Monthly Archives: May 2011

Innovation as Differentiation?

lightbulbProfessional service firms looking to differentiate themselves generally do so based on client service.

Client service, as I now realise, is shorthand for discovering what your clients, or segments of your clients want and need, and then providing it.  So one way an accountant may differentiate her practice is by using the annual audit as an opportunity to extend her remit to cover tax planning and profitability advice.  These are services many clients will be receptive to being offered.  Yet so many accountants miss the opportunity to identify their clients’ needs in order to provide the additional services they may well be happy to pay for.

If your firm can position itself as a trusted business adviser such as by offering related services that matter to your clients, you will be able to command higher prices, and avoid commoditisation.  Otherwise, clients will have no other criteria on which to select your firm than price.

Yet, it’s important to appreciate that no matter how essential it is to differentiate, the reality is that it’s increasingly difficult to do so in a meaningful or enduring way, given the oversupply of providers.

The legal industry is by no means alone in having too many firms chasing the same work.  Supply exceeds demand in many other industries too, making it generally more difficult to have a differentiating proposition.

The more similar brands become, the more likely people are to select on price, resulting in a downward impact on the prices you can charge.  This trend is very evident to those of us in practice currently as clients haggle over price, and sometimes manage to find alternative firms to do quite specialized work at astonishingly low rates.

The reason for the oversupply in many industries is that information on products and prices is now instantly and globally available.  So niche markets disappear, and as global competition intensifies, supply increases. As this oversupply is not accompanied by an increase in demand worldwide it results in commoditization of products and services, price wars and shrinking profit margins.

So, in overcrowded markets, differentiating brands becomes harder, which is in essence why law firms find it difficult to differentiate themselves from their competitors.

Even product brands are becoming more similar as people increasingly select on price.  People won’t necessarily stick to Colgate when Crest is on special offer and vice versa (unless they are subject to the well know ‘pester power’ of their children who tend to be very brand aware).

Deregulation

With deregulation coming into effect in October, many firms will sensibly look to innovation as a way of  differentiating themselves.  They will experiment with innovations which they perceive the  market wants or needs.

Here it’s important to first establish that the innovations are really wanted by clients.  Apart from doing market research, it could help if there were a way of knowing which ideas to run with and which to put on hold.  This would avoid spending unnecessary time and money on projects.

One useful tool for evaluating ideas for new products or services is given in the book Blue Ocean Strategy by Kim & Mauborgne.The book is not a light read, which may explain why I had not read it from beginning to end until recently despite having bought it in 2006.

As the book provides a practical framework and analytics for the systematic pursuit and capture of “blue oceans” it’s well worth taking the time to wade through it if you have an idea and want to assess whether it is a ground breaking one or not.

Blue Ocean Strategies

The book’s message is that the best way to break out of the vicious competitive landscape – represented by the red (bloody) oceans of competition – is to offer the market something completely different – something which makes the competition irrelevant, because there will be none.That is the definition of a blue ocean.

Examples of blue ocean industries unknown 30 years ago include mobile phones, biotechnology, express package delivery, coffee bars, and home videos.  How many unknown industries will exist if we put the clock forward 10-20 years?

Cirque du Soleil

Among the many examples of a blue ocean concept the book discusses is Cirque du Soleil which was born out of a dying industry, that of the circus.  Cirque du Soleil didn’t win by taking customers from the already shrinking circus industry, which traditionally catered to children.

It created new market space that made the competition irrelevant. In a crowded market the prospects for profits and growth are reduced. Cut throat competition turns the red ocean bloody whereas blue oceans are untapped market space, where demand is created, as well as potentially high profitable growth.  Most blue oceans are created from within red oceans by expanding industry boundaries.

