How can law firms manage innovation? Meeting the needs of an expanding market

As partners step back from dealing with the normal in-tray of financial performance, new partners, under-performing partners, the office rent and new IT systems, there are probably any number of initiatives jockeying for position. John Atkinson and Robert Pay of Jaffe Associates, assess the innovation minefield, examining how you can lead your firm to develop new and different initiatives.

The reasons for not managing innovation may be partly explained by the nature of the profession, which forces them to be client focused. In comparison to senior executives in large corporations lawyers are much often closer to their market, though that does not necessarily mean systematically following trends that may affect the way business is done or provide an opportunity. They are also forced to innovate because they are responding to new developments in technology or regulations on the way business is done. Few, however, “innovate” other than by responding to the outside world. This relatively passive approach to forced innovation is fine if done quickly and effectively enough, assuming not too many other firms are ahead of you. But, the market for legal services is competitive, expanding and changing. This suggests some conscious management is required.

Most innovation in firms falls into one of the categories below.

Business environment:
New business ideas:

New financial instruments
Employee share option plans

Sector specific issues and opportunities

Convergence of media & technology
Growth of IP due to new technologies

Service delivery
New ways of doing business:

Partnering (the Dupont Model)
Secondments
Independent quality reviews

Technology enabled:

Client Extranets
Electronic compliance packages (Blue Flag etc.)

Legislation
New UK & EU legislation

Any potential legislation that has an impact on clients' businesses

Successfully undertaken, there are rewards for innovation, including greater client and staff retention and the obvious financial benefits that flow from that. These might also include enhancing your brand values. (Clients increasingly cite the need for new solutions which is why your marketing team may have included “innovative” as an attribute of your firm on your web site!)

Innovation changes the way we do things and what we do, however, and not all innovation is painless. For example, the battle to remain generalists was hard fought (and lost) in many commercial law firms over the last twenty years. Is there some way that you can manage the process so as to attract the dividends that can flow and make it happen less painfully?

Innovation in a management context

Strategy is about the future allocation of scarce resources – mainly partner time in the law. In our experience the underlying assumptions of most firms and their environment, are rarely challenged. Most law firms treat strategy as a relatively static process of matching resources with market opportunities, so that the organisation can somehow seek stability and harmony with the environment. In the jargon, this is essentially “strategy as fit”. Innovation requires that the current fit is stretched. Innovative strategic thinking should be about generating alternatives, potentially challenging current practices and focusing on the future competencies needed to serve tomorrow’s clients and compete with tomorrow’s competition: these may be the same clients as today’s in name but their needs might be very different in the future.

The competition might be different too, who would have predicted the emergence of the consolidators in the accountancy market? Or the massive growth of the consulting profession, much of its success based on innovation and an ability to identify problems and provide solutions? Who now can be sure that commodity aspects of commercial legal services will not become more widespread after the launch of Blue Flag or its imitators?

Until quite recently more or less the only preoccupation for many law firms was recruitment. Everyone was chasing the same resources in the same way, and there is often a premium to be enjoyed by focusing on something different that might add to your success. Innovation is a way of staying ahead or at least keeping up and it is, we believe a process that can be managed.

What are your firm’s key factors for success?

The essence of success innovation in professional services is to understand just how the profession and your firm add value – and then, if necessary, changing the rules. After all, if you allocate resources in the same way as competitors there is no competitive advantage. Innovation requires a different allocation of resources and therefore a different value chain in the context of the markets served by the firm. It is surprising what a large gap there can be between what the lawyers value and what the client values. Much of the technical expertise that is core to delivering legal advice is taken for granted. Much expertise is seen as routine.

For example, the introduction of partnering in the US, now radically changing many law firm relationships at the top end of the market, has as its premise that much work has core elements that can be measured and standardized. How does a firm, which has never encountered a service level agreement for the provision of services or attempted to measure efficiency, compete to retain a client moving to this way of doing business? You need to know what clients value, and understand the way and the cost of delivery.

In 1982 Ken Ohmae, an ex-McKinsey partner, wrote a highly regarded book on key factors for success (KFS.) He suggested that every profession or industry has to take account of a relatively small number of factors that are the drivers of specific industry success. Such factors are, of course, dynamic and it is part of the innovation process first to know them and then to concentrate on a different combination of the same factors, or to reconfigure and change them, in order to wrong foot the competition. The issue is complicated as KFS may also be specific to discrete market sectors and to the individual firm as well as the legal profession as a whole.

The difficulty of all of this is how to go about establishing the success factors as any team discussion will result in a long list of equally valid factors. (Just read what lawyers say about their services in their marketing materials). One way forward is to think in terms of “order starters and order winners”. For example, all legal firms know that responsiveness, trust and value for money are critical to success, but they are probably taken for granted by clients. They are not recognized as “order winners”, regarded only as “order starters”, the minimum you must do to be considered a viable contender for business. Properly researched your clients will give you the data to start your planning.

Once your KFSs are determined, what is important is the degree of freedom or flexibility that the individual firm has in relation to each factor. For example, if commerciality of advice is judged to be a KSF, your firm needs to have the flexibility and willingness to invest time and money to change the existing behaviour to display the desired attribute? One of the top international firms is reputed to be spending more than £1,000,000 in retraining its client teams based on exhaustive research.

