We’ve been quoting Clayton Christensen, a professor at Harvard Business School, for many years. Christensen once called large American law firms "the most profitable businesses in the world," while at the same time indicting them: "Speedier information-gathering capabilities allow large law firms to increase utilization of less experienced lawyers without passing cost savings on to their customers."
Christensen is the author of The Innovator’s Dilemma, a longstanding business bestseller, and credited with coining the concept of "disruptive innovation." A disruptive innovation is essentially one undertaken by new kids on the block that undercuts competition from the big boys by pursuing their low-margin, high volume profits–something the big boys often fail to do–resulting in, according to Christensen, the fall of big steel to mini steel mills, GM to Toyota, console radios to transistors, and companies making larger disc drives or big excavators to those making smaller disc drives and hydraulic backhoes, among many other examples.
The surprising point of Christensen’s thesis is that "the new technologies that had brought the big, established companies to their knees weren’t better or more advanced–they were actually worse… But the new products were usually cheaper and easier to use…" and there were so many more consumers concerned about price, that those disruptive technologies prevailed.
In 1999 Christensen and Andy Grove, CEO of Intel at the time, appeared on the cover of Forbes magazine after Grove said Christensen’s book was the most important he had read in 10 years–and proved it by bringing out a cheap chip, ideal for the emerging low-end PCs, that captured 35% of the market within one year.
Christensen contends in his 2008 Harvard Business Review article "Reinventing Your Business Model" that, when faced with these potentially significant competitive incursions, many "successful" businesses are unable to evolve what has been an historically profitable business model into a model better suited to the emerging market and to undertake it before the disruptive innovations fatally undercut their business.
Christensen suggests in his HBR article, "Meeting the Challenge of Disruptive Change," essentially running two businesses at once when faced with the encroachment of disruptive change: one with the old business model (which is usually still viable while disruptive change is emerging) and one with the new business model. Our entry "Profiting from New Market Demand" identifies some of the early lower-cost legal services providers that are provoking that disruptive change in the legal market and also some firms that are trying to run two businesses at once–a more traditional law firm and also a competitive low-margin, high-volume legal business.
Christensen’s views have been applied to the legal industry by others — "Disrupting Conventional Law Firm Business Models Using Document Assembly" –and several years ago he authored a white paper on "Transforming Legal Services," in which he notes that law firms have been able to successfully make outsize profits –40% on average for the AmLaw 100, or roughly twice the average margin of the country’s 100 largest publicly-traded corporations–without updating their product or their business model. He warned, though, that that success was unlikely to continue:
"In the parlance of disruptive innovation theory, corporations are ‘over-served’ when they pay top-firm rates for routine matters… Corporations have reacted by fragmenting their legal spend… For the leading law firms, fragmentation means loss of market share."
"Over-served" resonates with the repeated warnings coming from a number of sectors these days (including us) of over-capacity in the legal industry. Christensen’s theory predicts that firms may flee upmarket trying to make up the revenues and margins lost to the disruption rising from below, a strategy that he says rarely succeeds. Similarly law firms, most famously and recently Dewey & LeBoeuf, have tried to bolster sagging revenues by bringing on board high-profit "stars" to bulk up the top-end of business while continuing to lose their bread-and-butter work to alternative providers. A strategy that has often failed.
One of Christensen’s long-standing points is that strategic planning must be focused on the steps to be taken now that will keep companies on the best long-term trajectory. He says too many companies take the easy step–increasing immediate high-margin business, for example–which leads to another easy step, until the strategic plan is simply the one of least resistance to short-term profits. But one which doesn’t grapple with the hard analysis of what the demand of the future is likely to be and how to change the business model to meet that.
Christensen has a new book out this year, one that captures some of the personal journey he has been through–from a conservative Mormon upbringing that spurred a spiritual awakening and empowerment in adulthood and poised the problem of how to balance a strong commitment to family, community and church with the demands of his career. The last few years have presented particularly tough personal challenges–including a heart attack, a terminal cancer diagnosis, and a stroke that left him unable to speak for many months.
How Will You Measure Your Life? is an expansion of an HBR article by Christensen of the same name. Christensen’s advice is to make investments in our personal lives in much the same ways that he advocates investing in business–identifying and then devoting time and energy to our long-term priorities.
"As I think about my former classmates who inadvertently invested for lives of hollow unhappiness, I can’t help believing that their troubles relate right back to a short-term perspective.
When people who have a high need for achievement—and that includes all Harvard Business School graduates—have an extra half hour of time or an extra ounce of energy, they’ll unconsciously allocate it to activities that yield the most tangible accomplishments. And our careers provide the most concrete evidence that we’re moving forward. You ship a product, finish a design, complete a presentation, close a sale, teach a class, publish a paper, get paid, get promoted. In contrast, investing time and energy in your relationship with your spouse and children typically doesn’t offer that same immediate sense of achievement. Kids misbehave every day. It’s really not until 20 years down the road that you can put your hands on your hips and say, ‘I raised a good son or a good daughter.’You can neglect your relationship with your spouse, and on a day-to-day basis, it doesn’t seem as if things are deteriorating. People who are driven to excel have this unconscious propensity to underinvest in their families and overinvest in their careers—even though intimate and loving relationships with their families are the most powerful and enduring source of happiness.
If you study the root causes of business disasters, over and over you’ll find this predisposition toward endeavors that offer immediate gratification. If you look at personal lives through that lens, you’ll see the same stunning and sobering pattern: people allocating fewer and fewer resources to the things they would have once said mattered most."
Christensen’s thinking is abundantly relevant to both the law business and lawyers personally–to how we assess and react to competition, how we respond to falling revenues and how we allocate resources in both our professional and private lives: focus on long-term priorities, Christensen says, and not short-term gain.