Most law firms have a limited number of options to improve their profitability. They can ask their lawyers to work harder —which in many firms is a function of having the work to do, as well as a culture that inspires and rewards hard work.

Another alternative is to cut costs but, for most law offices to truly make a dent in profitability problems, the level of frugality required will affect lawyer work styles in an unacceptable manner. That leaves the options of increasing rates or increasing leverage. Law firms quickly observe that these two options provide the greatest opportunities for profitability improvement. But, most often, making significant changes in pricing and leverage requires a major up-grade to the firm’s practice.

Accordingly, a common law firm strategy is to attempt to move the firm’s practice “upstream.” Simply stated, this means improving the mix of disciplines and areas in which the firm practices to provide more sophisticated work which generates higher fees. At the same time, more sophisticated practices typically permit greater leverage.

Implementing upstream migration strategy, however, can be difficult and somewhat risky. It requires that the firm accurately assess which of its practices are suitable upstream migration targets. The firm must also objectively determine its own capability to perform those practices at an appropriately competitive level. Unfortunately, to perform this analysis well, a law firm must have an incredibly acute understanding of the marketplace for the services it would like to provide and the ability to make honest judgments about itself.

Downstream flow

It is difficult to argue against the concept of a law firm seeking to upgrade its practice. Firms naturally become stagnant in their mix of practice areas and the level of the work they do. Legal work constantly flows down a value curve in which it is considered less sophisticated by the lawyers doing the work and is less valued by the clients benefiting from the lawyers services. The obvious examples of this are commodity work, such as insurance defense or loan documentation, where both clients and law firms recognize that value is created through the routinization of the process and the volume of the workload. But all legal work is subject to this process, no matter where it is on the demand curve.

For example, only a couple of years ago, private equity deals were among the most valued aspects of any law firm’s corporate practice. The deals were complex and chaotic and premium legal fees were routinely paid as “deal dust” in large transactions. But as hedge funds grew, and both the hiring of in-house lawyers and fee sensitivity increased, often clients’ views of the lawyers involved began to shift from being “valued members” of the deal team to “a necessary evil.” At the same time, for the lawyers, the adrenalin surge of working all night to meet a closing deadline transitioned to the routine and mundane work of meeting unnecessarily tight and arbitrary timetables. From the clients’ perspective, after watching a magician perform the same act several times, the audience begins to understand how the trick is done and a lot of the magic goes away. From the perspective of the lawyers, having performed the trick dozens of times it starts to get boring even if the audience is wildly appreciative.

Identifying upstream practices

By definition, upstream represents practices that are superior to a firm’s current practice mix. Downstream represents those that are inferior. Of course, where a firm is poised on the stream is a function of the law firm’s practice in relation to the possible practice alternatives. For example, product liability defense is decidedly upstream to firms doing consumer insurance defense but downstream for firms with sophisticated patent infringement cases.

If identifying upstream practices were as simple as comparing hourly billing rates, the strategic targeting of desirable practices could be accomplished with mathematical precision. However, practices also have strategic value to a law firm beyond the maximum generation of revenue. Certain practices speak to the institutional foundation of a law firm, either because of client relationships or the generation of significant amounts of other work. For instance, in the case of a corporate transactional firm, listed company governance work may have become commoditized but being the general counsel of a public corporation is a defining feature of the firm and creates work for all of the firms’ practices. For intellectual property practices, patent prosecution may have become highly commoditized but provide access to eventual patent litigation and licensing work.

Upstream Figure 1

Unfortunately, the institutional value of practices can be seductive to the point where a firm can justify the institutional value of any practice, regardless of how low its billing rates. In fact, we can identify four positions a practice can take in the comparison of revenue value and institutional value.

The Bread & Butter practice is an ingrained part of a firm as an institution to the extent that it personifies the firm and its reputation. Baker & McKenzie, for example, was created as and long maintained a reputation as a tax firm. Even after the competition from accounting firms made stand-alone tax practices lower revenue producers than many other areas, Baker & McKenzie continued to purposefully maintain its reputation as a tax firm, even though they had become one of the largest full service firms in the world.

The Rocket practice is an area that provides extraordinary billing rates during what is often a short-term life span and, typically, has no real bind to the firm’s institutional values or reputation. These are practices that are presented with entrepreneurial opportunities, and tend to not have a tie to the core strategy of the firm. A current example is the Corporate Investigations practice that a number of firms are entering. The growth of CEO misconduct, insider trading and fraud and abuse issues have created opportunities for law firms to act as independent internal prosecutors on behalf of shareholders. Although highly lucrative, such practices do not provide ties to a law firm’s institutional reputation. Clients hire investigative firms because of their objectivity and lack of practice ties to the company. In such situations, practices are unlikely to spin off significant work in other practice areas.

Upstream Practices are those areas that provide a significant revenue increase while supporting the firm’s institutional character. For instance, for a firm with a strong corporate transactional practice, a move to white collar crime defense in high-profile cases could produce strong revenue increases but might potentially be deleterious to the firm’s institutional reputation. On the other hand, a firm that has a strong health care practice could logically add white collar criminal defense involving fraud and abuse as a natural part of its institutional reputation.

