The LVS Law Firm Performance Index

Author: Debra Baker
June 1, 2012

As a follow up to my Moneyball and the Law series addressing whether statistical data is a better measure of law firm performance than subjective insight, I’m introducing a new framework that tests this hypothesis.

The Law Firm Performance Index

To achieve the highest level of performance, law firms need to understand the outward-facing factors that impact the business of law. The LVS Law Firm Performance Index™ provides insight into these external drivers:

-          The trends that generate or limit demand for specific types of legal services.

-          The needs and decision-making process of potential buyers in a given market.

-          The landscape of lawyers competing for the same clients.

Armed with this knowledge, law firms can develop and execute strategies based on objective rather than subjective evidence, reducing risks and increasing returns.

The Performance Indicators

Are you in demand?
Because of the dynamic nature of legal services, predicting demand in a given market is challenging. Legal matters typically fall into one of four categories: Commodity, Routine, Complex, Bet-the-Company. The largest volume of work falls into the first two categories while the most profitable work lies in the latter two.

A variety of trends impact the volume (amount) and nature (value) of legal services. The LVS Performance Index™ evaluates global, national and local trends to predict demand for different practices:

  • Economic
  • Industry
  • Regulatory/Litigation
  • Geographic

Who needs your services?

Corporate buyers of legal services vary based on business type, size and market reach. The buyer profile provides insight into the value (cost) of different types of legal needs. Size also impacts the way clients make decisions about whom to hire.

LVS segments the business market into five categories:

  • Multinationals
  • Public Companies
  • Large Private Companies (greater than $75 million in revenues)
  • Mid-Sized Private Companies ($10-$75 million in revenues)
  • Small business enterprises (less than $10 million revenues.

Pricing of legal services is generally associated with the level of risk and complexity of a matter. The larger the company, the more complexities in running the business and the greater the value of legal services that facilitate this process.

The business segment can also dictate how decisions about who to hire are made. Small companies make decisions quickly and rely heavily on referrals from trusted advisors when deciding who to hire. Large companies have more formal hiring processes, so firm brand and the ability to demonstrate and validate expertise is more important.

Can you get the business?

Law firms do not compete on an even playing field. The richest firms are getting richer. They are able to attract the best lawyers and win the highest volume of premium legal work.

At the same time, the firms that make up “Big Law” are increasingly segmented. A new tier of super-rich firms now controls the largest share of the premium legal services market. Large firms in the tier below are under increased pressure to compete for the premium work that remains. Trends impacting these firms have a trickle-down effect on other regional, local and solo firms.

Although these sub-groups will continue to evolve, Legal Vertical Strategies segments the law firm competitive landscape into five tiers:

Tier 1 An emerging Global 25 law firms that LVS believes will ultimately control the legal market.
Tier 2 The remainder of the AmLaw 200 firms based on revenue.
Tier 3 Regional and other firms outside the AmLaw 200 with multi-city offices.
Tier 4 Single office/city law firms with more than four people.
Tier 5 Solo attorneys and firms with up to four people.

 

What is your baseline competitive position?

The LVS Competitive Matrix pinpoints the relative competitive position of each tier of firm based on the type of client and value of work needed to achieve those goals.

The matrix compares nature of work (low to high risk) against type of business (small to multinational) to identify which tiers of firm are most competitive for the specific type of work and client.

Using the baseline competitive matrix, firms and individual attorneys can evaluate and adjust strategic goals and objectives based on market realities.

External dynamics impact how law firms will achieve these goals in many ways:

  • The ability to generate business is dependent upon global, national and local trends that impact demand for legal services.
  • Developing strong client relationships requires a deep understanding of the unique characteristics and demographics of businesses in the market.
  • In order to demonstrate and differentiate to a client requires an in-depth knowledge of the competitive landscape.
  • Operations, profitability and professional development are all dependent upon decisions that arise out of business creation, client relationships and competitive differentiation.

The Law Firm Performance Index provides the data firms and attorneys need to align external-facing strategies with the overall vision and culture of the firm. As with any index, the indicators will continue to evolve over time.

I’d like to hear from you. What external measure would you look at to predict law firm performance? In the meantime, I look forward to sharing in future posts the results of the work I do with clients who utilize this framework.

 

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