Tag Archives: Profit Management

Realistic Approach to Innovation in Law Firms: Collaborate with Your Best Clients

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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.

Fundamental Truths

Let’s start with some fundamental truths about disruptive innovation.

  1. 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.
  1. 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).
  1. 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.

Raynor Disruption Graphic

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.

  1. 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.
  1. 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?
  1. 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).
  1. 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.
  1. 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.

 

 

 

Ensuring Practice Group Effectiveness

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Our joint research project with the Managing Partners Forum continues and our topic in February 2014  was practice group management.  Specifically, are there particular responsibilities practice group leaders should be taking on in order to drive effective practice management?  In addition, what kinds of base level support are firms providing to practice leaders (e.g., job descriptions clarifying the role, training for leaders, etc.)?

At the core, we found that firms experiencing higher levels of success with practice group management have different (and higher) expectations for their practice leaders.   Firms reporting the highest levels of success with practice group management ask their practice leaders to take on more responsibilities – the most common responsibilities in more successful firms can be summarized as:

  • Strategic planning for the group;
  • Work flow management (right people on the right matters at the right time);
  • Coordination and encouragement of teamwork, esprit and morale;
  • Coordinating and encouraging marketing to new clients;
  • Coordinating and encouraging professional development and training.

Those top responsibilities are depicted graphically below.

Top six effective firms

A complete documentation of the results of this survey on practice group management can be found at the Managing Partners Forum web site.  We welcome your questions and feedback regarding these findings.

Our March 2014 research focuses on best practices in law firm strategic planning.  Highlights will be presented here, a full write-up of results will be published at the Managing Partners Forum, and a more in-depth article will be developed for and published in the June edition of Legal Management magazine.

Talking with Clients: The Critical Role Non-Lawyers Need to Play

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This article is a follow-up to a major section in our recent article Non-Lawyers: A Critical Success Factor for the Law Firm of the Future.  Namely, when should non-lawyers – and specifically, business development professionals – be expected to interact directly with major clients?  This follow-up is both informed and motivated by the comments, feedback, speaking invitations and other conversations that original article sparked.

To be clear, we are talking about non-lawyer involvement in communications with major clients.  By major clients we mean that group of clients that (with the possible exception of the very largest law firms) fall into an 80:20 or 70:30 rule (i.e., the 20% of clients who represent 70% or 80% of the firm’s revenues).  That especially includes clients for whom the firm provides multiple legal services (i.e., clients served by multiple practice groups).  Even more particularly, that should include major clients who are using other law firms in areas where your own firm has demonstrated strengths (i.e., where your firm is not getting work from otherwise great clients in areas where your firm  has exceptionally strong capabilities).

Are You Advocating Cutting Lawyers Out of the Relationship?

The short answer to that question is, “of course not.”  So, let’s stipulate some things that may be obvious, but ought to be underscored nonetheless.

  • Lawyers are the primary contact(s) with clients for the delivery of legal services and the management of legal (and often other) risks.
  • Nearly 100% of current client relationships originated with a lawyer or team of lawyers – though in many instances, the “originating” attorney is no longer active in the practice of law (i.e., the client relationship pre-dates the current team serving that client).
  • Lawyers should (in fact must) remain integral to client relationships – maintaining, improving and growing those relationships.

The point is not that lawyers are set to be thrown on the trash heap of history.  Rather, the point is that the efforts of client serving attorneys can be greatly enhanced and augmented by involving non-lawyer (particularly business development) professionals in client communications.  Also, while a few firms are turning to (non-practicing) lawyers to take on these business development or client relations roles, the majority will be filled by professionals whose training and experience has prepared them to lead business development in a professional services setting.

So, How Can/Should Talented Business Development Professionals Be Interacting With Major Clients?

Business development professionals are (or at least should be) extremely well positioned to gather systematic, objective, constructive, deep feedback and input from major clients.  That feedback gathering can benefit from the involvement of managing partners, practice or section leaders, or others law firm (i.e., lawyer) leaders.  However, law firm leaders are generally too busy to maintain regular, systematic contact with major clients.  Gathering that input via well-structured, extended conversations with multiple people within major client organizations is the starting point for non-lawyer interaction with clients.

Remarkably, relatively few firms are gathering feedback from clients (major or otherwise) on a systematic basis.  Even in firms that are committed to gathering client feedback informally, many do not leverage the skills and experience of business development professionals to do so.  Many firms on the smaller end of what we would consider to be mid-sized may not have a seasoned business development professional capable of leading that process (i.e., the marketing and business development function is staffed by people skilled in marketing communications and/or event planning).  In that case, feedback gathering can be outsourced – frankly, the return on investment is outstanding.

With systematic, objective, constructive, deep feedback and input from major clients in hand, what should the firm do?  There are several answers to that question.

