Ark Group approached me in late 2018 to update the strategic planning for law firms book. You can find the second edition – with updated case studies and fresh discussions of value innovation and business model analysis at this link.
We addressed innovation (disruptive and otherwise) in a series of articles last summer. The topic is certainly not resolved as evidenced by the many posts responding to and expanding upon a recent discussion of disruptive innovation at Harvard Law School. Both that Harvard Law panel and the subsequent responses to it have underscored (at least for us) the need for some pragmatism as law firms invest in innovation – and perhaps a refresher on some fundamentals regarding disruptive innovation.
Let’s start with some fundamental truths about disruptive innovation.
- Disruption is happening in the legal industry. The longer it takes you (and your firm) to recognize that fact, the more vulnerable you are to disruptive competition.
- Disruptive innovation is rarely a pure technology play (i.e., disruptive technology directly displacing existing, presumably people driven, competitors). Rather, technology enables new business models that disrupt incumbent competitors – generally by targeting “over-served” customers (see Clearspire, Axiom and other LPOs) or entirely unserved customers (see Legal Zoom).
- Incumbents rarely succeed in adopting disruptive business models – mainly because it cannibalizes their existing business and their margins. Michael Raynor’s Innovator’s Dilemma explores the data at some length and concludes that incumbents are highly successful at sustaining innovation, while new entrants excel at disruptive innovation.
Source: Michael Raynor; Innovator’s Dilemma; Crown Business; 2011
Raynor’s findings are unsurprising if you think about them in the context of today’s sophisticated law firms. For instance, if a firm were going to adopt the disruptive model(s) at work at firms like Axiom and Clearspire, they would need to be prepared to get rid of 80-90% of their current office space, half or more of their associates, and a likely a majority of their partners (equity and non-equity) as well. Who is ready for that kind of change?
Rather than trying (almost certainly unsuccessfully) to imitate the disruptive innovators, incumbents have a couple of reasonable alternatives.
- First, incumbents can (and in some markets do) acquire a disruptive competitor. To make that acquisition work, the acquired entity needs to largely be left alone by the incumbent parent (i.e., it provides a source of new revenues and perhaps a place to direct lower margin work, but it should not be integrated into the traditional business).
- Alternatively, incumbents can co-opt a disruptive competitor – outsourcing activities to them that are done better (and usually much more cheaply) in the context of the disruptor’s business model. In this scenario, the revenues are lost, but the relationships are preserved (and possibly strengthened).
So, am I arguing that large and mid-size incumbent law firms should give up on innovation and surrender to the disruptors? Heck no. There are tremendous advantages associated with being a high service, high value incumbent service provider. However, to survive, evolve and prosper over the long run, you will need to innovate – pragmatically.
Pragmatic Approach to Innovation
We provided some background and some examples of an innovation model (co-creation) here and here. In addition, we talked at some length about the growing importance of non-lawyers in successful, sophisticated law firms here. All of that can be put together in a pragmatic approach to innovation.
Consider launching a pilot innovation program following these basic steps.
- Pick a client with whom you have a broad (i.e., multiple practices, multiple partners), deep (i.e., significant volume and revenues), and warm (i.e., mutually trusting) relationship.
- Empower (and hold accountable) your firm’s senior business development person (or your managing partner if you do not have a highly experienced and polished BD person) to start a dialog with that client. Note that this dialog may require multiple conversations with multiple people in the client organization. The dialog should include the following topics.
- A review of the work the firm has been doing for that client over the past three years with an emphasis in the discussion on two topics: 1) what was the best work, the work where the firm delivered the most value; and 2) what was the most disappointing work, the work that fell short of expectations for value?
- A discussion of the work the client is doing in-house with an emphasis on who is doing that work (e.g., level of experience, lawyers or not, etc.); what costs are associated with that work (e.g., salaries, benefits, bricks and mortar, etc.); and why the work is in-sourced (e.g., value assessments, risk management trade-offs, etc.).
- A discussion of the work that the client is sourcing to other law firms and contractors. That discussion should focus on categorizing work that is going elsewhere because: the competitor delivers at a cost/value that is hard to beat; the competitor has irreplaceable expertise and/or experience; the competitor has tenure, a long standing relationship, or other intangible reason(s) for having that work.
- What new legal issues and/or projects are coming down the pipe?
- That client input should lead to analysis with/by the client service team. That analysis should focus on the full portfolio of legal issues, matters and risks the client manages. The analysis should include (at a minimum):
- The volume of work associated with each category of work;
- The cost sensitivity of that work;
- The risk profile associated with the underlying legal issues;
- The level of expertise/specialization needed;
- The firm’s current capabilities in each area;
- The firm’s ability to improve the value the client currently captures (e.g., via process, people, technology improvements).
- In turn, that analysis should lead to a plan of action and recommendation to the client for each substantive category of work within their portfolio. There is a broad range of outcomes you may recommend for each category of work:
- Some things should continue largely as is (status quo, whether done by the firm, the in-house team, or someone else).
- Some things should continue to be done by your firm, but with a new approach, model, or set of tools (e.g., KM, project management, other).
- Some things may call for a more robust in-house team – that may include moving things out of your firm to the client’s in-house team.
- Some work should probably be moved to your firm (either from in-house resources or from other firms – be prepared to demonstrate the superior value you will deliver as a result of that change).
- Some work should probably be moved to others – either to low cost vendors (some that you will manage and some that your client will manage) or to highly specialized experts.
- Finally, those recommendations and the related plan should be presented to the client’s team – ideally by a team from your firm (e.g., relationship partners, selected legal experts, selected functional area leaders, etc.). That presentation should include a discussion of the investments the firm is prepared to make on the client’s behalf (e.g., new technology, tools, process improvements, etc.); the cost implications associated with managing the portfolio of work as recommended (presumably a reduced total cost, improved total value, and/or a reduced risk exposure for the client); and the benefits the client can expect from adopting the recommendations.
