Knowledge as a foundation for innovation

The relationship between knowledge and innovation is an interesting one. Good use of knowledge (in the broadest sense), coupled with openness to novel influences, is essential for successful innovation.

Innovation basics

Innovation is no different for law firms than it is in other sectors. With that in mind, consider David Hepworth’s view (expressed in the context of commentary on the music and magazine industries):

This is a classic case of Hepworth’s Law Of Improvement, which I developed over years of watching people trying to improve magazines. There’s improvement, then there’s the kind of improvement which is recognised by the user and finally there’s the kind of improvement which is both recognised and valued by the user.

Only the third sort is worth the trouble.

The same is true for innovation in law — only value marks out truly useful changes. So, my working definition of ‘innovation’ is ‘an improvement that meets a real need’. That need might be external (improving client service, for example) or internal (where a change in working practices results in improvements to profit).

Law firms might be able to make major improvements by changing the way they work with clients, but I think this is much easier for new entrants to the market (no firm can yet match Riverview or Axiom in this regard, for example). They may also innovate at a much smaller scale by creating new products or services at the practice group level. And then there is innovation in the law itself — providing a new answer to a legal or business problem. This might give rise to a new practice — in the past, IT law, PFI projects, and Islamic finance might have fallen into this category.

Water mill: innovative, then common, now redundantOf these three types of innovation, the last depends on real client need and requires an imaginative lawyer to spot the opportunity. As such, it could occur in any firm (apart perhaps from firms that suppress such imagination…). The other two require the firm to be supportive of experimentation (not all ideas succeed) and change (successful initiatives require old ways of working to be put aside). Experimentation and change are hard for traditional law firms to tolerate, especially when they depend on an annual cycle of budgeting and investment. (This is one reason why new entrants, which can often take a longer view, might have the upper hand.) It also explains why a small number of business-focused changes (legal project management, different pricing models, use of paralegals and other resourcing models) occur in a large number of firms. These improvements are based on business practices outside the law, and so are proven in use. As firms see them introduced elsewhere, they can see the benefits in action and will copy their peers.

Innovation shortcomings

The point about copying was well-made today in Jeremy Hopkins’s analysis of the reported intention of Freshfields to open an office in Manchester as a lower-cost base for some support services and legal work. Jeremy rightly challenges the logic behind this kind of cost-reduction exercise.

It follows that these associates have over the years being doing lower value work than perhaps they ought to have done. More significantly, if these alternative models are successful in achieving their objectives then the result will be less work for them.

This tempts the question how will this work be replaced ? I’m sure the aim will be to win more higher value work, but as more and more firms adopt this model it will become the norm, not a differentiator. They can’t all increase their share of a finite market.

As more firms take this course, the result is likely to be a reduction in numbers of lawyers. And there is little doubt that this kind of resourcing change is fast becoming part of the standard toolset for law firm management. As Jeremy points out:

As firms follow the crowd and join the queue to set up their “near-shoring” and flexible resourcing operations, you have to wonder whether they are really looking any further ahead than the firm in front of them ?

Bruce Macewen came to a similar conclusion in one of his Growth is Dead series of articles.

The history of responding to pricing pressure in BigLaw through “innovation” has been almost exclusively the story of labor market arbitrage. We have never gotten serious about changing the way we work.

By “labor market arbitrage,” I mean finding (a) cheaper people; (b) cheaper locales; (c) cheaper career paths; (d) cheaper offices, or some combination of all of these, to be able to deliver a service of indistinguishable quality for less. This works, and for awhile it gives clients what they want. But it has a few intrinsic limitations:

  • These savings are one-off’s. You can only move certain people out of midtown Manhattan once, and you can only introduce the non-partner associate track once.
  • There are virtually no barriers to entry in the labor market arbitrage business. If AmLaw firm A can do it, so can AmLaw firm B, C, D,…—not to mention the Pangea3’s and Integreon’s of the world.
  • Finally, “arbitrage” only succeeds as a profitable strategy, in equity and fixed income markets and in lawyer labor markets, so long as there are inexplicable price differentials. Once those “inexplicable” price differentials have been ironed out of the system and all that remain are fair, supply/demand driven, price differentials (based on quality, responsiveness, consistency, reputation, or other variables clients will pay for), there is no further profit to be made.

