, systematic analysis of relevant information using one or more of a dozen analytical techniques (while vigilantly watching for and rooting out cognitive bias in their own views of the intelligence that has been gathered), mitigate the impact of these impediments to an effective understanding of law firm business problems.

$64 Billion in Unearned Premium

The title to this post might be considered an alternative answer to the question “Why should law firms be interested in competitive intelligence?”  The $64 billion figure is taken from an article in the Economist last September.  The article describes a recent book by two scholars at the Brookings Institution and a University of Houston professor entitled First Thing We Do, Let’s Deregulate All the Lawyers that analyzes the legal services market in the United States and concludes that of the $170 billion in expenditures on legal services annually in the U.S., $64 billion represents a premium produced by “market distortions.”

The authors argue that this premium results from there being too few lawyers in the legal market, a point which might meet some resistance in various quarters.  For this post, though, the important thing is that the idea that some large portion of what law firms and lawyers in the U.S. are paid is an unearned–or even undeserved–extra amount now exists in public consciousness, and particularly in the minds of general counsels and other legal consumers in a position to select and exert pressure on—or seek alternatives to—outside counsel.  This idea existed before First Thing We Do, Let’s Deregulate All the Lawyers, but now it has a scholarly book behind it and a shockingly large number associated with it.  At a time when law firms are already facing more and more competitive and efficiency pressures, the increasing view that a large portion of their revenues consists of “extra money” will only intensify those pressures. This may mean that:

• General counsels will be more disposed to, and will be under increasing pressure from their CEOs to, demand ever-greater efficiencies from outside counsel and/or move work in-house if it can be done in a cost-effective manner.
• Alternative service providers will move to capture as much of that premium as is feasible under their business models (even if part of their sales pitch involves lower overhead and increased efficiencies that will ultimately reduce the amount of that premium—their gain is traditional law firms’ loss).
• As clients wring more and more efficiencies out of law firms, and alternative service providers capture more of the legal spend, mid-sized and smaller firms, as well as mid-range and lower-end large firms may attempt to move “upstream” to capture more of the top-level work that is less price- and efficiency-sensitive, e.g., high-stakes litigation for large companies and complex M&A and financing transactions.
• To the extent the authors’ argument is accepted, increased deregulation of legal services that could allow better-funded competitors capitalized and financed by non-lawyer investors (although the ABA has continued to resist meaningful change in this regard—for analysis, see this post by Jerome Kowalski).

Whether ultimately resulting from the above factors, or others that have not occurred to me so far, the notion that over 1/3 of the amount spent in this country on legal services is unearned premium seems likely to increase the existing competitive pressures in the industry, and provides yet another signal the industry will not return to its pre-2008 state anytime soon.  New and existing business will presumably continue to be harder to win and keep, and there will be less margin of error for strategic actions like mergers, entry into new markets and changes in service offerings.  Although by no means a panacea for the challenges law firms face, effective competitive intelligence can help firms take better-informed action on the basis of intelligence that has been evaluated and analyzed by CI practitioners trained to attack business problems objectively and to consciously avoid biases that can arise from unexamined assumptions and habits of thought that can sometimes cloud the perspectives of even the most intelligent decision makers.

Competitive Intelligence for Law Firms

What is competitive intelligence?

There are a number of definitions that have been developed for competitive intelligence (“CI”).  One of my favorites is the following formulation by CI expert Ben Gilad:  competitive intelligence is “[t]he gathering and analysis of information from human and published sources about market trends and industry developments that allows for advanced identification of risks and opportunities in the competitive arena.”  (Ben Gilad, Early Warning: Using Competitive Intelligence to Anticipate Market Shifts, Control Risk, and Create Powerful Strategies (2003), quoted in Ann Lee Gibson, Competitive Intelligence:  Improving Law Firm Strategy and Decision Making (2010).)  The purpose of CI is to create actionable intelligence that can, when acted upon appropriately, create a competitive advantage.

Why should law firms use CI?