Now, there will almost certainly be additional dialog – some changes may not be easy for the client to make (for instance, they may not want to make additional in-house hires and/or make in-house lay-offs). But, the net outcome should be a stronger relationship – greater transparency and trust – and ultimately, more work done by your firm at sustainable (and presumably improved) margins. Most importantly, it will lead to continuing (i.e., sustaining) innovations on the portfolio of work your most prized clients turn to you to execute. And that it a pragmatic form of innovation that you can control and do with a high probability of success.
Having great attorneys – well-trained, highly capable, hard-working and client focused – has long been a critical success factor for law firms. Strategically, it has become basic table stakes for competing effectively in the legal industry, particularly among more sophisticated law firms (i.e., BigLaw and BigEnoughLaw). The big change coming to the legal industry is the growing criticality of non-lawyers. Yet, it is currently an area in which many otherwise sophisticated law firms fail miserably.
Think about it for a moment. Where else (besides large and mid-sized law firms) do highly educated professionals get placed on such limited career paths, essentially for lack of a JD? Furthermore, what is it about obtaining a JD that qualifies a person as an expert in information technology, project management, business development, process redesign, innovation, knowledge management or really anything besides the law and precedent? As Bruce MacEwen astutely observed in his Growth is Dead e-book, “lawyers are inclined to assume they can do anyone else’s job but no one else could possibly do what they do.”
The very term “non-lawyers” is a peculiar construct of law firms. And, at many firms it is used in a way that devalues, even marginalizes, professionals who are not lawyers by training and education. Given the trends affecting the legal industry, especially the trends facing sophisticated law firms, those with a cultural predisposition that devalues so-called non-lawyers will be at a distinct disadvantage in the future. Consider three examples where non-lawyers will be critical to success.
Responding to Macro-Level Trends
The most obvious arena in which non-lawyers will drive the success or failure of law firms is in response to the macro-level trends influencing the more sophisticated segments of the legal industry. Richard Susskind’s book is called The End of Lawyers in large part because it foretells a future in which legal training and expertise are necessary, but insufficient for survival and prosperity. More sophisticated law firms will be (are being) forced by clients and competitors to embrace technology, knowledge management, project management, lean process, and other management tools more common outside the legal industry.
Successfully adopting any of those management tools requires attracting great people – well-trained, highly capable, hard-working and client focused – whose professional training is grounded in engineering, information technology, organizational psychology, management, and other fields. Their training and backgrounds will not include a JD or a background practicing law (with rare exceptions). Even in cases where those functional managers do have a JD, it will not be instrumental to the contribution they make to the success of their law firm.
In short, winning law firms in the future will attract (and will highly value) professionals across a range of professional disciplines. Attorneys will defer to the expertise these professionals bring to the table. And, attorneys will collaborate effectively with those professionals to apply their expertise to the firm’s practice and its relationships with clients.
Business Development and Marketing
Over the past twenty years, marketing professionals have been gradually gaining credibility and respect in law firms. Marketing and business development positions have been elevated within the management hierarchy and investment in the leadership positions appears to be rising. However, there is a long way to go to fully capitalize on the expertise of marketing and business development professionals in law firms.
As long as powerful partners can push marketing and business development professionals (and their own partners) away from direct contact with select clients, the firm is at a disadvantage and at risk. That risk includes the potential of losing the partner (and his/her clients) to a lateral move. Frankly, partners who keep others away from “their clients” raise a number of red flags. Beyond the risk of purely mercenary behavior on the part of a partner, a lack of broader contact risks the loss of the client relationship. Studies demonstrate that clients with multiple partner relationships and/or that use multiple practice groups are much more likely to remain with a firm. Further, that broader contact improves the probability that emerging and/or nagging problems (e.g., responsiveness, pricing, quality of work, etc.) will surface before a client shops their work to other law firms.
Looking forward, business development and marketing professionals will play an increasingly important role in a number of areas including: gathering genuine, actionable client feedback; expanding existing client relationships (e.g., facilitating cross-marketing); identifying opportunities to deepen and strengthen existing relationships via process improvement, technology, pricing and other innovations. Marginalize marketing and business development professionals at your own risk.
Delivering Cost Effective Legal Services
Perhaps the most challenging (or controversial) change coming to the legal industry is the inevitability of involving more non-lawyers in the direct delivery of client services. That growing involvement of non-lawyers will go well beyond (though it will include) the use of paralegals over the next five to ten years.
Ask yourself a few questions (thought experiments if you will). Who is a better value to clients in managing document discovery, a well-trained paraprofessional with expertise in IT, database searches and document management or an associate earning three to four times the salary (with less grounding in large scale document management)? Can a $60,000 per year professional with a finance degree add value to a transactions team (perhaps many times more value than a junior associate)? Can a trained actuary add value to risk management assessments for major litigation clients?
Certainly, some firms have already made great strides in the use of non-attorneys in the delivery of legal services. For instance, the best IP practices and firms are loaded with PhD and Masters level technical specialists. In the future, firms across the practice spectrum will be challenged to become much more creative in integrating non-attorney professionals into their client service teams. That will be especially evident in practices where clients and/or competition drive the market toward more cost effective solutions.
* * * *
So, if your firm still has a culture that devalues non-lawyers – that doesn’t draw upon the knowledge and expertise of other professionals – you better get started on changing that culture. No silver bullet (technology or otherwise) will save you in the long run if the only voices that matter in your law firm are attorney voices (or even more narrowly, partner voices).
Most law firms are deeply in (or about to enter) budget season. We surveyed law firm leaders last year regarding best practices around budget development. As a seasonal follow-up to that survey, we offer the following five tips to improve the alignment of law firm strategy with annual budgets.
Engage Practice Group Leaders Directly in the Budget Development Process
A surprisingly high percentage (44%) of firms in last year’s survey reported that they do not build budget projects from the practice groups up (i.e., direct costs, gross revenues, realizations, etc.). The budget development process provides an excellent opportunity to cascade firm strategy (and strategy implementation) to the practice group level.
