Law firm strategy

Peter Drucker and the 21st Century Law Firm. Part 8: What will your law firm’s business be?

Although Drucker wrote the Practice Of Management in 1955 he could easily been writing in 2015  when he considers topics of innovation and technology in the context of law firm strategy.

What Will Your Law Firm Business Be?

How often do law firm partner and management consider “what will our law firm business be?” from a medium to long-term perspective?  There is much short-term planning in law firms but less strategic planning for the medium to longer term.

Drucker suggests that “So far all questions regarding the nature of “our business” have been concerned with the present. But (law firm) management must also ask: “What will our business be?” This involves finding out four things.”

His four questions are as pertinent to law firm management today as they were in 1955.

1. Market Potential & Trends

“The first is market potential and market trend. How large can we expect the market for our business to be in five or ten years – assuming no basic changes in market structure or technology? And what are the factors that will determine the development?”.  Note his emphasis on the assumption of no basic changes in market structure technology. In today’s climate how might law firm management answer this question when it is evident that the market is undergoing fundamental changes in structure due to technological innovations.

2. Changes in Market Structure

“Second, what changes in market structure are to be expected as a result of economic development, changes in fashion or taste, or moves by competition? And “competition” must always be defined according to the customer’s concept of a product or service he buys and must include indirect as well as direct competition.” It is vitally important to understand competition from the client’s perspective. What or who will be competitors to law firms in the next three, five, 10 years? There is no doubt that the competitive landscape for law firms is already changing, and will change rapidly and radically in the short to medium term. Is law firm management capable of meeting this legal market structural change? How will they, at a firm level, meet this challenge?

3. What Innovations will Change the Customer’s Wants?

“Third, what innovations will change the customer’s  wants, create new ones, extinguish old ones, create new ways of satisfying his wants, changes concepts of value or make it possible to give them greater value satisfaction? This has to be studied not only in respect to engineering or chemistry, but in respect to all activities of the business.….. And innovation is not only a servant of the marketing goals of the business but is, in itself, a dynamic force to which the business contributes and which in turn affects it.” Law firm innovation must be considered from the client’s needs. How many law firms actually encourage or allow innovation to occur? And if it is, how will it assist the client. Innovating in how more time will be recorded then billed probably does not classify as client centred innovation. It is incumbent on law firm management to allow innovation to flourish, and to encourage it. Unfortunately, the current billable hour business model must be considered an innovation killer.

4. How will Customers’ Wants be Satisfied in the Future

“Finally, what wants does the customer have that are not being adequately satisfied by the products or services offered to him today? It is the ability to ask this question and to answer correctly that usually makes the difference between a growth company and one that depends for its development on the rising tide of its economy or industry. And whoever contents himself to rise with the tide will also fall with it.” A truly in-depth understanding of each customer or customer segment is required for law firm management to answer this question. It is probably fair comment that over 90% of the global population of law firms rise or fall with the tide. Great for the 10% that are “growth companies” in the true [Drucker] sense of the term (as opposed to revenue growth).

And what should your law firm business be?

“The analysis of “our business” is not yet complete, however. (Law Firm) Management still have to ask: “are we in the right business or should we change our business?”

“Of course, many companies get into a new business by accident; they stumble into it rather than steer into it. But the decision to shift major energies and resources to new products and away from old ones, the decision, in other words, to make a business out of accident should always be based on the analysis: “What is our business and what should be?” Back to the fundament question for law firm management. A questions that should be asked, and answered, frequently but more often than not is only raised at the annual partners’ retreat.

What about Law Firm Profitability?

When Drucker writes about profitability he assumes that (law firm) management understand the concept of profitability. Unfortunately, there are many in the business of law who do not really understand profitability, rather mistaking it for revenue.

“Profitability considerations should not, however, normally lead to changes in the nature of the business. Of course, business (or a legal practice area) can become so unprofitable as to be abandoned. But almost always market standing, innovation or productivity would have counselled its abandonment much earlier. Certainly profitability considerations limit the business an enterprise might go into.” Profitability analysis in a law firm is not easy but it is a vital function. Profitability considerations range from the overall firm to business units to matters.

“But if the decision to go into a business (new legal market) is sound on the basis of market standing, innovation and productivity, if it is sound according to what makes a business, it is the responsibility of (law firm) management to make it produce the needed minimum profit. That, bluntly, is what (law firm) managements are being paid for. And if a management cannot, over a reasonable period of time, produce the minimum profit needed, it is in duty bound to abdicate so as to let another management try to do the job properly.” How many law firm managements abdicate due to a failure to do their job properly? Or how many are stymied attempting to do their job by the owner managers (the partners).

Law Firm Objectives

“This is simply another way of saying that the (law firm) business must be managed by setting objectives for it. These objectives must be set according to what is right and desirable for the enterprise. They must not be based on the expedient or on an adaptation to economic tides. Managing a business cannot, in other words, depend on “intuition”… And profit in a well managed business is not what one happens to make. It is what ones sets out to make because one has to make it.” Objectives are over and above revenue or profitability objectives which are frequently (and sadly) the only major law firm objectives. Many law firm’s are managed on intuition. Unfortunately, business intuition is not taught at law school or could be considered an inherent trait in lawyers.

“To reach objectives, detours may have to be made round obstacles. Indeed the ability to go round obstacles rather than charge at them head-on is a major requirement for managing by objectives. This is one reason why all objectives have to be re-examined continually. Yet, setting objectives enables a business to get where it should be going rather than be the plaything of weather, winds and accidents.”

Drucker again hits the mark for 21st century law firm.

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Paddy Oliver

Managing Director

Lexcel Consulting

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Paddy Oliver