Buyers of legal, governance, compliance, and risk services actually don’t care much what type of supplier they are dealing with. That was possibly the most profound and revealing finding from our research into SME and most recently school buying behaviour here.
Yes, law firms assume it’s their turf, but so do payroll software developers, ex-traded services advisory teams, HR consultancies and even insurers. Each of these industries have their unique competence area(s), but these are actually quite small.
For the most part they overlap. Yes, you don’t ask an HR team to deal with safeguarding litigation (but you might ask an insurer); you don’t ask a lawyer to cover playing field mower safety checks (but you might ask an HR consultancy). These blurred industry lines are confusing to the industries themselves; but actually less so to the buyers.
So when asked recently to come up ways of comparing suppliers across industries, we came up with the following.
Soft issues such as empathy, being “one-of-us”, etc all matter, but the approach we took in terms of hard economics was quite simple. Essentially it is a “follow-the-money”‘ approach (technically , a supply-side economics approach). When you assess where buyers of legal services are spending their budgets, and take a long term view, the picture you see is quite often different from that claimed by the respective leaders of the various industry types. This is the “how quickly” and “why” of disruptive economics. The suppliers have to remember that “the supplier who kills you doesn’t look like you”. We looked at the supplier characteristics that buyers implicitly relied on (as well as those they made explicit). But these are the uniquely hard to fake attributes. So we asked some difficult inter-industry questions reflecting current issues in the legal services markets:
(a) How can small teams motoring after a few years be compared to big brands resting on their laurels?
(b) How do teams with simply a large sales force compare to boutique quality players or those dominating professional services marketing channels?
(c) How can software firms offering process consulting be compared to management system consultancies?
(d) How can a law firm’s HR team be compared to the legal team in an HR consultancy?
(e) How do large mbo teams compare to start-ups?
Buyers typically prize eight key factors. We have successfully applied the same attributes of each to every supplier, be they a law firm, a software house, or a consultancy to achieve a weighted ranking of suppliers. It is not simply a top 100 or a biggest is best. It is not the fastest growing or the best VC exit approach. It is an algorithm which tracks where buyers are spending their cash – which business models are being preferred for what and by whom. Empathy is actually a key determinant in weighting how buyers perceive a firm. In the education sector it is more important, for example, than locality or regional proximity. Being an HR education specialist is better than being the local law firm who do some education law, for example. The Education sector is also very tribal (and loyal). They reward focus, investment and commitment to their calling. In summary the following key points drove the issue:
Critical Mass: A proven scale helps, but it is not the be-all and end-all. The threshold to being a credible supplier is lower than you might think, and in many cases it is small entrepreneurial teams who out rank the well promoted but small divisions of larger brands. Having £2-5m of business in a sector shows commitment and capability but many teams can credibly punch above their weight from £500k in sales against bigger brands. It would be wrong to dismiss firms smaller than this, especially in some specialised niches, however, so we balance this with “focus” too below. A £100m law firm with a £1m team trying to cover all the bases will not be as safe a bet for a buyer as a £1m boutique consultancy, which does that one thing brilliantly.
Focus: Many can dabble, few genuinely specialise, and being a small after thought or “partner’s pet” is very different from being a core business line. Buyers want to know that a supplier is committed to investing in their sector and specialisms. They want to know that ideally they will be top of the list for their developments next year and the year after too. One of the strengths of a lawyer is their ability to diversify; here it can be a drawback, and at a firm level, a positive disadvantage over the medium term. The ELA measures members as spending 25% or more of their time on employment law. Buyers want in many cases lawyers who eat, sleep and breathe employment law, and have done so for the past 3,5,10 years. An employment lawyers who redirects into litigation or commercial contracting is a great flexibility for the firm; for the buyers of employee relations services nowadays, it is a distraction. The distinguishing characteristic of GRC consultancies is that most genuinely specialise here, whereas of the 80 law firms in Education law, for example, only a handful could say that education is a core constituent of their brand (although more will do so, we believe). It matters; you want to know that they’re going to stay the course and ideally have the ambition to try to set the pace.
