Destroying your own business

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Well before Blockbuster Video actually filed for bankruptcy protection earlier this fall, The Onion produced a prescient video about a museum tour based on the movie rental chain: Historic ‘Blockbuster’ Store Offers Glimpse Of How Movies Were Rented In The Past. One dazzled visitor remarks: “It’s like stepping into a time machine … it’s hard to believe people used to live this way.” The whole feature is well worth the two minutes, but the sting comes at the end, as the anchor adds: “Blockbuster joins a growing number of historical sites, including Buffalo, New York’s re-creation of a Virgin Records music store and Iowa City’s Borders Bookstore Museum.”

The only thing more striking than the dismantling of these former powerhouse franchises is the speed at which they’re coming apart. Blockbuster, Virgin and Borders were corporate giants with global reach and massive brand strength. Yet today, when you think of videos, music and books, you first think of Netflix, iTunes and Amazon, companies that launched in 2001, 1999 and 1995, respectively. How did the mighty fall so swiftly?

James Surowiecki asks that very question in a recent New Yorker column, citing not just Blockbuster but other former “category killers” like Home Depot, Toys R Us, and Circuit City, companies that dominated the “big-box” developments that spread like wildfire throughout suburbia over the last few decades. These stores were also giants in their day, but today each is either struggling badly in the new economy or has already sunk beneath the waves. Surowiecki puts his finger on the problem in three paragraphs that every law firm leader should read and take to heart:

The problem — in Blockbuster’s case, at least — was that the very features that people thought were strengths turned out to be weaknesses. Blockbuster’s huge investment, both literally and psychologically, in traditional stores made it slow to recognize the Web’s importance: in 2002, it was still calling the Net a “niche” market. And it wasn’t just the Net. Blockbuster was late on everything — online rentals, Redbox-style kiosks, streaming video.

There was a time when customers had few alternatives, so they tolerated the chain’s limited stock, exorbitant late fees … and absence of good advice about what to watch. But, once Netflix came along, it became clear that you could have tremendous variety, keep movies as long as you liked, and, thanks to the Netflix recommendation engine, actually get some serviceable advice. (Places like Netflix and Amazon have demonstrated the great irony that computer algorithms can provide a more personalized and engaging customer experience than many physical stores.) …

Why didn’t Blockbuster evolve more quickly? In part, it was because of what you could call the “internal constituency” problem: the company was full of people who had been there when bricks-and-mortar stores were hugely profitable, and who couldn’t believe that those days were gone for good. Blockbuster treated its thousands of stores as if they were a protective moat, when in fact they were the business equivalent of the Maginot Line.

What happened to Blockbuster and Virgin and Circuit City is now starting to happen to law firms, for all the same reasons. Firms have invested heavily in legacy costs like long-term leases of downtown offices with rich interiors, and have resolutely refused to take the internet seriously as a service delivery vehicle. They have thrived from the absence of client choice, but will suffer as new competitors offer more options and, ironically, more personalized service. Firms aren’t evolving because they can’t evolve: the lawyers within these firms are so invested financially and emotionally in the old structure that they can’t believe things could change.

It’s difficult to see how the outcome for our profession will be any different, because like Blockbuster, we aren’t even trying to adapt. Almost all the innovation in the legal marketplace is now taking place outside of law firms or on their periphery. Contract lawyers work from home, legal process outsourcers work from Mumbai or Manila, LegalZoom works entirely on the internet — these entities are the drivers of change today. The happy result for clients is a fractured marketplace in which they’ll have their choice of which providers to provide which services in which priority.

If you want to see what the client of the future looks like, in fact, take a good look at Colt Technology Services, a UK-based Europe-wide IT company profiled this week in The Lawyer. Colt’s GC uses a combination of providers, including law firms, an offshore captive operation, contract lawyers, and Berwin Leighton Paisner’s revolutionary Lawyers On Demand service, to meet his company’s legal needs. This is an established client trend towards using a portfolio of legal providers, and law firms should be aware of it by now.

