Do You Have a Chief Strategy Officer?

When you see—or when I see, at any rate—sustained outperformance by a firm over a five-year span, I cannot help but ask myself: "How did they do that?"

What follows has a dusting of speculation at the end, but I think it's a path worth walking down, with more than enough hard truth along the way to give us firm footing.

The firm I have in mind this morning is Reed Smith, which announced its total 2005 revenue was up 12% over 2004 to $563-million, revenue per lawyer up 10% to $609,000 from $553,000, and its profits per partner up 21% to $800,000 from $662,000. 

And the five-year record?:  Revenue per lawyer up 62% and profits per partner up 154%.   Aside from one senior recruiter at BCG Attorney Search who sounds as though she took the reporter's phone call unaware of the Reed Smith results, and who expostulated "That's very good, very, very good," the real story is reflected in this range of comments:

"We basically doubled in size over five years," [Managing Partner Greg] Jordan said. "I suspect we'll continue to grow at about that pace."

"[Philadelphia-based legal recruiter Michael] Coleman said it is difficult to think of a firm that has transformed itself as dramatically as Reed Smith has over the past few years. "If one looks at Reed Smith over the last five years and each year had very significant growth in its numbers, one can't help but be extremely impressed with the management and direction the firm has gone in converting itself from a regional shop to a national powerhouse with some global offices," Coleman said.

"Chuck Fanning, global practice leader for the partner placement group at Major Lindsey & Africa said Reed Smith is clearly one of the firms that is moving up in the ranks. "It's a national -- and becoming a global -- player that is, I think, on the rise," he said."

Reed Smith has grown geographically, most notably with its 2003 acquisition of California's Crosby Heafey, and its UK practice, launched in 2001 with the acquistion of Warner Cranston, is growing at a rate outpacing that of the firm as a whole.

For historical perspective, in 1999, just before Jordan took over, Reed Smith was #79 in the AmLaw 100, with total revenue of $126-million and profits per partner of $335,000; the 2005 numbers would put them at #27.

So what's going on?  Jordan uses one critical phrase more than once:  "It's just the result of following through our strategy," and, "while the firm has achieved a lot of its strategic plan,...I don't think we're anywhere near becoming a finished product."   What are the elements of that "strategy?":

• to expand geographically, domestically at first and now internationally (they just opened in Paris late last year);
• to move the mix of work towards more complex, high-end work (which also enables cross-marketing);
• to focus on areas such as financial services and life sciences; and
• to command rates higher than were typically available in their home town of Pittsburgh.

A consistent and sustained campaign of moves like this, in my experience, is not an accident.    How, then, does a firm create and follow through on such a strategic campaign?  In the case of Reed Smith, by appointing a "Director of Strategic Planning."   In other words, if you're serious about strategy, make someone responsible for it.

Now we move into slightly more speculative territory.  In the 2nd quarter of 2001, McKinsey published a study, "Lawyers Get Down to Business," subtitled "New pressures are hitting the legal industry.  Now is the time to think through your strategy."  (The report is now behind a pay-wall, but I have a hard copy; anyone interested in learning more, please contact me.)  

McKinsey's premise then?:

"The legal industry is losing its immunity to the macroeconomic forces that have propelled consolidation and stratification in other industries.  Of the world's largest law firms (measured by revenue), all but the most profitable are in some peril. [...] 

"The more far-seeing firms will build national, and in some instances, global practices of distinctive depth and breadth of expertise—practices that can support high profits per partner and significant growth.  These strengths will set in motion a virtuous cycle in which such firms cherry-pick top talent from other, less profitable competitors and invest in geographic expansion and technology.  New talent and investments will help the leading firms put even more distance between themselves and the stragglers, which will be swept into an almost irreversible downward spiral, thus losing talent and stature at an accelerating pace until they unravel, get acquired, or reconstitute themselves as 'commodity' players."

McKinsey also discussed the "bifurcation" between routine legal needs and high-value practice areas, and proceeded to create a four-quadrant "profitability map" of the Global 50 law firms, showing their positions in 1993 and 1999, with number of equity partners on the horizontal/X axis and profits per partner on the vertical/Y axis. 

Saying that "a firm's position on the profitability map provides insights into that firm's strategic choices," they posited the following groupings:

• Upper left "specialists," with few partners but high profits, focused on a few related, highly lucrative practices:  Wachtel, Slaughter & May
• Upper right "shapers," with high profits and a large number of partners, combining a distinctive strategy with top-flight execution:  Skadden
• Lower left "incumbents," with small partner bases and low profits, lacking both world-class skills and scale:  Hogan & Hartson
• Lower right "full-service integrators," with substantial geographic scope but not stratospheric profits:  Jones Day, Latham, Baker & McKenzie.

So what?  McKinsey identified a key "winning strategy" going forward as that of becoming a dominant "megafirm," with a broad but coherent set of practices and a compelling geographic presence, "skilled at negotiating and struturing deals and at integrating and governing a large, diverse, and highly dispersed group of attorneys."

My speculation is that McKinsey did not prepare this report on a lark:  That it was an offshoot of a paid engagement by an AmLaw 50 firm facing an identity crisis in 2000.  And my nominee is O'Melveny & Myers.  Tea leaves:

• In 1999, O'Melveny was #18 on the AmLaw 100, with total revenue of $372-million, but no clear path to growth or even sustainability.
• In 2004, they were #16, holding their own against incredibly strong incumbents; this was not an accident either.
• Finally, as Aric Press puts it,

  "O'Melveny jumped into the first quintile [in Value Per Partner] in fiscal 2001 and has stayed there, finishing this year at number 20. The change started with a power shift too, this one after a contested election for chair that was won by Washington partner Arthur "A.B." Culvahouse... As Culvahouse saw it, the firm was already working hard, but the work varied in price. Quickly and aggressively, Culvahouse recalls, the firm sought "to move to higher-value engagements at the top of the market."

Sounds like the McKinsey strategy, and what a coincidence of timing.

I leave you with these questions:

• What is your firm's strategy?  Time's up if it takes you more than 5 seconds to reply.
• What specifically are you doing to be clear, consistent, and firm in its implementation?  Do you have a Chief Strategy Officer? 
• If not, #1:  Then who's the champion of your so-called strategy?  And don't reply that it's the managing partner; they have too many other irons in the fire to do this full-time.
• If not, #2:  Name a high-end professional services firm outside the law that has no such person or no such function—and if you can come up with one, let me know because I want to short their stock.
• If yes:  Is your CSO on the management/executive committee?  Are they, in other words, for real?