As a rule, lawyers have a tough time with abstract concepts.  That’s why it surprises me that when law firms do strategic planning they are willing to accept some pretty vague objectives.  Read a typical law firm vision statement and you’ll find things like: “Enhance profitability;” “Become preeminent;” and “Be the ‘go to’ law firm…”  Nice concepts, but kind of hard to nail down when it comes to drawing a blueprint or trying to measure success.  And, to paraphrase what the Cheshire Cat said in Alice in Wonderland, “If you don’t know where you are going, any road will take you there.”

The truth is that the hard part of strategic planning isn’t creating the plan.  Once a firm figures out where it wants to get to, the plan usually kind of falls into place.  The tough part is developing the vision of where the firm wants to go. Or, more appropriately, where it can go.  What is the firm’s highest potential; how high is up?

The immediate question, of course, is what difference does highest potential make?  We want to be as profitable as we can be.  Why limit ourselves?  In part the issue is acceptance of reality.  If the firm announced its vision is to be the Cravath of Cincinnati with profits of $2.6 million per partner, the planning committee would probably be laughed out of the firm.  So while big bodacious goals are fine, they must have at least a touch of realism to maintain credibility.  But more importantly, the vision determines the plan – how you are going to get from point A to point B.  If point B is a reasonably modest change in practice, client base or profitability, the actions required are equally modest.  But if point B is off in the stratosphere and you’ll have to tear the firm apart to get there, you probably need to know that early on.

The easiest way to identify a firm’s potential is to step back from the monthly financial reporting cycle and annual budget and consider some basic macro issues about the firm.  Pretend you are a venture capitalist interested in buying your law firm (okay, that can’t legally happen…but I said pretend).  I suspect you would perform five basic analyses:

  • Business Model Analysis.  How does your firm go about generating revenues and what determines the proportion that represents profits?  This raises the basics of productivity, pricing, use of technology and maximization of output.  So, what would the potential result be if we were able to build the firm from scratch and design it strictly around the most favorable micro-economics?
  • Customer Analysis.  Who buys the services we are offering and what factors determines their supplier selection and the volume of their purchases?  Are there certain types of clients who purchase more profitable services or are willing to pay premium prices? Do some clients present higher risk profiles both in terms of ongoing business and the likelihood of being paid?  What would the firm’s potential be if it could pick and choice its ideal client base?
  • Product Analysis.  Are there certain services that are more highly valued and in greater demand?  What would be the risk/reward in focusing on the most highly demanded services even if they didn’t provide maximum profit, or, conversely, what would the potential be if the firm focused only on its most profitable practices?
  • Competitive Analysis.  How does the firm compare to competitors in all aspects of its business model?  Have similar and competing firms reached their potential and do such peers represent a ceiling for the firm’s potential?
  • Capital Analysis.  If the firm were to receive an infusion of capital how would it be best used?  If the capital were used to grow, how would that growth occur and what would be the impact on the business model and profitability?  What is the firm’s optimum size and what potential is offered through growth?

There are probably dozens of other analyses that a venture capitalist would use in considering whether to buy a law firm, but you get the idea.  Understanding its potential allows a law firm to dream, innovate and prosper.  Then the firm can calculate what it would take to reach its true potential and determine whether the result would be worth the effort…which is sort of the point of strategic planning.