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

Posted on April 24, 2014 by Sterling

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.

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.

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

Posted on February 26, 2014 by Sterling

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

Posted on November 14, 2013 by Sterling

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.

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.

Strategic Thinking for Mid-Size Law Firms

Posted on October 3, 2013 by Sterling

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.

Market Leadership

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).

Merger Inquiries

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.

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

What Are the Prospects for Mid-Size Firms – and What Does Mid-Size Mean Anyway?

Posted on September 17, 2013 by Sterling

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.

Think Strategically

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 info@sterlingstrat.com, and via phone at (312) 543-6616.

Strategy Implications of Disruptive Innovation

Posted on April 10, 2013 by Sterling

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.

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.

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.

Partner Development Strategy – November 2012 Strategy Question of the Month – Survey Results

Posted on December 10, 2012 by Sterling

Our strategy topic for the November 2012 focused on where the future leaders of law firms will be coming from. There is a simple industry wide issue relative to generational demographics. A very large cohort of baby boomer partners will be retiring over the next 20 years. In fact, by 2020 (eight years from now) half of the boomer cohort will be 65 or older. If you look at the broader demographics, the generational cohorts create something akin to a roller coaster.

Baby Boomers are a large cohort of over 80 million people
Generation Xers are a smaller cohort of roughly 60 million people
Millennials are a large cohort of over 80 million (similar in size to the boomer generation – with many still in high school)

So, how do you overcome the overall industry (and societal) demographics to ensure you have strong people across all generational cohorts? Our findings point emphatically to the value of hiring and developing ‘lifers’ (i.e., people who stay with the firm they join at the entry level). In other words, the best path to ensuring you have great people across the generations is to hire and develop your own! To quote a couple of respondents:

“We are blessed with strength throughout the demographic ranks, as well as a culture that is attracting like minded star/potential star laterals. We highly value having high quality lawyers at all levels (including entry level), training and mentoring, and making it such that all who work here can, if they do their parts, make a career at our firm.”
“(Our future leaders are) most likely from “lifers”. We have a good group of them.”

Firms who reported that 50% of more of their current attorneys are ‘lifers’ (let’s call those firms ‘high lifers’) are dramatically more confident in the future prospects of their young people. Asked the importance of various generational cohorts in future succession (i.e., who are most likely to produce business developers and leaders over the next 10 years):

‘High lifers’ are three times as likely to consider their current associates to be a very or critically important source of future leaders (compared to ‘fewer lifer’ firms).
Similarly, ‘high lifers’ are 3.5 times as likely to have confidence in associates that they ‘plan to hire and train in the next ten years.’
‘Fewer lifers’ on the other hand only truly have confidence in their mid-career (over 45) and younger equity partners.

More broadly, no one expresses much confidence in the ability of future lateral hires to be key players in 10 years. However, there were firms anecdotally expressing great confidence in their laterals.

“We have grown over the last 10 years 200%, mainly from lateral hires. It is from this group that we see our future leaders.”
“(Our future leaders will be) highly successful laterals that subscribe to our business philosophies and firm culture.”

In addition, there is not much confidence in the future prospects of younger (under 45) non-equity partners. While not entirely surprising, the lack of confidence in non-equity partners raises enough questions about their long term role(s) to fill its own blog post.

Hiring at the entry level has been consistently lower across the industry – as compared to pre-recession levels. The following pie chart explains why that condition persists quite clearly.

Finally, a couple of respondents looked into the proverbial crystal ball and offered predictions about where the future generation of law firm leaders will emerge.

“They will come from the middle tier of law schools, they will have worked their way thru college and law school, they will have started working early in their teens and understand how to make a dollar. They will display a high level of emotional intelligence and a majority will be women.”
“From those who have a business/entrepreneurial bent as opposed to simply applying a legal analysis to a set of facts.”

As always we thank those who took the time to share their insights with peers and colleagues. Comments are open and we welcome your emails and phone calls as well.

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Partner Development Strategy – November 2012 Strategy Question of the Month

Posted on November 16, 2012 by Sterling

The demographics of the legal industry are clear – a very large cohort of baby boomer partners will be retiring over the next 20 years. In fact, by 2020 (eight years from now) half of the boomer cohort will be 65 or older. While it is certainly true that productive people work beyond age 65, there will clearly be a need for a new generation of highly capable partners to develop and manage client relationships, to train and mentor future partners, and to lead their firms and practices.

If you look at the broader demographics, the generational cohorts create something akin to a roller coaster.

Baby Boomers are a large cohort of over 80 million people
Generation X are a smaller cohort of roughly 60 million people
Millennials are a large cohort of over 80 million (similar in size to the boomer generation)

There are clearly cultural differences between (and within) each generational cohort – something demographers have studied and documented. However, simply looking at the size of the cohorts underscores the challenge facing law firms over the next 10-20 years. A large generational cohort has begun to retire and will continue to retire over the next 20 years. Meanwhile, the generational cohort behind them is smaller (and we see many firms with fewer equity partners from this generation). The Millennial generation represents a new, large cohort (boding well for the long run), but the oldest Millennial is still an associate today – and many are not even out of high school yet.

The question then is, “where will law firms’ future leaders come from?”

The very short survey below should only take two or three minutes to complete. Your individual responses will remain anonymous and confidential – collective input will be published here at the end of the month. Please complete the survey by the close of business (PST) on November 28, 2012. If for some reason you do not see the survey in the box below, click this link and you will be taken directly to the survey.