Growth: Growth long term (compound annual growth rates over longer than one business cycle, ie 7-15 years) usually confirms that a team is doing something that clients genuinely value and want. Taking more than a 1-3-year perspective is important where it can be achieved. For some the first £250k is comparatively easy, and where there are several such start-ups the market lesson is clear even without relying on long term perspectives. In legal services there is a push and a pull. Buyers want specialists, but the toxic environment in many large commercial law firms for some (and especially in second tier commercial specialisms such as employment law) the number of refugees setting up boutiques can be a sign of that pressure too.
Profitability: Doing the right thing for the right people at the right cost is important. While some teams will deliberately “invest”, ie lose money on start-up or repositioning, in this market that is rare and not economically mandated (yet). Many of the stellar legal services innovators recently have not need millions of VC or other investor cash. Client cash has been their source of funding – and it is a very neglected source. Market leaders will also be more profitable than followers, but as explained above, adjusting law firm profitability for partners “drawings” is required to compare these firms with their commercial equivalents. Law firms are typically not inherently that much more profitable than compliance specialists any more. Their equivalent of a commercial dividend policy is holding many of them back as it typically equates to a 100% distribution each year.
Net New Sales: A firm’s capacity to accommodate new business matters. No buyer wants to over-extend a firm, and often firms “step” this growth over time as they staff up to anticipate it (rather than struggle to accommodate it). CAGR (compound annual growth rates) tells you that a firm can handle this long term; NNS (net new sales pa) tells you by how much. Scalability in sales channels is hard; very hard and nobody invests in a marketing plan. As such this is a corporate finance measure devoid of interference from banks or speculators. It is the ability of a firm to deliver.
Investment Capacity: The ability of a firm to invest in the future of the business and this industry in particular is key. This is a function of profitability and focus, but is probably the most important capability buyers seeking long-term relationships will look for. It’s not just “big is beautiful”, however; targeting spend matters more. Sometimes the worst thing you can do is advertise a service, and sometimes throwing money at a proposition simply fails. Here I’ve seen £8m deployed very professionally on national campaigns deliver less than £400k ins ales, and I’ve seen £3m investments from experienced professional firms deliver less than £25ok sales after 5 years or more. You have to be in it to win it, but there’s no guarantee that deep pockets will be enough in and of themselves.
Project Capacity: For some the requirement is simply to manage a major project, which may or may not have a long tail. The ability to call in a sizeable team of specialists is historically the capability which law firms have been best known for, but it is important to see it as only one of a set of capabilities. For some projects only full service law firms will have the necessary scope and depth. It gives law firms a unique appeal; but it is also no longer the dominant characteristic when clients are seeking a long-term partner. Some law firms are very comfortable with this, preferring to stay on the project scale business model. This explains why firms such as Clifford Chance, Allen &Overy, Linklaters, Freshfields, and Norton Rose can undoubtedly pull a team together to tackle an education sector project if needs must; it’s just that they seem to have bigger fish to fry elsewhere.
Value for Money (VFM): Last but never least is value for money. An indicative measure here is sales per employee (SPE), the only readily available cross-industry operational metric. In disruptive competition, however, it is a price/margin indicator for suppliers and a key decision point for buyers. Value is elastic; the lowest price is not always the best “value” and in choosing lawyers, for example, when it comes to brand critical litigation, high hourly rates can be reassuringly expensive. Thankfully now the VFM metric no longer means always taking the lowest quote, or even justifying why the lowest price is not where you start. In service procurement it is never that simple. It is a misconception that sales per employee rates for law firms, for example, are much higher than normal commercial firms. In industry terms the highest SPE ratios usually come major enterprise software firms, not consultancies. Here, firms investing in service development and migrating away from the old law firm models will demonstrate the same benchmarks as the equivalent GRC consultancies. SPE ranges from £75-100k may seem modest to some, but are normal here.
The end result is a mechanism that shows trends in buyer spend, preferences for business model approaches or sales and marketing channel types. This is why Uber is a cab firm with no cars, and AirBnB is a hotel business with no buildings. It is why some of these solutions can gain traction very quickly (and some not). In Education legal, governance, compliance and risk services the shift away from central services is creating opportunities for creative teams from several industries. Focusing on these factors can explain why lawyers no longer dominate here, but also where they are strongest and where the new teams can redefine the service provision. There are no bad suppliers in the Education sector, for example, but there are teams pushing at open doors. This ranking approach show you where and why.