Engaging practice group leaders in budgeting – in thinking about cost drivers, revenue drivers and factors that contribute to client satisfaction (which often translates to realizations) – helps to “connect the dots” for people. It highlights how strategies are being operationalized in the practices and makes those connections tangible in financial terms.
Budget for R&D
What does the average partner (i.e., the partner not involved in management) think about budgets? Mainly, he/she wants the firm to beat its budget so that distributable income is higher than projected – creating a pool of funds that can pay partners more than their “expected compensation.”
By explicitly budgeting for R&D (both time investments and direct costs), the tension between partners’ desire to distribute all income at year end and the firm’s need to invest for the long term is mitigated. Essentially, R&D projects should be prioritized along with other investments (see the next section). At year end, assuming the firm had a good year, everyone is happy. The firm has made needed investments for its future. The partners get distributions above what was budgeted.
Prioritize Budgets in Financial and Strategic Terms
Law firm leaders (especially COOs and CFOs) are very comfortable thinking about projects and initiatives in financial terms. Projects with high returns on investment (ROI) and/or fast payback are a higher priority than low return projects – a blinding glimpse of the obvious (a la Barbarians at the Gate).
In addition to the financial perspective, we recommend adding consideration of the expected strategic impact of a project to the prioritization process. Essentially, projects that contribute to multiple strategic goals (i.e., that are more “mission critical”) are higher priority initiatives. For example, a Knowledge Management project may contribute to achieving goals associated with client satisfaction; improved efficiency/value; and improved predictability. Contrast that with a project to reconfigure office space – which may have a high ROI, but relatively little strategic impact.
Prioritization across both dimensions (financial and strategic) yields added clarity on what the priorities really need to be across a range of projects – and may even lead a firm to delay or spike selected projects.
Validate Revenue Projections by Taking a Client (bottom-up) View
Revenue projects are (more often than not) built on the basis of headcount, anticipated hours, and rates (i.e., FTE x Hours x Realized Rates = Gross Revenues). That is entirely logical and appropriate. However, a nice check on that approach is to look at revenues from a client perspective.
At many firms, the top 50 clients (plus or minus) represent a substantial share of total revenues (often well over 50%). By asking relationship partners what those major clients are expected to do in the coming year, a firm can help to validate its revenue projections. If most of the major clients are expected to continue to generate similar or higher revenue streams, great. However, if revenues from important clients are expected to fall (e.g., a major case has been resolved, the company has been sold, etc.), it may lead the firm to make important adjustments to its budget.
Align with Other Metrics – Financial and Non-Financial
Last December we asked law firm leaders where they had reliable metrics and where they did not. Over 95% of firms have solid, reliable financial metrics. Metrics associated with client satisfaction, people development, and business processes are more spotty – though those kinds of metrics do exist on at least a limited basis.
The budget process provides an opportunityfor firm and practice group leaders to think about and revisit financial and non-financial metrics. Essentially, it is an opportunity to ask the question, “If we make or exceed this budget, will we also achieve our other measurable objectives?” Similarly, it is an opportunity to ask, “Are the financial and non-financial metrics we have adopted to track the success (or lack thereof) of our strategy consistent with the budget we are about to propose and approve?”
Essentially, the budget process becomes another tool to help a firm and its practice groups effectively use a balanced scorecard to monitor and drive strategy implementation.
* * * *
As always we welcome your comments and insights – in the comment section below, via email at email@example.com, and over the phone at (312) 543-6616.
Last month we talked about mid-size law firms: how best to define “mid-sized;” whether aggressive growth was the most logical strategy for mid-size firms; and alternatives to adopting an aggressive growth strategy. We got quite a bit of feedback – including some asking whether we had any alternatives to rapid, merger fueled growth. Part of the answer to that question was addressed in the second half of that article (a section entitled “winning strategies for mid-size law firms”). This article advances that discussion further.
Last month we identified some important commonalities among successful mid-size law firms, including the following.
- Successful mid-size firms tend to be general service, business law firms (though not “full service” – that is unattainable even at 2,500+ lawyers).
- A large number (perhaps a majority) of their clients are middle market companies – and that means that legal costs are essentially paid out of the owner/CEO’s pocket.
- Successful mid-size firms have people and/or practices that are the absolute best in the local/regional market in their areas of expertise.
- They have at some point (perhaps frequently) been approached by another law firm (probably a larger law firm) interested in merging.
There are important strategic implications associated with each of these traits, each suggesting potential sources of competitive advantage and vulnerabilities to competitive disadvantages. Some generic strategic thinking can be applied to these common attributes – a few examples follow.
General Service, Business Firm
As a diversified law firm, a “general business firm” has an opportunity to build deep, multi-practice, multi-partner client relationships.
Potential Advantage – Partners at mid-size firms have a strong personal familiarity with (most of) their partners. That should provide an advantage relative to introducing one another to clients as new needs arise (assuming partners have confidence in one another).
Potential Disadvantage – Every firm has practice capability gaps and those gaps can be pretty large at mid-sized firms (even in the strongest). When competing against biglaw, mid-size firms need to avoid competing on the basis of scale or breadth.
Middle Market Clientele
Serving middle market companies has preconditioned many partners at mid-size firms to be value conscious. The legal market has been moving decisively toward reduced costs and value, particularly since the great recession. Many mid-size firms have been benefiting from that trend.
Potential Advantage – Generally speaking rates are lower in mid-size firms. In addition, many mid-size firms are predisposed (temperamentally and practically) to staff matters with lean teams.
Potential Disadvantage – Biglaw firms are making substantial investments in knowledge management, project management, and financial management and that has the potential to close rate and efficiency advantages currently enjoyed by mid-size firms. In addition, as Bruce MacEwen has noted here, some large firms are engaged in “suicide pricing” – it isn’t sustainable for a biglaw firm, but it is a real threat to competing mid-size firms.
Strong mid-sized firms are often the best choice in their local or regional market for a number of legal issues. Yet, they are rarely the largest or most visible firm in their own market.
