If you’re seeing more competition for each engagement, greater pressure on rates, more involvement by professional buyers in the Purchasing Dept., and perhaps worst of all, longtime clients putting out RFPs for “your” work, your work has reached the Maturity stage of its Product Cycle. If you fail to change, you’ll ride a downward spiral until you can no longer make money on that work.
What is the product cycle?
Everything offered for sale goes through the Product Cycle: Introduction -> Growth -> Maturity -> Decline. Revenue and profit follow a fairly predictable path through this cycle.
Most buyers understand that, among the three forms of value -- Good, Fast, Cheap -- they can only have two. During the Introduction and Growth phases, they opt for Good and Fast. At Maturity, they favor Good and Cheap. At Decline, they may demand all three.
At the maturity stage, sales growth has started to slow and is approaching the point where the inevitable decline will begin. Defending market share becomes the chief concern. Most lawyers don’t know how to do that other than by reducing their price to try to hold on to the work. Additionally, more competitors have stepped forward to challenge you for every engagement, and offer a lower price. This can touch off price wars. Lower prices mean lower profits, which will cause some wise lawyers to discontinue offering that service altogether. The maturity stage is usually the longest of the four life cycle stages, and it is not uncommon for a service to be in the mature stage for several decades. Whatever you’re experiencing now is also the future.
For quite awhile, lawyers who thought about this at all could be forgiven for believing that legal services were immune from this. After all, for more than 20 years, buyers and work were plentiful, and clients accepted annual rate increases of 6-10%. All that meant, though, was that legal services had a longer Growth phase than is normal. Even during that 20-year boom, many legal services declined in value and pricing power, to the point that many lawyers lost that business to lower-cost competitors, off-shoring, or to in-house legal staffs.
The symptoms cited in the opening paragraph are reliable indicators that it’s time to begin reducing your dependence on that work. You can’t justify investing in a declining asset.
Here’s the core problem for lawyers: There are only so many legal service categories. Even global behemoth DLA Piper lists only 10 major categories with about 6-7 subcategories for all but one of them. (Corporate; Employment; Finance; IP; Trade/Regulatory; Litigation; Capital Projects/Energy; Real Estate; Tax; Restructuring) That totals only 70.
One of the big factors causing price pressure in mature categories is decreased risk. The first time a company tackles a type of legal matter, the perceived risk is high. They want to get it done right, and quickly, so they’re less sensitive to cost and place greater value on expertise as a way to reduce risk.
After something has been done a number of times, the risk of getting it done right goes way down, so the perceived value of the service declines, and they no longer feel the need to pay the top lawyer in the game.
Here’s a concrete example. In the late ‘90s, Dick Rudder became the first lawyer to securitize a music portfolio, for David Bowie. The security’s value was based on the future licensing revenue of Bowie’s prolific catalog. Bowie cashed out for a reported $60 million, so he probably wasn’t too concerned about a six-figure legal bill. Fast forward just a couple of years and you’ve got any number of securitization deals done by lots of different lawyers. Once the recipe is known, the risk declines and, along with it, the buyer’s willingness to pay a premium for the wizard practitioner.
When risk and business impact declines, so does your access. While the top people pay attention to unfamiliar matters with potentially high stakes, once the risk goes down, they delegate downward and move on to emerging issues that have greater risk and impact. Don’t think that your relationships with the people at the top will protect you against service maturity. They’ll still like and respect you, but it you’re associated with issues that are no longer relevant to them, neither are you.
It’s very difficult to reinvent yourself completely and practice a different type of law, so that’s not a practical option. That’s why I argue that you should associate yourself with a business problem that triggers demand for your expertise, and opens doors to those experiencing that problem. That’s why we call it the Door-Opener. When your problem matures, you can associate with a different business problem within the same industry pretty easily.
The most successful lawyer I ever coached, a New York City securities lawyer, many years ago caught the wave of accounting irregularities and financial fraud at exactly the right time. He developed a book of business that peaked at $40 million per year. A few years later, he called me to say that that wave had passed, and his book was down to $4 million per year. Time to reinvent himself. However, when we looked at the kinds of problems his longtime stakeholders (Boards of Directors and corporate officers) now faced, we discovered that the “new” problem had a lot of similarities to the old problem, so all we had to do was repackage him, not reinvent him.
Just as it’s imprudent to invest in declining categories of legal matters, it’s a bad idea to hitch your wagon to a declining industry (unless you do Bankruptcy or Restructuring). Clients in mature industries experience the same increased competition, price pressure, and shrinking margins as you do. They’ll opt for Good and Cheap.
To avoid suddenly realizing that you’re in a tough spot such as described in the opening paragraph, focus on an industry. Become an industry expert, knowledgeable about their challenges and opportunities, and keep yourself well informed so you can recognize the early signs that your Door-Opener (the problem that drives demand for your service) is maturing and declining in significance. If you know what’s going on in the industry, you’ll know which problems to shift your association toward.
Always invest in emerging issues, preferably in robust, growing industries.
This is the fifth in a 13-part series. Next week: Don't limit yourself to a product or geography.
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