Upstream Figure 2

Targeting Upstream Practices

There appears to be two ways in which law firms engage in practice upstream migration. The first is strategic, in which the firm makes a conscious decision to move into a practice area that provides an upstream benefit and then goes about implementing that strategy. The second is opportunistic — for instance, a lateral candidate provides a serendipitous entrée to the upstream practice area. While the focus of upstream practice migration is strategy, it must be noted that a considerable number of law firms’ attempts to upgrade their practices are the result of unplanned luck.

The issue of evaluating potential practices remains the same, regardless of whether it is the target for a strategic practice shift or considering a lateral opportunity. This evaluation involves five questions:

1. How far upstream is the targeted practice?

Developing a new practice or dramatically expanding an existing practice requires a large amount of management focus and an element of risk. The first logical question, therefore, is whether the practice is sufficiently upstream to justify the effort. When firms are dominated by lower rate practices, the focus on rates tends to limit horizons of the level of rates possible, even for new practices. What rates are being charged by competing law firms for this practice and how do those rates compare with existing rates in your firm are pivotal questions

2. How strong is the institutional tie for the upstream practice?

It is possible to add a practice as a free-standing economic unit but that eliminates the institutional value of the practice. The question, then, is how well does the upstream practice area fit with the firm’s existing practice? This involves two issues — how likely is it that the practice will be of value to existing clients of the firm, and will clients of the upstream practice be prone to purchase other legal services from the firm? The answer to these questions largely involves determining whether there are spin-off opportunities for the practice and if they are likely to benefit the firm’s existing clients.

3. What is the anticipated life of the practice?

Legal practices go through a life cycle just like businesses. As they become more mature, they become more mainstream; eventually they move downstream with lower billing rates. The time it takes for firms to mature differs among practices, and a practice that is just reaching maturity is more likely to produce high rates for a longer time than a practice that is moving toward saturation. Practices tend to move through the life cycle stages rather uniformly, so a practice area that reaches maturity rapidly is likely to move downstream equally rapidly. By the same token, a firm that stayed in a growth stage for an extended period is likely to slowly move through maturity and provide an upstream opportunity for a longtime.

4. What is our level of capability and how are we positioned in the marketplace?

For the migration to an upstream practice area to have a significant impact on the profitability of a law firm, the firm must be able to demonstrate a level of sophistication that moves it toward a position of dominance. For example, for a firm to add one or two specialty lawyers in a highly valued corporate transactional practice may generate some additional revenue but, in order to make an impact, the firm must have a reasonable depth in comparison to competitors or a path to achieving that depth.

5. Is the firm willing to accommodate the cultural impact of a practice migration?

There are identifiable cultural differences between firms with differing practices. The strategy of moving practices upstream will almost certainly have an impact on a firm’s culture, the way partners relate to each other and the values that the firm espouses. Clearly the addition of laterals and practice groups have an impact on culture but the expectations of clients from upstream cultures may have a profound effect on issues such as teamwork, urgency, work ethic and independence.

Implementing a Practice Migration Strategy

Like so much with strategy, selecting practices into which the firm wants to migrate is the comparatively easy part. The heavy lifting comes with attempting to implement the strategy.

For most firms, the default means of migration is by buying a practice (through the hiring of laterals with both the capability of doing the work and a ready base of clients seeking the services).When firms are using practice migration primarily to jump start profitability increases, there are some factors that must be in play if the primary implementation driver is going to be lateral entry partners.

In observing firms that have successfully moved their practice upstream (and there are some stunning examples of what can be accomplished) three features seem ever present. First, the firm always has a clear vision of what it is trying to accomplish — and often the goal is bodacious. Firms that say “let’s get a couple of lawyers in that practice area and see what happens” rarely accomplish much.

Second, they have a clear idea of what the ties are to their existing practice and how the institutional synergies will occur. In fact, one of the problems is that sometimes their lawyers are out talking to clients about the practice before the migration has effectively occurred.

Finally, and most importantly, building the upstream practice always involves requiring that incumbent lawyers with the firm migrate with the practice by building their capabilities and knowledge. They don’t allow the lawyers to “keep working in their old practice and work in the new area when they have time.” That assures they will never have time, sends a message to the firm about the importance of the migration and guarantees its failure.

Other Benefits of Practice Migration

The focus of the foregoing has been on Upstream Practice Migration as a strategy for increasing profitability. But a more important aspect of the strategy may be as a means of increasing lawyer job satisfaction. By virtue of the law school admission screening process and law firm hiring standards, the large firms to which this article is directed are populated by some of the brightest, most able and most creative minds our society has to offer. And, according to ABA surveys, the overwhelming motivation for most lawyers to enter the private practice of law is intellectual challenge. Yet, many large firms promulgate compensation systems that reward their lawyers for performing routine cases over and over rather than passing the work to less qualified lawyers for whom it would represent a challenging learning experience.

Upstream Practice Migration provides a means for lawyers to again find their work to be challenging – and, in the process, improves profitability by pushing the current work to younger, less qualified lawyers to create leverage and justifying higher billing rates for everyone involved in the migration.