There is very little time or money spent on research by law firms compared with similar professions, such as accounting and consulting. As evidenced by the recent Lighthouse Research report on research in the professions, lawyers are behind both in spend and the way they use research. Even some mid-size accountants have set up vehicles for looking at innovation within their practices, charged with finding new ways to compete based on market demand and competitor activity. Much of their research spend is on developing and testing new services.

Often the services are not new in terms of know-how, but combinations of expertise. For example, KPMG’s blend of tax and intellectual property know-how managed to make the domiciling of IP rights a boardroom issue, with substantial benefits to clients. In contrast, law firms still predominantly rely on cross-selling to generate multi-disciplinary solutions. We undertake a great deal of service quality and relationship research and clients tell us that they often spot the synergies between legal disciplines, rather than the lawyers. It may be dangerous to rely on clients spotting how to use you in a novel way or to think out of the departmental box, however, clients are key to innovation.

Using clients to innovate

The real opportunity is to identify those few clients with whom an organisation can develop new or superior services. This is of course easier if you have clients who are innovators or market leaders (or just plain demanding!), whereas the average clients, frequently themselves conservative, are a useful asset because they are happy with OK, and probably pay their bills on time. In the long run though, relying on these clients to set the pace at which the firm innovates may be very dangerous for your ability to compete.

In order to get to the future faster than competitors, one way of doing this is to innovate in conjunction with the firm’s most demanding clients. Such clients may be market leaders or small at present and at the margin of an industry, but are frequently the pointers to emerging, dynamic market sectors. The firm should aim to form “innovation partnerships” to work with the most demanding and difficult clients with a view to exceeding the existing service norms of the profession.

The opportunity to create such innovation partnerships frequently arises from the dynamics of the professional “cluster”. Clusters refer to geographic concentrations of firms operating in a specific field and may include suppliers, specialist infrastructure providers, professional education and research centres, competitors and the demanding customers referred to earlier – the financial industry in London would be a case in point.

Looking at the huge number of legal conferences, lawyers are keen to share their know-how with their competitors in areas where individual firms may have much to gain. The use of extranets in servicing clients is a recent example there are also support groups for marketing personnel, and the senior management of the top City firms, at least until recently, used to meet to discuss issues of general interest. In short there are some well-established mechanisms to spread innovative ideas, it is actually working out how to get them adapted and to what end that is not so easy. Also looking to the rest of the profession makes you a follower. The greatest dividends lie in the broader business environment.

Managing innovation internally

As mentioned, innovation is frequently left to client demands, individuals or practice areas and happenstance. None of this is a substitute for law firms managing a wider innovation programme from within. Yet what vehicle is right to foster creativity without creating traditional structures such as a committee?

One approach is to create a “competitor within”. Most firms have partners who are potential intrapreneurs and innovators (entrepreneurs within your firm). Managements need to harness them to help innovation. Their role is to be the bridge between the “invention and the application” or between the acquisition of knowledge and the commercial exploitation of knowledge. It is the entrepreneur who recognizes opportunities to transfer resources from less productive to more productive applications. Law firms are not normally associated with the encouragement of such people - they may be the people who tend to bother the readers of this magazine, and can be “difficult”, and their enthusiasm may blind them to the commercial realities. However, they can often be creative and commercial, and if encouraged will make a great contribution to the firm.

There are already models for managing in some of the accounting and consulting firms. These are not committees of the traditional variety but groups charged with seeking and developing ideas, researching the market and the competition, and might work on a firm wide or on a practice area or market focus basis. They often make use of outsiders to help facilitate the process and undertake further research or to develop ideas. This is a way of managing the potentially over-enthusiastic, giving a reality check to ideas and to undertake additional work for which the partner may not be qualified or have sufficient time.

A more arms length approach is to act as a venture capitalist. The firm then actively seeks out independent initiatives that it can promote and finance at arms length.

The firm acts as a sponsor to activities and initiatives and encourages experimentation across a wider area of activity. This does, however, require a cultural change at partnership level.

Conclusion

Innovation is generally regarded as a difficult challenge, even in companies good at it. Few businesses as successful as law firms are unable to survive without attempting to manage the process. We have considered some of the generic factors generally accepted to underpin the management of innovation and suggested some solutions to managing innovation. A good place to start is to interrogate your own firm’s need and track record in innovation.

YOUR NEED TO INNOVATE - KEY QUESTION

What market discontinuities might happen that would blow your firm off course?
Who are the innovators in your markets today and who is failing and why?
How did these innovations come about; was it, for example, from inside, at the margin or from outside the legal profession? What are the lessons?
What has been the contribution of “intrapreneurs” in your firm and who might they be? (Partners who spotted the opportunity and made it happen.)
Which competitors have entered and exited the profession/market as a result?
What changes and convergences of markets and know-how are anticipated that will generate new professional market segments?
What new technology should the firm “capture” now in 5-10 years?
How will your firm deliver value in the future?
How exactly can your firm develop a more innovative culture?
How well does your firm innovate or do hope things don’t move too far ahead too fast?

Robert Pay, managing director, Europe and John Atkinson, senior consultant JaffeAssociates. John can be contacted at atkinsonj@jaffeassociates.com and Robert atpayr@jaffeassociates.com