But what really concerns me is this: where is the strategic response from law firms to the revolution outside their gates? Where are the signs that firms recognize the existential threats to their marketplace position and are reacting accordingly?

Here’s an example: last month, Bloomberg BusinessWeek published a cover story about Diapers.com, a sort of Amazon.com for baby and infant products that looked to be the next evolution in online shopping. Its founders were quoted in the article as saying they’d welcome a price war with Amazon, and the article was in fact titled “What Amazon Fears Most.” This week, Amazon announced it had bought out Diapers.com for a truly stunning $545 million. That is how you handle upstart competition that threatens your market position.

So what are law firms, facing the same kind of threat, doing these days? Merging with each other, of course: mergers within the United States, within Canada and across the Atlantic, with more surely to come. Same old response, same old thinking. Where are the law firms buying out LPOs and bringing them in-house? Where are the law firms adapting the online delivery methods of startups? Where are the law firms that recognize the peril of their position and are moving to thwart, or to transform themselves into, their smaller, swifter, hungrier new rivals? They’re nowhere to be found, and that’s why the future of law firms looks a lot more like Blockbuster than Netflix.

Surowiecki concludes his article with an observation that readers of The Innovator’s Dilemma will find familiar: “Sometimes you have to destroy your business to save it.” Law firms, unfortunately for them, don’t come with self-destruct buttons.

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3 Responses to “Destroying your own business”

  1. Susan LettermanWhite

    Nice piece Jordan.

    The self destruct button gets pushed inadvertently when any business gets stuck in a hidden-mindet or logic that no longer allows it to respond to the changes in its “ecosystem,” to use the language of Clay Shirky. It’s difficult for anyone to change the way he or she thinks and sees the world. It’s even more difficult to change the culture of an organization; i.e., the hidden drivers behind the way the organization does anything, including solving its problems.

    Also, Joseph Tainter’s theory on complex societies that cannot solve their problems is on point. Like the collapse of the Roman Empire, when the cost of conquering (think mergers and acquisitions) becomes more than the value created, law firms collapse. Firms also collapse when there is insufficient income to pay for real estate and other resources because the hidden mindsets, cultures, and complex structures (think of the structures and power dynamics that affect decision-making) make it impossible to develop effective strategies to compete in a market that responds best to the simple solutions, like selling a less complicated and not quite perfect or risk-free solution, like the products and services of LegalZoom, for instance.

  2. Rachel Rodgers

    What a rousing piece, Jordan! That really lays it out. I think one of the positives is that young lawyers that have grown up on the Internet now have an advantage that they can use to create law firms of the future that are online and that are providing what the client’s want. Unfortunately, young lawyers and young law firms do not have the money to buyout their competition, but they don’t have much to lose when it comes to creating a new law firm business model. Maybe part of the message to traditionall firms is that they need to unite with young lawyers to create a law firm model that actually has a future.

  3. James Cooper

    An excellent analysis. You have indeed identified a critical weakness in some law firms that hamper their competitiveness by investing too heavily in “bricks and mortar” overhead that drives up costs in a way that piles on the pressure to maintain a certain billable threshold in order to stay afloat.

    In the new economy, firms will have to stay leaner and perhaps outsource some of their work on an as-needed basis so as to maintain a flexibility in their rates.

    That said, I don’t see a wholesale consolidation of legal services under large corporate entities (though for the simpler administrative matters, that is indeed inevitable). For certain legal tasks, however, many people still depend on what they perceive as the kind of personalized, hands-on service they could get from a smaller firm.

    In the future, those lawyers who are most savvy at targeting their preferred clients through highly specific, informative legal content
    will be the most successful in the new economy.

    I think what we’re really seeing is a switch from the Directory model of lawyer search to a more content-rich model in which the winners are the ones who make the sustained effort to demonstrate that they have the answers to the legal issues that are increasingly being researched
    online by members of the public.

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