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Reinventing The Law Business: What Can The New 'Star Wars' Movie Teach Us? Porter's Five Forces Applied To The Legal Profession (Part 2)

Managing partner Bruce Stachenfeld applies the insights of Harvard Business School professor Michael E. Porter to the business of law -- specifically, bankruptcy law.

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May the Force be with you! In Star Wars there is only one force; however, Professor Michael Porter, of Harvard Business School, has Five Forces. In my last article, I began an analysis of applying these Five Forces to the legal profession. I started by defining the Industry that we would analyze as follows:

Bankruptcy lawyers in the State of New York that focus on sophisticated and significant bankruptcy matters.

I will now move to the next step and apply these Five Forces to that Industry. To refresh your recollection, the Five Forces are:

The Degree of Competitive Rivalry

The Threat of New Entrants

The Threat of Substitutes

The Bargaining Power of Buyers

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The Bargaining Power of Suppliers

First, let’s look at the degree of competitive rivalry: I would say that this force is very strong right now in this Industry. As the economy gets stronger and stronger, there are (obviously) fewer and fewer insolvent parties, so the overall demand for this service decreases. Also, prior down-cycles have convinced many in the business community that the bankruptcy process seems to just enrich lawyers and cause a long-term morass that often does not create value; accordingly, businesspersons try to avoid it by pursuing an out-of-court workout, a sale or a merger transaction through a reorganization in a prepackaged bankruptcy. All of these options have the effect of diminishing demand for bankruptcy legal services.

So you would start to think, with the same number of practitioners and the demand decreasing, that the degree of competitive rivalry would be very strong. But then I wonder, with years and years of decreasing demand, does that mean that more and more practitioners are going to retire from the legal profession or re-tool themselves into other practice areas? Also, more obviously, does it mean that fewer and fewer law students will graduate and go into this area? It probably does mean exactly that.

So what is the degree of competitive rivalry like now? After talking about it, my longtime bankruptcy partner Kirk Brett and I believe the degree of competitive rivalry is very high. However, one doesn’t have to be super smart to recognize that trees don’t grow to the sky and what goes up will come down, so the “up” economy will turn down at some point. Also, with almost every government in the world coming up with creative ideas to make itself insolvent – and with many municipalities in the U.S. doing the same thing – not to mention intermittent stresses in different parts of the economy (e.g., energy, retail, etc.) one could predict that at some point this will change – and maybe even change dramatically – to become a shortage! Now that would be something, wouldn’t it – a shortage of bankruptcy lawyers. That would change the degree of competitive rivalry quite significantly by making it a lot lower.

So the conclusion is – pretty obviously – that now in a generally up-cycle, the degree of competitive rivalry is high, and when the down-cycle occurs this will reverse.

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Second, let’s look at the threat of new entrants. This one seems on its face to be a real problem; however, is that really the case? How easy would it be for a law firm that doesn’t have a bankruptcy practice to enter the field – or how easy would it be for a lawyer to just train herself into the practice? Well, years and years ago real estate fell apart and I tried to teach myself real estate bankruptcy from scratch. I am pretty smart and insanely determined and I read everything I possibly could, but today I only know enough to be “dangerous” in that I can spot issues, but I can’t really be “sure” about bankruptcy advice I would give to a client – I need Kirk’s advice to be sure that good advice is given. Plus I don’t know the judges or colleagues in the industry. Overall, I just don’t have the expertise, and thinking back, it would have taken me many years to develop it. So it is hard to see how an individual lawyer could come into this field very easily. From the point of view of an individual bankruptcy lawyer, therefore, the threat of new entrants seems low.

However, if a law firm wanted to come into the practice, it would not be hard to do – the firm would only need to purchase bankruptcy lawyers from other firms by paying them highly. As we all know, a law firm doesn’t really “own” its lawyers – they are mobile. Indeed this is what seems to happen – in “up” cycles of the economy no one wants bankruptcy lawyers around and they are generally shed by law firms, but in “down” cycles the reverse occurs and there is a feeding frenzy to hire them. However, a new entrant cannot easily purchase a high-quality reputation in bankruptcy where it doesn’t already have such a reputation.

This means that the threat to a law firm in this Industry is that its talented bankruptcy lawyers may be hired away by others – which would eliminate the firm’s ability to practice in the area altogether (at least until it can hire someone else). I learned this the hard way about 15 years ago when in the heart of the down-cycle my star bankruptcy lawyer (and his associates) were all poached away from me by a major law firm who made him an offer too good to refuse. That smarted!!!

So how would I analyze the threat of new entrants on this basis? I would think through how strong is the culture of the law firm in question, how overlapping are the practices, and whether there are other reasons why bankruptcy lawyers that are hired would stick with that firm in the next down cycle.