Potential Advantage – Marketing and business development that supports market leading practices generally has the best return on investment. That includes both investments intended to attract new clients and those intended to expand existing relationships across practice areas. The key is being willing to make those investments.
Potential Disadvantage – Essentially, two can play that game (i.e., biglaw competitors will be pushing their own strengths forward in the marketplace) – and larger law firms have larger marketing and business development budgets. In addition, that biglaw competitor may have a great option for the client sitting in an office 2,000 miles away (geography often isn’t a barrier for work these days).
Critically, you need to know what your firm’s general disposition is vis-à-vis merger. Even if it is quickly dismissed by the partners, it is important to have that conversation from time to time at the Executive Committee or Board levels, as well as with the broader partnership.
Beyond that, as a general rule of thumb, mid-size firm managing partners should accept invitations to lunch from an out-of-town (merger seeking) peer. At worst, you will learn a bit about a firm that is obviously interested in competing for clients and people in your market. And, you will gain insights into what other people value in your market and in your firm.
* * * * * *
As always, we welcome your comments and insights below, via email at firstname.lastname@example.org, and via phone at (312) 543-6616.
The Executive Committee of an AmLaw 200 firm (aspiring to become an AmLaw 100 firm) raised the following question. “(We’re at) an awkward size (roughly 500+ lawyers)…what should a mid-size firm like ours do (strategically)?” Given their aspirations, the answer was to keep growing and become a ‘big’ law firm. They certainly would not be the first to follow that road and some have realized their aspirations. For instance:
- At the time of their merger in 1999, Piper Marbury was a 400 lawyer “Baltimore law firm” with most of its lawyers located outside money centers and Rudnick & Wolfe was a 350 lawyer “Chicago real estate powerhouse” with no New York presence at all. According to the American Lawyer DLA Piper is now the world’s largest law firm, with over 4,200 lawyers in 30 cities worldwide.
- Similarly, at the time Elliot Portnoy became chairman of the Firm in 2007, Sonnenschein, Nath & Rosenthal was a 600 lawyer “Chicago-based law firm,” with less than 20% of its people in New York. Since declaring its intention to become leading global law firm, Sonnenschein scooped up over 100 lawyers from the disintegrating Thatcher Proffitt & Wood in New York, merged with UK law firm Denton Wilde Sapte, and simultaneously merged in international firm Salans and Canadian firm Fraiser Milner Casgrain. Dentons now has over 2,600 lawyers in 80 offices across 50 countries.
“Moving up market” (as some like to term the strategy) is certainly not impossible. But, the conversation with that aspiring AmLaw 200 firm raises a couple of pointed questions. Is a 500-600 lawyer firm actually “mid-sized?” And, is growth the only winning strategy for mid-size firms that intend to survive and prosper into future generations?
What is a Mid-Sized Firm Anyway?
Let’s deal with that first question – is a 500+ attorney firm mid-size? Sure, if your frame of reference is the AmLaw 50 or 100, then an AmLaw 200 firm is mid-size. That is especially true if your firm aspires to being part of ‘BigLaw.’ To generalize the point, defining what mid-size is depends largely on what you are comparing it to (e.g., an elephant is mid-size next to a brontosaurus).
That said, for many, many firms ‘mid-size’ is better defined in the context of nearby (i.e., local and regional competitors). In other words, mid-size is a function of your size relative to other firms/offices in your primary (or only) city. Firms that are mid-sized by that definition tend to share some common traits.
- They tend to be general service firms (since “full service” is unattainable at any size) focused mainly on the legal needs of business clients and their owners.
- They have a number (perhaps a majority) of clients who are classic middle market companies – and that means that legal costs are paid out of the owner/CEO’s pocket (if it isn’t insured risk).
- They have people and/or practices that are the absolute best in the local/regional market in their areas of expertise.
- They have at some point (perhaps frequently) been approached by another law firm (probably a larger law firm) interested in merging.
Is the only (or even the most logical) strategy to say ‘yes’ to merger overtures and/or launch a search for suitable merger partners with whom to grow aggressively?
Winning Strategies for Mid-Size Law Firms
So, is aggressive, merger fueled growth the best/most logical/only strategy for mid-size firms? After all the demise of the mid-size firm has been predicted for at least 25 years. Our answer: it is certainly not the only strategy, but it really depends on what your firm aspires to become. We addressed that broader question in a recent article regarding strategic direction.
Mid-size firms can adopt a compelling strategic direction that does not include substantial growth. Assuming there is widespread agreement among the partners regarding that direction (whatever it might be), there are a few things that you can (in fact should) do to turn that into a winning strategy.
Focus on a Few Things that Can Create a Competitive Advantage
Focusing a a few things that create competitive advantages requires a firm to do at least two things. First, honestly assess what the firm is (or can become) truly great at doing – strengths that can become the epicenter of genuine excellence that cuts across the firm. Second, get external validation that being great at those things is meaningful in the marketplace. Focus on a handful of things you are great at (or can become great at) that also have meaning in the market.
A basic SWOT assessment (strengths, weaknesses, opportunities and threats) can highlight your areas of strength (actual and latent). If you are not good at looking objectively at yourself, a good consultant can help.
External validation can and should come from your clients. Your best clients want you to succeed into the future – they almost certainly consider your partners to be among their most trusted advisers. So, ask your clients what you are good at and what you can do better. It will inform your strategy and improve your relationships to boot. It is amazing how few firms do this in any systematic way.
What does that mean, to think strategically? Well at a minimum, think about competitive advantage (those areas you might focus your energies on) through three lenses.
- Consider whether you enjoy size or scale advantages over competitors – or more likely face larger competitors who have size advantages with which you must cope. Large firms do have deeper pockets (or at least more equity partner pockets) over which to spread marketing, technology and other shared costs.
- Identify factors that may help you to defend your firm’s market position against competitors (even much larger, better financed competitors). It may be your knowledge of the local courts and judges, your reputation and brand may have deep roots in the community, you may have very deep and broad relationships with clients. Consider how you can capitalize on and solidify those defensive advantages.