I challenge you to name one so-called innovation in our industry, introduced in the name of cost-cutting and efficiency, that has not at root been an exercise in labor market arbitrage.

Real innovation in law firms is, I think, fairly rare and poorly understood. Firms also seem to be oblivious of the shortcomings of their logic in pursuing the kind of development that Bruce MacEwen so neatly skewers. My suspicion is that their vision is too narrow — they think only in terms of the impact of the changes they make. They aren’t considering wider market changes in the way that Jeremy Hopkins does so succinctly.

Using knowledge and insight to improve innovation

I find it intriguing that law firms appear to be constantly surprised by the novelty of things that other professions have been doing for some time. If I were responsible for conferring innovation awards, I would take a dim view of lawyers reworking something that accountants or management consultant have been doing for years.

I think this lack of imagination is a result of firms being inherently poor at understanding how they fit into the wider legal and commercial world. This is not to say that individual lawyers lack that insight — quite the opposite, in fact. Rather, few firms have any mechanism for accessing and using the knowledge that their people have.

The historical position of knowledge management in law firms (generally expressed in resources like precedents, training programmes, and know-how repositories) was to make sure that lawyers could do work of the same type more effectively the second/third/fourth… time. That is still important, and is itself the subject of innovation (by using established knowledge more intelligently in the form of automated documents, client self-service products and so on). However, these activities are inherently backward-looking. A firm that wants to do something genuinely new must learn to access knowledge that is less visible and combine it with other insights to create something that hasn’t existed before..

One example: the development of PFI contracting in the 1990s meant that lawyers had to combine a range of knowledge sets — long term commercial contracting, public sector advice, finance, and so on. Few individual lawyers could cover these topics, so the firms that managed to build successful practices in this area over the following decade tended to be ones where someone spotted the opportunity (a knowledge skill in itself)), could find and combine the relevant expertise (knowledge location within the firm (and possible externally)), and present it meaningfully to potential clients (requiring client insight). Similar processes apply to other novel areas of practice. (And of course, the novel soon becomes commonplace — many firms now have a capability to support major projects, not just those that were early to the market.)

Sometimes it is simpler — a client wants to do something novel with their business and so they will push their lawyers to develop new legal instruments to make that possible. Those lawyers need to be able to identify and make use of the most sensible components from the knowledge that exists in the firm (and possibly make some new ones up). The easier it is to do that (which is one of the purposes of knowledge management) the better the result for the client.

Left to their own devices, good lawyers will come up with good new ways of working with their clients. Better, more consistent, results come when the firm has established tools, techniques and processes to make it easier for good lawyers to follow their instincts and for others to reach the standard of the good ones. That’s why knowledge management is like farming — left to their own devices, livestock will breed and produce useful progeny. Carefully managed breeding will improve the quality of the herd or flock, so no modern farmer allows nature to take its course. No modern law firm should rely solely on the instincts of their people — they need to intervene to improve performance.

Firms that can find ways of pooling and using the knowledge that all their people have — of their clients and their markets, of the legal market, of legal change on the horizon, and of the capabilities and limitations of the firm itself — are much more likely to be able to develop a coherent strategic response to the challenges they face. That response is likely to have innovative components, in that it results from the unique combination of factors present in that firm and its client base.

My sense is that firms are only slowly waking up to the possibilities presented by a more forward-looking approach to understanding and developing their knowledge. For some law firms, this is a very different way of thinking about knowledge management for law firms. Unsurprisingly, it is not unknown in other sectors. For example, this weekend I came across an interesting summary of 64 different ways for news sites to present their stories. How many firms could come up with 64 ways of working with their clients (they don’t all have to be sensible)? How many firms would open up such a process as widely as they possible, to attract insights from as many different people as possible? How many firms could actually express their need for change in such an easily understood way? (As always, get in touch if your firm is interested in getting better at this.)

Good innovation comes from a broad perspective on the world, an openness to novel insights and influences, reliable access to knowledge and insights across the firm (and from outside — clients and suppliers), and an organisational expectation that these should all come together coherently. That demands forward-looking knowledge management coupled with processes to support experiments in doing things better.

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