So how strong is the threat of new entrants? Overall, I would conclude that the threat of new entrants is low at this time when we are in the up-cycle — but will be moderate in the next down-cycle depending upon the firm’s culture. When I think ahead to the next down-cycle, I would say that for a law firm that has no real “glue” holding its lawyers together, the threat of new entrants is quite high; however, for a firm that is able to deliver a strong value proposition to retain its lawyers on a long-term basis, this threat is greatly reduced.

Third, let’s look at the threat of substitutes. This one is going to require a deeper analysis of the Industry. This is because you can easily see that some bankruptcy lawyers from other geographic areas may try to compete for the work that is otherwise handled in New York. I know that a few have done this successfully, but they are generally lawyers who used to practice in New York, or are with firms having a significant New York presence – and there does not appear to be an increase in the number of these players.

Also some areas of bankruptcy practice may be facing the threat of substitutes in the form of what I will loosely call artificial intelligence in the legal industry – that is, going without a lawyer at all, or using internet resources, or volume-based lawyers charging only a tiny fee. But that threat does not exist in the Industry as I have defined it (i.e., sophisticated and significant matters), which generally applies where there are major businesses involved with more at stake, multiple creditors, unique situations, and more brainpower needed to create value out of the bankruptcy chaos. However, as noted above, clients often conclude that bankruptcy is too much time and trouble to be worth it, so they try to avoid it altogether – and “avoiding” bankruptcy with a pre-packaged bankruptcy plan or a workout is essentially going with a substitute.

So how strong is the threat of substitutes? I would say that the threat of substitutes is quite low. My conclusion here is based on the fact that to the extent a substitute could occur it has already occurred, for the reasons noted above. I don’t see it getting much worse.

Fourth, let’s look at the bargaining power of buyers. This is very strong right now. There is not enough bankruptcy work in the Industry we are in to keep all the bankruptcy lawyers busy. So I guess the bargaining power of buyers is quite high right now; however, it will shift to the other direction in the next down cycle. That seems straightforward enough.

Fifth, and finally, let’s look at the bargaining power of suppliers. As managing partner, my “suppliers” are lawyers that produce hours that are sold to clients. Since at this point we are in the up-cycle, I would say that the bargaining power of suppliers is quite low as there are quite a few bankruptcy lawyers seeking work. And, of course, that will reverse in the next down-cycle.

So to summarize the analysis:

Force Strength Today Strength in Next Down Cycle
Competitive rivalry: quite high low
Threat of new entrants: low moderate
Threat of substitutes: low low
Bargaining power of buyers: quite high quite low
Bargaining power of suppliers: quite low quite high

This is a very interesting analysis. I suspect if you asked most people about the Industry we are looking in, most people would say something like “Oh, bankruptcy is dead as a doornail – I would never even consider it.” But if you look at Porter’s Five Forces, you see some signs of life, for sure.

As you read this you will probably see a bunch of holes in my thinking. For example, you might consider that bankruptcy isn’t really a separate practice area any more – instead, it might be part of the overall service that a sophisticated finance-law practice provides to a client, with bankruptcy being an integral and critical part of it. You will probably disagree with some other parts of my analysis above. But that is okay. I am not telling you how to do this with exactitude in this article; all I am suggesting is that if you are trying to run a law firm or a law practice or decide where you want to practice law or where decide where to go in your career, then spending significant brainpower (presumably with your colleagues and maybe a bottle of single malt scotch) to figure out these kinds of things is a great idea.

Lastly, if you find yourself interested in Michael Porter, I heartily recommend the book written by Joan Magretta called Understanding Michael Porter (affiliate link). She writes really well and does a great job in synthesizing the thirty years of Professor Porter’s work.

P.S. By the way, I am blessed to have had Kirk Brett as my bankruptcy partner for the past 15 years (click here for his bio). He is super smart, creative, aggressive and strategic. He has practiced bankruptcy law (both litigation and transactional based) for nearly 25 years. His practice includes business reorganizations and is thoroughly interwoven with our real estate pure play – since we have so much real estate work here, the reorganization and insolvency work weaves in seamlessly. Finally, as distressed real estate has become less ubiquitous in recent years, Kirk has morphed his practice into being the “guy we call when there is trouble.” His informal internal nickname is “The Wolf” (for those who are fans of Pulp Fiction) – when we have trouble, Kirk just comes in and gets us out.

Earlier: Reinventing The Law Business: Porter’s 5 Forces Applied to the Legal Profession (Part 1)

Bruce Stachenfeld is the managing partner of Duval & Stachenfeld LLP, which is an approximately 70-lawyer law firm based in midtown Manhattan. The firm is known as “The Pure Play in Real Estate Law” because all of its practice areas are focused around real estate. With 50 full-time real estate lawyers, the firm is one of the largest real estate law practices in New York City. You can contact Bruce by email at thehedgehoglawyer@gmail.com.

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