How Well Does Your Firm Really Know the Industries It Claims To Specialize In?

Patrick McKenna doesn’t have a problem with industry specialization – he has, in fact, been one of the more outspoken proponents of it over his nearly three decades of competitive strategy and leadership training for law firms. He has even dedicated a full e-book to the subject: Industry Specialization: Making Competitors Irrelevant.

What McKenna does have a problem with is how law firms approach specialization – that is, by selling themselves as experts without making the effort to go deeper and truly understand what clients in the sub-segments and micro-niches of those industries really need. His observations of the accounting profession has turned up similar deficiencies.

McKenna spoke to INSIDE Public Accounting in a wide-ranging interview about the opportunities and challenges of industry specialization for both law firms and accounting firms.

Why do you support an industry specialization strategy for firms in the legal profession? What are some of the key benefits? If you really listen to what clients are asking for, the No. 1 reason they hire a law firm is a demonstrated understanding of their industry. They might say, ‘I want someone who knows my business,’ but what they’re really saying is, ‘Do you speak my language? Do you understand how I make money? Do you really know what’s happening in my industry?’

Beyond that, there are plenty of other reasons why industry specialization makes sense. It helps a firm differentiate itself. When I pose the question ‘Why should I choose you?’ to law firms I work with, I watch them choke. It’s a tough question. But most competitive efforts today are focused on tit-for-tat rivalries rather than pioneering new industry market spaces.

Focused specialization makes it easier for any firm to identify prospective clients. If a law firm focuses on patent work, for example, almost all the most valuable patents can be found in just a handful of broad industry groups – computer software and hardware, medical devices, etc. If I’m focusing on having an intellectual property practice or focusing on patent work, I might want to take a look at those industries where the real action is happening.

Specialization also allows you to place a higher premium on expertise. One of the fundamental principles of economics is this – what is scarce is valuable. If what you do as a professional is rare, a premium fee is easy to justify. Clients will select a firm that’s more expensive than another option if they know the expertise they’re getting is worth paying for. If you have a deep understanding of the critical business challenges and speak the language, clients are happy to pay more.

Are there any industries that law firms really seem to be gravitating toward? The common ones are actually very similar to what I’ve seen in accounting firms as well – real estate, energy, transportation, construction, technology and health care. But what is true in both law and accounting is that firms tend to tell you all the various problems and issues that they address; they don’t list the kinds of health care providers, for example, that they work with. And clients find this to be a massive pain point – they can see that a firm does health care, but they can’t see whether it does the specific kind of health care work they need.

What are some of the most important things to keep in mind when trying to hone an industry focus? The most important thing is to get granular. Most industries, especially as they mature, are comprised of a number of granular levels, including what I call sub-industries, segments and micro-niches. If you’re a player in the construction industry, for example, you would recognize that it is comprised of four different sub-industries broken down further into 51 different segments. The largest of the sub-industries is special trade contractors, which encompasses 23 segments – including everything from demolition to swimming pool construction to elevator installation. And then there are probably a dozen micro-niches below that where a firm could establish itself as the go-to provider. We’re talking about multi-million-dollar opportunities that are going begging because firms aren’t getting granular enough. If you do a little bit of inventory on the kinds of matters that your partners have been handling, chances are they may have worked on some obscure area that could turn out to be a whole new market for the firm.

Another important thing to keep in mind is labeling. If you’re lumping distinct industry segments into broader categories, potential clients in those segments are going to see that you don’t distinguish between what they know to be very different areas, and they’re going to look elsewhere. Having real estate and construction lumped together is a problem. Having health care as a catch-all category is a problem.

The third thing is to keep on top of what’s going on. One industry group leader said to me, ‘Your job is to not only do great work for your clients, but to help them prepare for challenges that aren’t even on their radar.’ It’s crucial to spot what’s ahead, because when a client brings up an issue that’s become a pain point, you’re already playing catch-up – and that’s not a position you want to be in, especially with regulators. That’s an important element of this discussion that really resonates with clients.

What are some law firms getting right about industry specialization? Where are some falling short? The ones that are getting it right are those whose industry groups are full P&L business units. They’re not playing around – they’re developing these as profit and loss business units. They work diligently to promote name recognition in these areas, they make sure that they’re perceived as attracting and retaining some of the top talent in these areas, and they have a significant number of lawyers working with these types of clients. They track what’s going in these industries and stay on top of the critical issues. Some are even recruiting executives from these particular industries to sit on advisory boards.

Firms that are falling short are those that list so many industries that there’s really no sense of specialization. I saw a firm with 70 lawyers and 18 industry specialties. Do you really think your clients are that stupid? Some firms focus on industry specialization purely as a marketing play – they list them all on the website, but they don’t put any resources into delivering any real value. I continue to hear from industry group leaders who are frustrated by the lack of any clear mandate, any authority or any visible support from the leadership at their law firms.

Does true industry niche focus generally involve bringing in any special skillsets or non-traditional personnel to complement the regular staff? I believe having a true multi-disciplinary practice can offer tremendous distinction and enhance profitability. One of the things I’ve often asked the members of any particular industry group is to give me a listing of all other non-legal service providers that you find yourself collaborating or working with in order for your client to realize a complete turnkey result. And on the legal side, I’ll hear things like accounting firms, PR firms, insurance brokers, cybersecurity consultants, lobbyists, forensic analysts, economic advisors and on and on. Why not bring some of these people into the tent – even if only as a joint venture or a marketing affiliation? What if a firm really developed a full-blown multi-disciplinary practice?

Are there any characteristics that make a firm particularly inclined to be very industry-focused? Are there any types of firms that might be better off steering clear of this strategy? Do you have the kind of leadership that can nurture an entrepreneurial spirit? Are there people in the firm who have ideas that we can nurture? Firms that can answer yes to these questions probably are well positioned to make an industry specialization strategy work.

Firms that might want to steer clear are those with partners who believe that being industry-focused would limit the scope of their practice. They want to be a full-service firm. To that I would say take a look at the retail industry. Which retailers seem to have experienced the most trouble? Department stores. Why? Because they’re trying to sell everything. I don’t know how a firm can truly be full-service these days. There are just too many segments and niches within all the categories you would want to cover that you couldn’t possibly be fluent in all of them. We live a specialist world. Trying to be full-service is an old-school mentality that is going to destroy a lot of firms.

Once a firm has come to be seen as an expert in a particular industry, what should it be doing to maintain and/or capitalize upon that reputation? I believe the key is going deep and becoming a first mover in some particularly emerging lucrative micro-niche, which means getting a head start and building some name recognition and developing some key relationships. There are so many industries that have dozens of sub-sectors and niches that are just waiting for some firm to come in and really set up as the go-to authority, which means there are huge opportunities out there for firms that are willing to dig a little deeper than their competitors. That’s why I encourage leaders to do an inventory with their partners to find out what they’ve worked on in the past 18 to 24 months that might be a little bit out of the norm.

Whenever I’ve had firms do this, they’ve been able to identify at least a handful of potential opportunities. It’s not that these areas of opportunity aren’t there – they’re just being neglected.

Both law and accounting firms are spending way too much time trying to figure out better ways to do commodity work. And I’m very concerned about where that’s going to end up taking both of these professions. Jerry Garcia once said, ‘It ain’t good enough to be the best of the best – I wanna be the only cat who does what I do.’ And that’s actually a pretty good way to look at this.

 

This article originally appeared in the May 2022 edition of INSIDE Public Accounting. To subscribe to INSIDE Public Accounting Monthly click here.

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