Robert Millard, founder of Cambridge Strategy Group, examines the differences between business models and strategy - and whether these differences matter in practice.
The March 2021 edition of the prestigious Journal of Management Studies contains no fewer than three articles on the topic of business models versus strategy. What makes them different; in practice, does this matter?
Intuitively, clear differences do seem to exist in practice. Strategy, one might say, is about the “what” that firm leaders must ask. What markets, clients and services will we prioritise? What objectives will we set? Business models, on the other hand, are about “how” questions. How will we organise to meet our objectives and optimise performance? How will we deliver value to clients that increases the likelihood of them instructing us again? How will we attract and retain the best people? Structures, systems and processes a firm puts in place and how these are used seem to be more aligned with the “how” than what we usually call strategy. Business models are inextricable with corporate governance. They involve managing and optimising the interdependencies and connections that inevitably occur across a firm. They have a profound effect on a firm’s success.
The term business model is at least a half-century old but its wide popularity coincides with the rise of the digital age, and the pressure this has placed on conventional ways of organising and doing business. So, the business model lens might be a more accessible perspective than strategy, for firms deal to with the issues involved in adapting the way they do business in a volatile, uncertain, complex and ambiguous (‘VUCA’) world.
One of the best resources for understanding business models, in my view, is Mark Johnson’s book ‘Reinvent Your Business Model’ published by Harvard Business School Press in 2018. Johnson defines a business model as four interlinked elements: the customer value proposition (CVP); the resources and the processes by which a firm delivers its CVP; and the profit formula. Johnson’s work resonates with realities in modern law firms. It is client-centric and its focus is not static, but on transformation. Johnson proposes that firms use their business models, in tandem with their strategies, to find new ways to deliver services to clients that their competitors cannot easily match. In other words, to differentiate themselves. In this, he references an important area of strategy theory, namely Jay Barney’s work. Barney, who co-authored one of the aforementioned three articles in this month’s Journal of Management Studies, pioneered the ‘VRIO’ framework for sustainable competitive advantage. This holds that any feature upon which a firm relies for sustainable competitive advantage must, to serve that purpose, be valuable (otherwise it would be uninteresting), rare (otherwise nobody would derive particular advantage from its possession) and inimitable (because if others can emulate it or achieve the same result by other means then it can be of only transient advantage). Finally, the firm must be organised in such a way as to be able to properly exploit that feature.
The importance of strategy
In today’s rapidly changing world, in which clients frequently say that law firms are so similar that it is difficult to differentiate between them, sustainable competitive advantage might indeed be better achieved through a market-beating business model. That doesn’t absolve the firm of the need for a proper strategy too.
For most law firm leaders today, moving from the people-leveraged, pyramid shaped ‘Tournament of Lawyers’ business model, predicated upon the infamous ‘billable hour’, is a major challenge. This model is deeply entrenched, having served the profession well for a century or more. Digitally enabled and agile business models that use alternative frameworks were once the preserve of innovative legal start-ups. More recently, though, the ‘Big 4’ and leading conventional law firms are following suit. External equity ownership is proving another powerful catalyst as expectations of external owners drive those firms taking this route into evolving quite novel business models. Where this includes CVPs – which clients find more appealing than those of more conventional rival firms – these firms are being rewarded. In conversation with in-house counsel, one frequently hears that firms they perceive to be most sensitive to their needs are not traditional market leaders but those experimenting with their business models.
Johnson advises firms to seek out what he calls ‘white space’ in the market. This means either new or existing clients being serviced in radically different ways compared to those that are a good ‘fit’ with the current organisation. Getting this right is difficult. It usually involves cannibalising existing service lines, threatening partners whose practice are being cannibalised. The CVP needs to be designed in close collaboration with the clients who the firm hopes will find it attractive. This can involve non-billable, real collaboration with clients on a scale and intensity that many firms are unfamiliar with and, frankly, some find deeply uncomfortable. Strong leadership is required to initiate and maintain momentum.
Serving your clients well
Serving clients exceedingly well lies at the heart of any lawyer’s practice. This has always been so. Transformation requires a shift from simple good intent – which fails Barney’s test in that it is not rare – to firms building the formal structures, resources and processes necessary to properly deliver the new CVPs that they develop in collaboration with clients. CVPs can be widely diverse but common threads include:
- They are more aligned with a client’s broader business needs, with a focus on the legal aspects of those and (of course) within the bounds of legal ethics, but with commercial awareness of what is really important to the client’s in-house legal team (if they have one) as well as to its executives.
- They deliver more value at less cost, without necessarily sacrificing profit. Many examples exist, across multiple industries, of businesses adopting new business models that make them more efficient at capturing value and delivering that to clients at a lower price, therefore winning more market share. Especially when the new models are digitally enabled. In many such cases, the quantum of profit increases even as the margin decreases – so the firms’ owners extract more value. Law firms need to stop allowing themselves to be valued, including by themselves, using metrics that suit the league tables instead of by what truly drives value for them.
- Digital transformation is a key aspect of any modern business model transformation, but the legal profession lags far behind other sectors. This, however, creates opportunity for firms that have open-eyed conversations with clients about how, using technology, their needs can be better met. Emerging legal technologies are transforming the business and practice of law and this process is probably still in its early stages. The most transformational digital innovations will likely come from outside the legal sector for now.
Paradigms usually change slowly, then very quickly. Tipping points emerge and laggards must then scramble to catch up, or watch their client relationships and practices erode. The coronavirus (COVID-19) pandemic will almost certainly be seen, in years to come, to have catalysed many such tipping points. Whether or not strategy and business model are the same theoretical construct, in practice law firm leaders must pay attention to their firms’ performance and futures through both lenses, if their firms are to survive and thrive in the current transformational era.