  • Most importantly, firms need to use that client input to help the team of lawyers who serve the client on a day-to-day basis – together with lawyers who perhaps should be serving that client – to develop and implement a plan to expand the relationship.  Seasoned business development professionals can and should facilitate this process (though it can also be outsourced if necessary).
    • That includes both deepening the relationship (i.e., doing more of what the firm is already doing for the client, ideally with a more engaged and informed team) and broadening the relationship (i.e., bringing other strengths of the firm to bear on behalf of the client – providing legal assistance in other areas where firm strengths align well with client needs).
    • That also includes tracking and coordinating implementation of those “client service plans” (which almost certainly should include metrics, action plans, and milestones).
  • In addition, that feedback needs to be used to draw other non-lawyers into the client relationship.  In the current environment, client feedback often uncovers expectations and/or needs that require the assistance of IT professionals (e.g., extranets, connectivity, proprietary systems, etc.); knowledge management expertise (e.g., process automation, database integration, smart forms, etc.); project management expertise (which may reside at the firm and/or at the client’s organization); and finance expertise (e.g., cost analysis, creative pricing arrangements, etc.).  Again, a seasoned business development professional should be able to bring this extended support team to the table and coordinate their efforts with those of the rest of the client service team.

The ultimate vision for non-lawyer interaction with clients ought to be somewhat akin to a more traditional marketing function in a corporate setting.  In a corporate setting, market intelligence and customer input is used to drive an integrated marketing function that goes well beyond marketing communications and business development.  Some may remember the “Four P’s” from Phillip Kotler’s Introduction to Marketing text books (i.e., Product, Pricing, Promotion and Placement/distribution).  Gradually, the legal industry is moving toward this model.  For instance, there are reportedly over 300 “pricing directors” at law firms now.  Similarly, there are more and more non-lawyer business development and outright sales roles.

Ultimately, these roles need to be integrated and coordinated.  Call the leader of that group the Chief Marketing Officer, the Head of Client Relations, or some other title.  Frankly, the title is less important than the function, which is to bring the outside into the firm (e.g., client input, market intelligence, competitor intelligence, etc.) and to coordinate the firm’s response to that information in ways that (profitably) extend and deepen existing client relationships and establish new ones.

Intentional Management: Saying What You Mean and Doing What You Say

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Over the past year we have noticed an important word showing up more often in the strategy deliberations of our law firm clients.  That word is intentional, literally meaning “done in a way that is planned or intended; thoughtful; deliberate; goal-directed.”

Frankly, we could not be happier to see our clients embrace the term intentional to describe strategic and managerial priorities.  For far too many law firms, for far too long, many aspects of firm and practice management have been anything but intentional.  On the contrary, many firms – including many with smart, well-conceived strategic plans – accommodated highly autonomous action on the part of practices and (especially) successful partners.  Firm strategy was essentially subservient to the needs and interests of individuals and small groups within the firm.

In his landmark article “Patterns in Strategy Formation,” (pdf) Henry Mintzberg accurately characterized this as the strategy of “muddling through.”  This approach is inherently reactive and leads to continual bargaining vis-a-vis priorities and goals.  As a result, strategy is fragmented and often reflects the narrow interests of powerful individuals, rather than the proactive pursuit of best opportunities available to the organization as a whole.  Sound familiar to anyone?

What do we mean by “intentional management?”  It simply means saying what you mean (i.e., being clear about the direction the firm is heading and the priorities it will adopt in its pursuit) and doing what you say (i.e., following through on those priorities).  Now, it is easy to define intentional management, but more difficult to live it.  Living it requires linking strategy across and through the firm.

Cascading

It also requires actively managing, monitoring and measuring progress toward the firm’s primary goals.  Passively waiting for annual (or less frequent) partner compensation discussions is not sufficient.  There need to be clear commitments to action at the firm, practice, departmental, and individual level.  And, the whole endeavor benefits immensely from tracking what is working (and what is not working) via outcome measurement.

After all, we adopt strategies and implement those strategies with particular outcomes in mind (e.g., revenue growth, improved realization, stronger client relationships, a more effective work force, etc.).  If we are following through on our commitments (i.e., managing intentionally), then we can use outcome measures to identify what is working, make appropriate adjustments, and challenge the strategy when circumstances dictate.

Intentional management applies to virtually every aspect of the law firm.  For instance:

  • We need to be intentional in our approach to people management – especially in recruiting, training and professional development.
  • Client relationships benefit from intentional management.  That is particularly true for relationships threatened by clients’ demands for greater value and/or cost reduction (e.g., where project management, knowledge management, or other aspects of the ACC Value Challenge are in play).  It is also true of relationships that can benefit from greater breadth and/or depth (i.e., where others in the firm can help substantially in cementing the client relationship).
  • It is certainly a requirement for effective business development if that is going to be anything more than heroic individuals going to market on behalf of the firm.  Any meaningful targeting, leadership in industry segments, and/or team-oriented selling is a function of intentional management.
  • Pricing decisions (e.g., rate setting, creation of alternative fee arrangements) and other basic economic decisions (both revenue and cost related) benefit from intentional management.
  • Finally, the ultimate decision of who owns the law firm (and at least here in the US, that means who becomes and remains an equity partner) should be driven entirely by intentional management.

So, three cheers to the firms out there embracing an intentional approach to management.  It will serve you well as the legal marketplace becomes increasingly competitive.