- Finally and most importantly, take an indirect approach – occupy the unoccupied market positions and be willing to do things differently from competitors. Precedent is a horrible source of strategy – don’t do what others are doing, do things no one else is doing.
Implement – Do What You Say You Are Going to Do
We have written extensively on implementation – through the balanced scorecard and through other means as well. Successful implementation involves:
- Cascading strategy implementation throughout the organization – from firm level initiatives to practice and departmental level activities to a vital and meaningful roles in implementation for all of the firm’s people (partners, associates and staff);
- Measuring and monitoring implementation and the results it is producing – reinvesting in and celebrating the things that are working;
- Adjusting as implementation unfolds – abandoning or recalibrating initiatives that are clearly not producing expected results and responding to new market challenges and opportunities as they arise.
In sum, if you think you are mid-size, you probably are – it is entirely a function of your perspective on the competitive marketplace. Being mid-size is not equivalent to being diagnosed with a fatal disease. You are free to reject the label and seek to grow – others have done so with remarkable success. But, you can also adopt other winning strategies by focusing on few sources of competitive advantage, thinking strategically, and implementing with discipline.
As always, we welcome your comments and insights below, via email at email@example.com, and via phone at (312) 543-6616.
Our last post introduced the principles underpinning a valuable strategy tool – co-creation. We noted that co-creation is a tool particularly well suited to sophisticated legal practices for two reasons. First, in many respects co-creation principles align well with attorneys’ instinctive approach to managing client relationships. And second, co-creation is proverbially “just what the doctor ordered” relative to having an effective tool to respond to the Association of Corporate Counsel’s (ACC) Value Challenge.
As we noted in that last post, co-creation is built on four principles: open dialog; access to information; shared risk assessment; and transparency (especially on costs and pricing practices). We promised to share a few real world examples of how those principles were put into play by forward-thinking law firms and partners – working collaboratively with clients. We share three real world cases below (disguised sufficiently to protect both the identity of the law firms and their respective clients).
Managing A Large, Growing Patent Portfolio
A global technology company, spending well into the seven figures to manage and expand their patent portfolio in the U.S. (exclusive of litigation costs), approached their leading intellectual property law firm looking for an approach that would save money, while effectively supporting a core business strategy that highly valued a strong and growing portfolio. The existing relationship was long-standing and strong. The law firm currently supported more than 60% of the company’s patent portfolio. Further, the primary relationship manager was predisposed toward open dialog, access to information, and shared risk assessment.
Supported by solid financial analysis on the law firm side and progressive thinking in the general counsel’s office (including the associate GC for intellectual property), the following solution was crafted
- An open dialog regarding the full scope and nature of the company’s patent portfolio – and the law firm’s technical capabilities – led to a realization that efficiencies could be gained by having one firm support the entire portfolio in the U.S. (as well as much of the rest of the world). Essentially, consolidating the work with a single firm would free-up resources in the GC’s office and the law firm and would streamline docket management.
- The law firm already provided real time visibility to the client’s patent docket. By consolidating all the work in a single firm, it also became feasible to have secure access to the underlying documents (e.g., applications, USPTO responses, etc.) across the law firm’s and the client’s networks.
- Real savings emerged from shared risk assessment. The company had a highly sophisticated strategy for its patent portfolio. They had a very clear sense for which patent families were most valuable and/or integral to that overall strategy – and the law firm became a valuable partner in helping to assess both value and risk. That in turn enabled the firm and the company to deploy the right level of resources to each element of the patent portfolio – especially in areas driving the greatest costs (e.g., the application docket and management of the pipeline of new technologies and patents).
- Entrusting the entire portfolio to a single firm enabled the company and the law firm to create a rational budget for managing the entire portfolio (i.e., via transparency on costs and pricing). That budget included meaningful insights into what work should be done in the GC’s office and what should be done at the law firm – in the process optimizing total costs to the company. And, because the right work was being done in the right place by the right people (including administrative support), the law firm was able to maintain profit margins even as the company’s total spending on outside counsel declined.
Controlling Costs on Recurring Litigation
A large petro-chemical company with recurring litigation in the toxic tort arena was looking for a way to gain greater control over the costs associated with that litigation. Costs ranged from the mid-seven figures to the low eight-figures (excluding judgments and settlements) in any given year.
- The company’s general counsel started a dialog with the lead partner of a range of litigation matters for the company (across multiple sub-specialties – including some toxic tort work). He was open about his objectives: to save money overall; and to introduce some predictability in his budget for this recurring work.
- The relationship benefited from an established set of tools that provided access to documents (via a secure document management system) and to regular status reports on all open cases.
- The partner was well respected for his ability to understand the risks associated with complex litigation – and his ability to cut through complexity to put a value on cases. That included an ability to assign solid ranges to the potential outcomes for any given case, as well as an ability to develop litigation strategies to manage cases toward controllable outcomes. This provided a dual ability to better manage ongoing litigation costs and achieve agreed upon outcomes vis-à-vis judgments and settlements. Settlement decisions could be made more strategically as a result – better managing risk and reducing the company’s total cost of litigation (not just the cost of outside legal counsel).
- The relationship was characterized by a high level of trust (and transparency). Thus, when the company approached the partner looking for savings and predictability, he suggested putting all of the recurring work on a single fixed annual budget. Time would be tracked against the budget and the budget would be reset annually – some years up and some years down (a real reflection of mutual trust). As a means of saving the company significant legal fees, the partner suggested staffing routine, but labor intensive aspects of the ligation with low cost contract attorneys (rather than his firm’s higher priced associates). That took money out of the law firm’s hands, but created additional credibility and trust – as well as substantial cost savings.
Innovative Financial Services Products
One of the largest banking and financial services companies in the U.S. was searching for innovative product ideas to respond to the post-financial crisis banking environment (e.g., low interest rates, higher reserve requirements, more stringent regulatory oversight, etc.).