As always, thank you for your willingness to share your experiences with your peers in the legal industry.

Survey Results – The Value of Client Feedback – October 2012 Law Firm Strategy Topic of the Month

Posted on October 30, 2012 by Sterling

October’s law firm strategy topic of month was the value of client feedback. Our initial rationale for exploring this topic grew as a by-product of our June 2012 strategy question of the month. June’s survey focused on best practices in the strategic planning process. We found that one of the key factors that distinguished highly successful planning processes from their less successful counterparts was the incorporation of client feedback into the process. Specifically, we found that firms that reported having “very successful” planning processes were 45% more likely to have solicited client input than were firms that reported disappointing results.

So, we thought it would be worthwhile to build a deeper understanding of what law firms are doing more broadly vis-à-vis gathering and using client feedback. What approaches are they taking to gather that feedback and what outcomes are they experiencing?

Approaches to Gathering Client Feedback

Interestingly, no single approach is used consistently by more than a third of law firms participating in this month’s mini-survey. Roughly 30% of firms report they consistently have their managing partner (or his/her counterpart) conduct structured interviews with a cross section of clients. Similarly, roughly 25% of firms report they have their senior marketing or business development people conduct structured interviews with a cross section of clients. Note: in some cases, both the managing partner and chief marketing officer conduct the interviews jointly.

When you include firms that report using a given approach – but who do so less consistently – the most prevalent approach to gathering client feedback is having the managing partner conduct informal (often one-off) interviews with clients. Roughly three-quarters of all firms report that their managing partner (or his/her counterpart) conducts periodic, informal interviews with clients. However, those interviews are not conducted across a cross-section of the clientele – and, they are not structured to ensure key topics are covered consistently.

Written surveys of all kinds (e.g., randomized, major client focused, and/or end of matter surveys) have fallen by the wayside. That approach was fairly common in the 1990’s, but fewer than 20% firms report using written surveys (web or paper) at all.

The following table presents the full range of responses relative to approaches firms are using to gather client feedback on a regular and/or irregular basis.

USE OF CLIENT FEEDBACK APPROACHES BY US BASED LAW FIRMS

As is always the case with these monthly mini-surveys, participants were generous in sharing some of their practical experience in the open-ended section of the survey. Among the practices and insights law firm leaders shared were the following.

We require annual meetings with top 100 clients on an annual basis. The meeting is structured and performed by supervising attorney. Top 25 clients are also contacted by firm managing partner on at least an annual basis.
We spend a lot of time educating/helping our senior attorneys develop disciplined, regular communications with their clients…we emphasize that all our attorneys need to know their client business/industry well.
(Our) client teams develop a (tailored) method that fits the client’s culture and relationship to evaluate how the firm is performing. (Examples include) team meetings with the various client contacts; in-person meetings between the key contact at the client and the (lead) attorney; and various contact attorneys reaching out to their respective contacts in the client organization…assessing our performance as the defined purpose.

It should be noted that there is still resistance in some quarters… “I’ve not yet been able to convince the Management Committee, who all have great relationships with their clients, that some client feedback system is necessary.”

Results and Outcomes from Gathering Client Feedback

Obviously, it is always helpful to have a sense for what our peers are doing to manage their respective firms more effectively. More importantly, however, it is critical to understand what results can and should be expected from pursuing any given management practice. In the case of gathering client feedback, the key benefits can be summarized in four points (reflecting five sets of insights firms report gaining more than half the time – either always or often).

First, over 70% of law firm leaders report gaining genuine insights into how to manage their client relationships more effectively.
Second, over 60% of law firms gain new insights into how their clients view the firm’s strengths and its opportunities to improve (i.e., its weaknesses and shortcomings).
Nearly 60% reported that the client feedback process always or often produces opportunities to do more of the type of work the firm is already doing for that client (i.e., to deepen the relationship).
Over half reported that gathering client feedback always or often produces opportunities to do new types of work for clients (i.e., to broaden the relationship.

In addition to the points above, it should be noted that a number of law firm leaders said that the process itself tends to generate goodwill. Further, it creates a dialog that grows the relationship in the context of the client’s needs rather than in a ‘selling’ mode. One law firm leader summed up both points quite succinctly in an open-ended comment, “(The process creates) great client satisfaction that we even take time out to spend time with them and more importantly “care”. Also learn how much many clients “hate” the “cross-selling” pushes.”

A complete summary of the outcomes firms experience via client feedback gathering processes is captured on the following chart.

Closing Points

Given the fact that structured, formalized client feedback processes are only pursued with high levels of consistency at somewhere between a third and half the firms surveyed, it strikes us that this type of outreach can still be a source of competitive advantage for law firms. It is certainly a factor distinguishing more successful strategic planning processes from the rest. And, our anecdotal experience confirms what we learned more systematically from this survey. Namely, asking clients for their feedback generates goodwill; it often creates new work (sometimes, entirely new work in new areas); and it provides valuable insights into what the firm does well, how it can improve, and how it can manage client relationships more effectively.

At Sterling Strategies, we tend to gather structured client feedback in the context of strategic planning assignments (though we do so as stand-alone engagements on occasion). However, our friends at the Wicker Park Group focus intensively on the client feedback process. They even publish a continuing series of client Q&A summaries you might find interesting.

As always, the comments section is open – and we always welcome your calls and emails.

Sterling Strategies

Tag Archives: Strategic Growth