Five Tips to Better Align Budgets with Firm Strategy

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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.

 Priorization matrix

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.

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As always we welcome your comments and insights – in the comment section below, via email at info@sterlingstrat.com, and over the phone at (312) 543-6616.

 

CO-CREATION OF UNIQUE VALUE WITH CLIENTS: A Strategy Tool for Winning the ACC Value Challenge (Part Two)

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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 (jsterling@sterlingstrat.com).

 

CO-CREATING UNIQUE VALUE WITH CLIENTS: A Strategy Tool for Winning the ACC Value Challenge (Part One)

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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.

 

 

Strategy Implications of Disruptive Innovation

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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.

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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.

Christensen Disruption Graphic

Source: The Innovators’ Dilemma; Clayton Christensen; 2000

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.

Raynor Disruption Graphic

Source: The Innovator’s Manifesto; Michael Raynor; Crown Business; 2011.

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.

Further Reading

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.

 

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As always, comments are open below and we welcome your calls and emails at (312) 543-6616 and jsterling@sterlingstrat.com respectively.

SURVEY RESULTS – Goals, Measures and Balanced Scorecards – December 2012 Strategy Topic of the Month

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Our final strategy topic  for 2012 focuses on what law firm management is doing relative to setting objective measures for their strategic plans. More specifically, what do law firms measure and are those measures in any meaningful way connected to their own strategies?

What we learned – in short – is that law firms measure financial results with real consistency.  Beyond financial results, measurement is relatively limited and is often unconnected to firms’ strategies.  That puts law firm management roughly 15 years behind corporate management – where balanced scorecards enable companies to translate strategies into measures in four primary categories:

Balanced Scorecard Graphic

The balanced scorecard idea was novel when Robert Kaplan and David Norton introduced it in the mid-1990’s.  Essentially, they recognized the peril in having a company focus only on financial performance – without consideration to its performance vis-a-vis customers, employees and underlying business processes.  Since then, research has demonstrated the positive impact of adopting measures in key areas beyond financials.  For instance, a 2008 study published in Advances in Accounting found that “firms that adopt the balanced scorecard significantly outperform firms that do not (including financial returns).”

No one responding to this month’s survey has formally adopted a full scale balanced scorecard approach.  However, roughly 40% of the firms responding to the mini-survey have either adopted portions of the balanced scorecard (25%) or are working with an informal version of the balanced scorecard (15%).  This is consistent with what we found in early 2009, when we were putting together case studies for Balanced Scorecards for Law Firms – namely, very few firms have formally embraced a balanced scorecard approach to strategy implementation and/or performance measurement.

Unsurprisingly, 100% of law firms report having and using financial measures.  In fact, the overwhelming majority of them consider their financial metrics to be either “solid and reliable” (24%) or “excellent and highly informative” (72%).  To the extent firms have measures linked directly to their strategic plans, those measures are predominantly financial.  Asked specifically if they have measures linked to their strategy, only about half of responding firms reported make any effort to link measures (financial or otherwise) to their strategic plans.

A summary of how prevalent measures in each of the four balanced scorecard categories are within law firms underscores the overwhelming reliance on financial results as a proxy for everything else.

Survey Table

The most striking thing here is that although over 95% of all firms have solid or excellent financial measures, 80% of firms have limited (or no) measures of client satisfaction.  This is consistent with our October 2012 strategy topic of the month.  In that study we found that relatively few firms have structured client feedback programs focused on their top clients.  Frankly, this is both a huge missed opportunity and a potentially critical mistake.  Even if you never seriously evaluate or adopt a balanced scorecard – at the very least augment your financial metrics with systematic feedback from clients.

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As always, we thank you for your input and willingness to share your insights via these brief monthly surveys.  We will return next week with a recap of the top ten insights gained from the 2012 strategy question of the month surveys.

Best wishes for a healthy and prosperous 2013.

 

Goals, Measures and Balanced Scorecards – December 2012 Strategy Topic of the Month

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Our final strategy topic of the month for 2012 focuses on what law firm management is doing relative to setting objective measures for their strategic plans. Peter Drucker famously said, “you can only manage what you can measure.”  The question is, do law firms measure progress against the key elements of their own strategies (i.e., are they measuring what they are managing)?

Kaplan and Norton put systematic rigor behind measuring key elements of strategy with the Balanced Scorecard. The essence of the balanced scorecard involves adopting a set of measures that allow management to track whether strategies (and strategy implementation) is working.  We take a particularly keen interest in the topic, having written a book for Ark Publishing/Managing Partner on applying balanced scorecard principles in law firms.  A generic balanced scorecard adopts measures in four broad categories.

 Balanced Scorecard Graphic

This month we explore the extent to which firms are using measures in these categories and the extent to which they are linking those measures to strategic goals.

As always, the survey is very brief (should take less than two minutes to complete) and all responses will remain confidential.  If for some reason you do not see the survey in the window immediately below, click this link to be taken directly to the survey.  Deadline for responses is end of business PST on December 21, 2012.  Questions can be directed to info@sterlingstrat.com.  Thank you for your insights and candor.