- General Counsel at the bank began a dialog with partners at one of its most forward thinking law firms. The bank and its competitors were responding to the low interest rate environment by adding a substantial quantity of government bonds (in particular municipal and other tax advantaged government bonds) to their balance sheets. However, the process through which those assets were traditionally created (e.g., underwriting and disclosure by investment bankers, public offerings and market making, etc.) was both cumbersome and costly. The bank was looking for a creative solution to simplify and streamline that process.
- That initial dialog led both the bank and the law firm to open access to the key stakeholders at the bank (e.g., investment bankers, commercial bankers, law department, etc.) and to subject matter experts at the law firm (e.g., securities, public finance, banking/bank regulatory, etc.). The combination of dialog and access led to the development of what amounted to a new product in both the banking and public finance world – direct purchase by the bank of newly created government bonds.
- The success of the product was strongly influenced by the ability of the bank and the law firm to effectively manage risk. That included strong risk assessment of the municipalities and other entities originating the bonds (i.e., no distressed municipal debt in this product mix). It required effective documentation of underlying disclosures by the issuing entities, as well as other regulatory compliance (another form of risk mitigation). And, to manage the longer run balance sheet risks, it required the creation of products with appropriate durations to protect both the borrower’s and the bank’s balance sheets.
- Creating what amounted to an entirely new product (both for borrowers and lenders) raised critical transparency questions. Should this product be considered highly proprietary (which in the world of financial services meant it would take a few quarters before other banks figured out their own way of offering the product) or should it be trumpeted as a new industry standard (enabling faster followers)? In addition, having created a product that was essentially a winner for all stakeholders (borrowers, the bank and the law firm), how repeatable and predictable could the process become? Direct purchase of municipal (and other public) debt has been moving rapidly toward industry standardization (answering the first question). There are tremendous efficiencies in the product/process, however the unique qualities of each asset (i.e., municipality/project/etc.) limit how entirely repeatable the process can be (partially answering the second).
Hopefully these three examples – across markedly different legal specialties and markets – help to provide some insight into how you might adopt and apply a co-creation strategy in your own firm and/or practice. At a minimum, co-creation ought to be in the “strategy toolbox” of every law firm of reasonable size and capability.
As always, we welcome your comments below and via telephone (312) 543-6616 and email (firstname.lastname@example.org).
This is the first in a two-part discussion of a valuable innovation tool for law firm leaders – “co-creation.” Co-creation has its greatest value at the individual client level, but can be applied at practice level as well. Co-creation dovetails directly with the kind of call to action at the heart of the Association of Corporate Counsel’s (ACC) “value challenge.” Namely, that increasing the value law firms deliver to clients requires “that solutions must come from dialog and willingness to change things on both sides.”
Co-creation is quite distinct from disruptive innovation (see our article from April 2013) which provides a process and roadmap for creating low end solutions that fundamentally alter established markets. On the contrary, co-creation is a process for creating solutions that have unique and enduring value for clients (often enhancing or at least preserving profitability). It is essentially a process for taking practices to higher levels of value and for strengthening client relationships in the process.
This first article provides an overview of the tool and how it applies in a law firm setting. Our follow-up article next week will provide a few examples to provide some practical, real world insights into the process.
Origins of the Tool and Principles
Co-creation emerged and was defined by C.K. Prahalad and Venkat Ramaswamy – both professors of business at the University of Michigan. They identified a number of foundational shifts in the nature of relationships between businesses and their customers – shifts that alter how and where value is created. Those shifts include:
- Growing access to information on the part of clients; globalization regarding viewpoints and perspectives (i.e., not only do clients have increased access to information, that information is global in scope);
- Networking among clients (for example, via the Association for Corporate Counsel, LinkedIn interest groups, and other formal and informal networks); and
- A willingness to experiment – particularly with digital and/or information driven products and services.
Given that backdrop, Prahalad and Ramaswamy found that increasingly value was created at the point of interaction between businesses and their clients. Value was becoming less a function of creating a product or service to be purchased (i.e., take it or leave it). Rather, value was being created as businesses and their customers created unique solutions together.
For many in the legal industry, this insight is not particularly novel. Because legal services often require dynamic interaction and unique tailoring of solutions via direct interaction with clients, the idea of co-creating value is a standard operating practice for many lawyers. Prahalad and Ramaswamy approached this dynamic from a mass market, product oriented perspective, and as a result they were able to develop some basic principles that are potentially valuable to law firms. In short, they have codified the foundational approach that makes co-creation based innovation a repeatable process with clients.
Using the Tool in a Law Firm Setting
Co-creation tools provide a roadmap for taking client interaction to a higher level – recognizing that the world has become more interconnected and information is more readily available to clients than it had been in the past. By recognizing and embracing that change, more value can be created for clients and in the process, relationships can be strengthened.
Applying co-creation in a law firm setting involves embracing four fundamental, ongoing principles in client interactions.
- Dialogue – “Dialogue means interactivity, engagement and a propensity to act – on both sides (client and law firm).” Beyond simply listening to clients, dialogue suggests shared learning on the part of two problem solvers.
- Access – Access focuses primarily on providing access to information and tools. For instance, many firms have implemented extranets and/or cloud-based solutions for managing shared information with clients. Embracing the access principle takes that one step further, ensuring access to the insights, knowledge and other foundational tools the law firm uses on behalf of clients (e.g., knowledge management tools, project management tools and processes, etc.).
- Risk Assessment – To fully engage in co-creation, clients need to have a deeper understanding of the risks (and trade-offs) they face when selecting and creating a particular solution. Some attorneys are extremely good at helping clients assess risk and make wise choices – others are not. Helping clients assess risk is fundamental to co-creating value.
- Transparency – Historically, there has been a natural imbalance regarding some elements of the relationship (e.g., pricing, underlying costs, profit margins, etc.). Some of that imbalance has already broken down. For instance, starting salaries for associates are published openly at NALP and profit levels are openly reported in the AmLaw 100 and 200 rankings. The transparency principle calls on firms to continue and expand that openness.