“The only way to beat the competition is to stop trying to beat the competition. In red oceans, the industry boundaries are defined and accepted, and the competitive rules of the game are known. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. …The companies caught in the red ocean followed a conventional approach, racing to beat the competition by building a defensible position within the existing industry order. The creators of blue oceans, surprisingly, didn’t use the competition as their benchmark. …Instead of focusing on beating the competition, they focus on making the competition irrelevant by creating a leap in value for buyers and your company, thereby opening up new and uncontested market space. …Value innovation is based on the view that market boundaries and industry structure are not given’ and can be reconstructed by the actions and beliefs of industry players.

History shows that industries continuously evolve, and are being created and expanded over time.Industry conditions and boundaries are not given.  For example, what Cirque de Soleil did was to look across market boundaries to alternatives to the circus. It ended up being part circus and part theatre.

Rather than focus on the market boundaries, they focused on the job the customer was hiring for — in this case, it was adults looking for sophisticated entertainment. Another key thing they did was to not target the existing market (that is, children), rather they targeted non-consuming adults.

Creating and capturing new demand

innovation

Blue ocean strategy is all about creating and capturing net new demand by ignoring boundaries defined by traditional competitors.

Strategy is what creates blue oceans, and value innovation is the cornerstone of blue ocean strategy.  This is to be contrasted to value creation – something that improves value but isn’t sufficient to make you stand out in the marketplace.  Innovation without value tends to be technology driven, market pioneering or futuristic, often shooting beyond what buyers are ready to accept and pay for.

Value innovation occurs only when companies align innovation with utility, price and cost positions.  Value innovation isn’t grounded in value-cost trade off.  The conventional belief is that companies can either create greater value at a higher cost or reasonable value at a lower cost – that is strategy is seen as making a choice between differentiation and low cost. However, blue oceans pursue differentiation and low cost simultaneously.  They involve redefining the problem rather than providing solutions to existing problems.

So value innovation is more than innovation.  It requires companies to orient the whole system toward achieving a leap in value for both buyers and themselves.  The aim is to create new best practice rules by breaking the existing value/cost trade off and thereby creating a blue ocean.

Reading this book closely, has helped me avoid spending time and energy on ideas to tackle problems that currently exist – such as the lack of access to legal services by the latent market (see my earlier blog post on the subject of latent markets) Reading the book might also help you to avoid experimenting with ideas that could prove to be distractions.

Differentiate or Die – Survival in Era of Alternative Business Structures

This is the last of 3 blog posts (see previous posts here, and here) on law firm differentiation that I’ve written on the important task of differentiating law firms.

scale11This headline is inspired by the title of Jack Trout’s book Differentiate or Die which explains why survival in our era of ‘Killer Competition’ makes it imperative to distinguish our firms from those of competitors.  This is important as we approach the final stages of deregulation in October 2011.

Legal Services Act and the Alternative Business Structure (ABS)

While some lawyers believe the introduction of ABSs (whereby non-lawyers will be able to hold a stake in law firms) will only impact on high street firms, it’s difficult to see how the possibility of providing a comprehensive range of services incorporating traditional areas of legal practice alongside related commercial solutions, is NOT going to lead to a significant change in the market for legal services for all types of law firm.

At a recent Law Management section talk Nick Jarrett-Kerr expressed the view that the actual impact of deregulation in October 2011 will depend on how much external interest there is in the legal sector, and whether the economy is flat or expanding by then.  If the economy is doing well and there is little external interest, people are likely to say  ‘What was the Fuss About?’ while if there is huge external interest and a flat economy, the legal ‘Big Bang’ will mean Doomsday for many firms.  So, his advice was to assume the worst and plan for it.

In my view being clear about what you offer and how you differ from competitors (not just law firms) is how you can stand out in your chosen area of practice, and survive and thrive.  So, the search for a differentiating strategy has to begin by studying your business, and the markets you serve, in order to identify ways to better meet your target market’s needs.

Service and relationships

I was disappointed that the Law Management conference emphasised quality, standards, and excellent customer service as the way to differentiate law firms.  This same message is often reflected in discussions on LinkedIn and blogs.

Why is everyone telling law firms to focus on customer service, which can rarely be a successful differentiator as Jack Trout explains in Differentiate or Die?

