In 1871, on the evening of October 8th, Catherine O’Leary was milking her cow in the barn behind her house in Chicago. The cow kicked the lantern, breaking the glass and starting a fire. The wind was high and the weather dry, so the fire spread fast eventually engulfing more than three square miles of Chicago. The Great Chicago Fire, we are told in a minstrel tune, was due to Mrs. O’Leary and her twitchy cow:
Late one night, when we were all in bed,
Old Mother Leary left a lantern in the shed;
And when the cow kicked it over, she winked her eye and said,
“There’ll be a hot time in the old town, tonight.”
At least, that is the urban legend. As with other urban legends, this one is not true, but it makes for a great tune. The Great Chicago Fire was real enough, and it did start in Mrs. O’Leary’s barn, but the fire department concluded a spark from a chimney was the likely cause. Still, lawyers should take heed that cows have a history of being around when bad things happen.
From Milk Cow to Cash Cow
The story about Mrs. O’Leary’s cow sparking the Great Chicago Fire is fun, but another cow may be fanning a bigger fire in the law right now. The story of the legal industry’s cow begins about 100 years after Mrs. O’Leary’s milk cow lived.
Bruce Henderson was the founder and for many years president of Boston Consulting Group. He created a simple matrix for a company to use when evaluating its business units as part of an overall growth strategy.
The “growth-share” matrix, often called the BCG Matrix, relies on measurements along two dimensions. Business units are measured along the Y-axis as having high or low market growth rate. They are measured along the X-axis as having high or low market share. The resulting matrix includes four categories (high-high, high-low, low-low, low-high) which Henderson gave the names stars, question marks, dogs and cash cows. This is where we got the business slang term “cash cow.” A farmer’s dairy cow yields a steady return (milk each day) for a relatively low investment (an area to graze), and a business’ cash cow yields a steady financial return for a low investment.
Using the BCG Matrix to categorize its business units, a company decides on a strategy for growth, following the BCG philosophy:
Only a diversified company with a balanced portfolio can use its strengths to truly capitalize on its growth opportunities. The balanced portfolio has:
- stars whose high share and high growth assure the future;
- cash cows that supply funds for that future growth; and
- question marks to be converted into stars with the added funds.
Plotting Law Firms and Law Departments
If you are leading a law firm and believe in the BCG Matrix, you evaluate each of your business units—practice groups—using the two dimensions. Then, you create a scatter chart plotting each practice group on the Matrix. For example, most law firms would put cybersecurity practices in the question marks box—they have a high market growth rate, but each firm has a low relative market share.
Each year, we see more firms evaluate their practices by implicitly following the BCG Matrix. When they complete the analysis, the firms shed attorneys in practice areas that are dogs and try to recruit lateral partners for question marks practices. This approach to managing the portfolio of practices that make up a law firm is one of the reasons we see such a hot market for lateral partners. One firm’s dog can be another firm’s question mark, so partners move from firm A to firm B.
Law departments also can use the BCG Matrix. Demand for services within law departments varies as the nature of the company’s business model varies. By categorizing service areas using the BCG Matrix, a department can look at where it may want to invest (demand is increasing) and where it may want to explore alternative service providers to significantly reduce costs. Put another way, general counsel should not spend a lot of money on the dogs and figure out how to invest in the stars.
Managing the Herd
Because law firms and law departments still operate on labor-centric models, shifting resources usually means firing and hiring. Certainly at the law firm level, we see firms rather routinely shed associates and sometimes partners when certain practice areas turn into dogs. We also see, as I noted above, firms hire partners and even associates when other practice areas turn into question marks or even stars. There are significant costs to this approach, but until firms find it in their self-interest to move away from the labor-centric model, we will see this behavior.
Law departments also shift by firing and hiring, but do so with more nuanced moves than law firms. General counsel are more tolerant of re-tooling lawyers within a department, perhaps because the majority of law departments still employ many generalist attorneys whereas law firms focus on specialists. Law departments tend to shift by dropping or adding outside counsel. In fact, this was one of the perceived benefits of using outside counsel. If M&A cooled off and litigation became hot, the law department would shift its outside spending accordingly.