While many will object to (or fear) the level of openness called for by the principles above, that fear is generally unsubstantiated in actual practice. Clients do not object to their law firms earning a healthy profit – they understand that profitability is the cost of doing business into the future. Furthermore, because they are actively part of key decisions regarding the creation of solutions and the management of risks, the value received relative to the fees charged is generally perceived to be very high. In addition, having co-created approaches that deliver high levels of value, incentives to switch firms falls dramatically – increasingly client loyalty in the process.
Co-creation works most effectively when complexity is high and resulting solutions are genuinely unique and of high value. In those high end settings, law firms are well served adopting principles of co-creation. However, the principals work in many other settings as well (e.g., improving value on high volume work, integrating legal process outsourcing vendors into ongoing relationships, etc.). In summary, co-creation is a natural extension of long standing traditions and leads to deeper, stronger and more loyal client relationships.
Next week we will follow-up with a few examples of how these principals work in practice.
The rise of Axiom, Clearspire and other disruptive innovators in the Legal Process Outsourcing (LPO) segment of the market has led to a wave of articles and blog posts – some insightful and well considered and some likely to prove embarrassing to the author(s) down the road. We have been addressing law firms’ strategy development and strategic planning needs for over 25 years and I personally have been a professional strategist for nearly 30. That contributes to my frustration with some of the writing out there – namely, this stuff isn’t particularly new (although some of the more successful disruptors in the legal industry are relatively new).
Clay Christensen published The Innovator’s Dilemma in 2000 – in the wake of documenting dozens of disruptive business models during the dot.com boom. Since that time, multiple books (including follow-ups by Christensen himself) and journal articles have been written building on that initial landmark. Further, several industries have adapted (and adopted) innovation toolkits based largely on the principle steps involved in pursuing disruptive innovations.
We covered this topic in reasonable depth in our book Strategic Planning for Law Firms: A Practical Roadmap. For the benefit of blog readers, we have excerpted an edited portion of that discussion below. We hope this helps you and your firm think about the strategic implications of disruptive innovation in the legal industry. Please keep in mind, especially in the legal industry, disruptive innovation is not the only successful approach to innovation and new service development. This a tool for pursuing one type of innovation and there are other valuable innovation tools with application to the legal industry.
* * * * * * * * * * * *
Disruptive innovation is an approach to product, service and business process development that focuses on delivering “good enough” products or services. In other words, disruptive innovations target and capture the so-called low end of a given market – usually by delivering “good enough” performance at a dramatically lower price than full service or full function incumbents.
Disruptive innovators typically attract either non-consumers of a product or service (essentially creating a new solution and a new market) and/or customers who are “overshot” or over-served by a higher cost and higher function solution than they really need (creating a low end disruption). There are dozens, if not hundreds, of examples of disruptive innovations entering and capturing the low end of their given market – Skype instead of full function video links, Quicken rather than more complex accounting software, cameras integrated into cell phones, and Metro’s free daily newspapers.
Origins of the Tool
Clayton M. Christensen is credited both with the research that identified the fundamental principles of disruptive innovation – in the first of two landmark books, The Innovator’s Dilemma – and with the subsequent work that codified how to pursue disruptive innovation in your own organization. Christensen’s second book, co-written with Michael Raynor, The Innovator’s Solution outlined the steps to pursuing disruptive innovation.
The disruptive innovation process involves three major steps:
- Opportunity Identification – This step includes identifying non-users of a product or service as well as users whose needs appear to be “overshot.” With potential target clients or customers in mind, opportunity identification focuses on defining the “jobs to be done” for those customers (i.e., identifying through traditional market research the core needs those non-users and overshot users actually need fulfilled).
- Idea Formulation and Shaping Ideas – The second step involves developing disruptive ideas – the authors provide a range of supporting tools to help with that process. With ideas in hand, this stage of the disruption process calls for an iterative process for refining and testing ideas. Christensen’s research found that innovators rarely understand the needs of non-users or overshot users out of the gate. Rather, they need to refine their ideas via low cost, low risk failures – leading to a refined product or service that can capture a larger and potentially growing market.
- Building a Business – The third step focuses on establishing a sustainable business to market the solution and grow the business to reasonable scale. This stage requires the innovator to identify and understand critical areas of uncertainty, experiment in ways that resolve that uncertainty in the early growth stages of the business, and refine the underlying business model in response to what is learned.
Christensen and his co-authors have built upon and refined this approach over the past ten-plus years and there are now a number of industry specific innovation methodologies in circulation (though none focused directly on the legal market).
Application to the Legal Industry
The application of disruptive innovation for incumbent (i.e., traditionally structured) law firms is largely two fold. First, for well established firms, understanding disruptive innovation is important. In particular, successful low end innovators can and are dramatically altering the established market – client relationships, pricing expectations, profit potential and otherwise. Ultimately, they may actually surpass incumbent competitors – fundamentally changing the market they undercut initially.
Second, there may be markets ripe for disruption that can be served by your own firm. In those instances, firms or practice groups can directly apply the disruptive innovation tools to targeted markets – identifying non-users/overshot users; defining the “jobs to be done” for them; creating, testing and refining solutions; and building a sustainable business that grows to scale over time.
Examples of disruptive innovation in the legal industry have emerged in a number of specialty areas, as well as in important elements of larger scale legal processes. For instance, the emergence of pre-paid legal services and “do-it-yourself” online tools have captured clients who were previously non-users of legal services – RocketLawyer.com is one of many examples of this business model (largely online, but with human talent behind it). Talented patent attorneys have created micro-boutiques that do nothing but patent prosecution on a fixed fee per application basis. Most threatening for bigger firms (and over the long run for mid-size firms), legal process outsourcing shops like Axiom are creating dramatically lower cost approaches to selected phases of large scale litigation and transactions. In virtually every one of these examples, the solutions offered are “good enough” for over-served clients and the costs are dramatically lower than using a traditional firm.