The short answer is that CI, when properly resourced and used effectively, can help firms obtain new clients, increase the amount of work done for existing clients, make better strategic decisions and avoid or reduce the impact of significant surprises.  I will explore how CI can be used for business development, strategic decision-making and surprise avoidance purposes in more detail in future posts.

How is intelligence obtained?

Much, perhaps even most, of the information used in law firm CI—about the firm’s clients, potential clients and their respective businesses and industries; the firm’s competitors and their capabilities and activities; and the firm’s own services, capabilities, processes and suppliers—is already available within the firm.  This information may be contained in the firm’s library, marketing department, accounting department, human resources department, recruiting department, or conflicts department, or known by individual attorneys or staff members.

Other information may be gathered from external sources including:

• Electronic sources such as databases of filings made with the SEC or PTO, or databases like Bloomberg, Hoovers, LexisNexis, Factiva, Dialog and others;
• Conversations with clients, potential clients, referral sources, firm alumni, contacts in the media or government, and even competitors (such as at bar association meetings or industry conferences); and
• Information obtained by visiting locations such as courthouses, libraries, government agencies or trade associations to review materials like court filings, land records, permits, membership rolls and attendance lists.

For detailed information about intelligence collection in the law firm context, see Chapter 3 of Dr. Gibson’s book, Competitive Intelligence:  Improving Law Firm Strategy and Decision Making, referred to above.  For a more general discussion of gathering and evaluating information for CI purposes, take a look at Chapter 9 of Seena Sharp’s Competitive Intelligence Advantage.

Information gathered for CI purposes is not obtained illegally or unethically.  Reputable CI practitioners adhere to the Code of Ethics of the competitive intelligence association known as Strategic and Competitive Intelligence Professionals (“SCIP”).  SCIP’s Code of Ethics requires the CI practitioner to, among other things, comply with applicable laws and to disclose his or her identity and organization before interviewing an information source.

How is information transformed into usable intelligence?

The purpose of CI is not simply to compile relevant information, it is to convert that information into intelligence that the organization can use to make an important decision–such as whether and how best to pursue a potential new client, enter a new market, acquire another firm or participate in a strategic alliance.  Information is transformed into intelligence through analysis using techniques like PESTEL analysis, Porter’s Five Forces analysis and SWOT analysis, as well as benchmarking, wargaming, personality/psychological profiling, trends analysis, timelining, reputation analysis and competitor profiling (among others).  I’ll discuss some of these analytical techniques in future posts.  The results of intelligence analysis are disseminated to decision-makers for review, discussion, refinement and action.   All of this activity–intelligence gathering, analysis and dissemination to decision-makers–occurs in the context of the process known as the “intelligence cycle,” which will itself be the subject of a separate post.

References

Although I don’t plan to use formal references in every post on this blog, I do intend to give appropriate credit.  In particular, Ann Lee Gibson’s book, Competitive Intelligence:  Improving Law Firm Strategy and Decision Making, has significantly improved my understanding of how CI can be employed effectively in the law firm context.  I highly recommend it for law firm CI practitioners, as well as law firm leaders who wish to know more about how CI can help their firms.  You can get more information about this book, and purchase it, here:

http://www.ark-group.com/home/Publications/Publication.asp?pubid=%7bA711489A-D0F4-4EBF-8043-B7DA3AC2C198%7d

You can read the table of contents and introduction, and a sample chapter, at these links:

http://www.ark-group.com/Downloads/Competitive-IntelligencePart.pdf

http://www.ark-group.com/Downloads/Competitive-IntelligenceCoverchapt%202.pdf

You can find detailed information and guidance on the uses of CI in law firms and the specifics of where information resides in and may be collected for purposes of law firm CI in Chapters 1 and 3 of Dr. Gibson’s book.

For a more general introduction to CI, Seena Sharp’s Competitive Intelligence Advantage is an excellent resource.  Larry Kahaner’s Competitive Intelligence is also a foundational work, although it was published in 1996 and does not address many online information sources.

Introduction

This blog explores how competitive intelligence, or CI, can be used to help law firms develop business, make strategic decisions and avoid or reduce the impact of major surprises.