Most Law Firms are Cows or Dogs
There is another way of using the BCG Matrix and it is happening right now in the legal industry. If you look closely, you can see many firms—or, more precisely, many equity partners—using the strategy.
Equity partners own a law firm. As investors, they should decide how to maximize their investments in the firm. They could build a strategy using the BCG Matrix for practice areas. Another approach is to think of the entire firm as one business unit. In other words, rather than ranking each practice area on the two dimensions, rank the firm as a whole on the two dimensions.
If the equity partners at most large law firms do this, they should conclude that their firms are not stars. Instead, they should put their firms in the cash cow or dog quadrants. Most firms are experiencing little or no top line growth and many have seen revenue drop. The market for large law firm services is fragmented, so no firm can claim a significant market share. Intellectually, that would put many law firms in the dog quadrant. But these firms do generate cash flow well in excess of costs. In fact, despite the decline in the market for large law firm services, law is still one of the most profitable professional service business models (accounting firms beat law firms last year).
If we asked equity partners in small firms and mid-size firms to do the same exercise, we should get the same result. Some firms will be the exceptions, just as there are about two dozen large firms that seem to fall into the star quadrant. Overall, however, firms are more likely to be cash cows and dogs.
How Law Firm Leaders Manage Cash Cows
To understand what this classification means, we should add another fact to the story. Law firm leaders and equity partners tend to be older. Many are baby boomers, which means they are roughly ages 52 to 70. In fact, not only are they older, they are older than their counterparts in companies. A recent study found that less than five percent of law firm leaders are from Gen X, whereas up to 30% of major company general counsel are from Gen X.
If we combine the results of the matrix exercise with the baby boomer information, we get an interesting picture. Most firm leaders (equity partners) will continue working for a relatively short period, perhaps another 10 years. The legal market is changing, but slowly. Over the next 10 years, we will not see carnage among the large law firms, though we will see the weaker firms picked off.
Equity partners may decide—rationally and as owners of a firm—to forego any significant investment in the firm or its future, invest only that which is necessary to keep a firm operating at its current level, and take the cash. In the BCG Matrix model, this would be milking the cash cow. The strategy will not keep a firm alive forever in this competitive market, but it will work to keep the firm afloat long enough for those equity partners in power (and their peers) to retire comfortably.
There are, of course, many others who work in law firms. The firms hire associates, promote some to non-equity partners, and maintain some level of staff in various other areas, including paralegals, IT staff, clerks, librarians, and so on. What happens to all of these people when firm leaders follow the cash cow model?
Some of these people realize what is happening and, if they have choices, leave the firm. Many do not realize what is happening. Some of them will be forced to look for work when the firm merges or fails, and some will be fortunate enough to move to a successor firm or find other employment. What works for an equity partner does not look so good for others in a firm.
Breaking Out from the Herd
Some lawyers think it is unfair that law firm equity partners can act in their self-interest and not protect all the employees of a firm. If you think that way, you may want to talk to the former partners of Dickstein Shapiro who lost their capital investments when the firm closed its doors. Ultimately equity partners are investors and to expect them to act altruistically is silly.
That does not mean we should ignore other stakeholders. Associates and non-equity partners (and even junior equity partners) should consider the future and how best to prepare for it. Some firms have decided to give these individuals a voice in the future of the firm. Other firms make it clear that only equity partners will have any voice in the firm’s future. A very few firms seem willing to make modest investments in their future.
Associates, non-equity partners, and junior equity partners must decide what they want and the best way to get there. But they should remember, that failure to act is a form of acting. The best way to predict the future is to make your own.
Lawyers have a strong tendency to remain bodies at rest, like content cows in a field, unless forced to act. When a firm receives enough work to keep its lawyers busy, even if only to a modest degree, lawyers will stay still and graze comfortably on what comes along. If you are one of those contented lawyers, now may be a good time for you to lift your head up, look around, and shape your own future. Otherwise, you may be the last cow in the barn when it burns down.