I can only assume it’s a reaction to the poor quality service that some law firms have given in the past.  Some firms have been poor at communicating with clients and keeping them informed, and failed to return phone calls promptly enough.  But surely the fact that some or even many firms need to improve in these basic ways and learn how to run their businesses properly to survive does not justify this emphasis on quality, standards and service by the Law Management section and others?

Pursuing service (exceeding client expectations) and relationships as differentiators is in danger of becoming the new non differentiators.

Size

There is a widespread belief that law firms are going to have to get much bigger to survive.  But I have yet to hear of a large firm that has managed to benefit from economies of scale so as to reduce its hourly charge out rates.  Indeed, the very opposite seems to happen – the larger the firm, the higher its charge out rates. Clearly the knowledge business is not the same as supermarkets.  Tesco’s size does enable it to lower its prices, and that’s achieved through Tesco’s increased buying power.

In the law, size introduces bureaucracy and inefficiencies, as well as allowing the law firm to have fantastic premises and facilities.   The larger firms also have the necessary resources and reach to service the needs of big global businesses.

However, just as the investment management industry has ended up with both very large firms and small niche hedge funds which focus and specialise in particular ways, so in law there is a place for small niche firms to exist alongside the large firms.

There are benefits to being small.  Niche firms can scale up using outsourcing, and collaboration with other firms both locally and internationally, and are well placed to meet certain market needs.  Generally,  small firms are the ones that charge lower rates – possibly because they do not have the layers of bureaucracy.  They also  tend not to retain a team of expensive specialist staff who may not be fully utilised.

If we are to see the emergence of large law firms along the lines of the banks, focused on meeting the needs of consumers and small businesses I hope they will not be emphasising service and relationships.  This is precisely what banks do today, and look at them.

The banks

Banks are all so alike as to make it difficult to choose between them.  If you are dissatisfied with one, will you end up with more of the same by moving to another?

It certainly seems that way in the absence of any differentiators between them.  They all pay lip service to service and relationships.

When I moved our account to HSBC a relationship manager was assigned to me.  I was impressed to be given her mobile number.  Only there was never a reply from that phone.  The reality is that I talk to a succession of call centre operators who work to scripts that are robot like.  Even where they are ringing me in response to a letter I’ve sent, they start by asking a security question – my date of birth.  This infuriates me because it’s always the same question, and I am sometimes in an open plan office where people are listening.  Yet I have never managed to persuade any of the operators to forego the question, or to ask a different question or to ask the question in a more imaginative way, such as what’s the first digit, the sixth digit etc.  I now dread the need to communicate with HSBC as they won’t use a more secure way of asking their security questions.

My banking experience highlights how difficult it is for the consumer when there is no differentiation in an industry – which there isn’t when they all use the same rhetoric to position themselves.

For law firms, service is a given.  Indeed no business survives long term without giving an effective and competent service.  Differentiating on service shouldn’t just be a gimmick.  Giving extraordinary service takes time, and costs money.  So in a climate where law firms are under pressure to reduce their prices it’s inappropriate and contradictory to advise them to differentiate on service and quality standards.  They can’t both reduce prices and increase service in any real and meaningful way.

Much better to differentiate in ways which will meet a market need that isn’t currently being addressed by competitors.  For example, opening at weekends for meetings and telephone enquiries would be a way to stand out, and would be of real value to a client base consisting of workers who are in full time employment.

Conclusion

In the new deregulated climate many law firms should be looking to differentiate themselves and to innovate.  To arrive at a successful differentiating strategy it is important to understand your own business and your target market’s needs.  Avoid trying to be all things to all clients.  Delegating the task of differentiation to a marketing company is not necessarily going to prove successful unless the owners of the firm understand the issues I’ve touched on in these 3 blog posts.

It’s likely the Legal Services Act will see many new offerings in the market.  For law firms to compete effectively it’s going to be important to know which ideas to run with and which to put on hold.  Otherwise, there is potential to lose a lot of time and money on the wrong projects.  My next post will reveal a useful tool for evaluating new product or service ideas.