It is critically important to understand the underlying business models of emergent disruptive innovators. If their solution is scalable, if it can add new capabilities over time (gradually encroaching on your practice’s incumbent solution), and/or if it attracts clients who perceive themselves to be “overshot,” those innovators need to be taken into account in the context of developing and implementing competitive strategies.
Using the Tool in a Law Firm Setting
The three phase approach outlined above applies fairly universally. It is certainly applicable in a law firm setting without unique tailoring or embellishment. Because there is considerable depth, nuance and insight in The Innovator’s Solution, it is recommended that those planning to pursue disruptive innovation take the time to read that book and use the many supporting tools provided in that text.
There is an important consideration law firm leaders should recognize prior to engaging in an all-out pursuit of disruptive innovation. Michael Raynor continues to research disruptive innovation with a high level of energy. His most recent book, The Innovator’s Manifesto, includes an important insight for incumbent competitors. Namely, incumbents tend to be highly successful at creating incremental innovations (i.e., innovating at the high end), but are dramatically less successful in introducing disruptive innovations (see the chart below). There is a reason why the first book characterized disruptive innovation as a dilemma – it fundamentally challenges the established (usually highly profitable) business model.
This would suggest that firms wanting to capture disruptive innovation in an area where they are already an incumbent competitor should consider a few alternatives to directly pursuing disruption within their firm/practice group. First, they can acquire a growing disruptor – someone who has already worked through the first two (and possibly all three) stages in the disruptive innovation process. Second, they can co-opt a disruptive innovator, using them as a sub-contractor (a recent interview by Lee Pacchia at Bloomberg Law identified some anecdotal examples of this approach). Third, they can set-up an ancillary business to develop the disruptive service offering – removing some of the principle barriers incumbents face when trying to launch disruptive innovations that will compete with their well-established services.
Those interested in pursuing disruptive innovation (or who have a strong interest in the topic) are encouraged to read Christensen’s and Raynor’s The Innovator’s Solution (Harvard Business School Publishing, 2003). Raynor’s new book, The Innovator’s Manifesto (Crown Business, 2011) provides valuable insights into the drivers of success and failure among innovators.
* * * * * * * * * * * *
As always, comments are open below and we welcome your calls and emails at (312) 543-6616 and email@example.com respectively.
Steven Harper wrote a terrific piece on law firm culture in response to the latest Citi Private Bank/Hildebrandt update on the legal market. Harper is incredulous of Citi/Hildebrandt’s warning that “Law firms discount or ignore firm culture at their peril.” He makes the point that “consultants have encouraged managing partners to focus myopically on business school-type metrics that maximize short-term profits…what has resulted from that focus: the unpleasant culture of most big firms.”
The reverse does not have to be (in fact often is not) true. Namely, firms with a strong, collegial culture are not inherently doomed to poor economic performance. They may not top $3mm a year in profits per equity partner, but everyone working in those firms earns a very good living, they have strong and enduring client relationships, and they enjoy a balanced and rewarding professional life. Having that kind of positive firm culture requires work and discipline – and, especially, a commitment not to throw away long held values in the face of short term economic challenges.
Our recent survey on best practices in law firm strategic planning confirmed this point. Namely, the firms experiencing the most successful results from strategic planning are much more likely to have articulated shared values or principles as part of that process. At the same time, those highly successful firms are much more likely to adopt and track measurable objectives as part of the strategy process. In other words, the most successful firms balance a strong commitment to long held cultural values with a pragmatic approach to setting objectives (i.e., financial, client relationship, and other measures).
Having had the pleasure and privilege of working with a number of firms over the years that have cultivated and sustained great cultures, here are five suggestions for how you can cultivate, embrace and sustain a set of shared values that define a great law firm culture.
- Honor the Founder(s) – When I started my consulting career at Arthur Young (that dates me), John Smock made sure everyone in the practice got a copy of a relatively short book entitled, Arthur Young and the Firm He Founded. That little book encapsulated many of the core values of the firm – and traced them to the values of the hard working Scotsman who immigrated to America and started the firm. Whether your firm was founded 20 or 200 years ago, you are likely to find some of the roots your firm’s values and culture in the character of your founder(s). Honor those roots.
- Celebrate a Milestone Year – Round number anniversaries lend themselves to celebrations (10th, 50th, 100th). So do record years, though they tend to arrive with more frequency and less fanfare. Take the opportunity of a milestone year to reemphasize the shared values that brought the firm to that point. Embrace and celebrate your culture and your shared values – not just the anniversary or the record.
- Document Your Stories, Your History and Your Culture – I have a number of books in my collection from clients – both law firm and corporate – in which the history of their organization (and its culture and values) is documented and described for posterity. Sometimes those books are commissioned in conjunction with an anniversary, others mark the passing of great leaders, and still others were done simply to capture the stories before they were lost to memory. Those stories may be the very best window into truly understanding the firm’s culture and the values – they are a way to connect our rational understanding of the values to our emotional understanding of values (see this brief slideshow for more). Stories can even be used when you need to drive cultural change (see Peter Bregman’s HBR article on the topic).
- Ask Your People to Define the Culture – We have used a technique very successfully over the years to isolate core values and help organizations coalesce around them. Ask a very simple question, “What three words best describe the values that endure over time in our firm?” The resulting word-cloud is enlightening and it helps to define (or reinforce) the firm’s shared values. It can be used in many settings to spark a discussion of shared values and the culture – keeping that culture front and center as other decisions are being made (e.g., employee reviews, partner compensation, lateral hiring, strategic planning, etc.).
- Put It In Your Plan – Finally, take a lesson from the firms having the most success with strategic planning and strategy implementation. Articulate your values as part of your overall strategy. Include a long term mission as part of your strategic plan and include a concise articulation of your core values in that mission.
While the embrace of firm culture and values may be belated for some, it is welcome nonetheless. Whether your firm is large, mid-sized or small, sustaining a positive firm culture is a critically important element in a genuinely successful law firm strategy. Who knows, it might even land your firm at the top of the Vault.com rankings for best firms to work for.