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Innovation: the importance of ‘why’

15 May 2015 Mark GouldLeave a comment

My friend Mary Abraham has written a characteristically perceptive post about the lessons innovators should learn from the pyramid builders. It is both interesting and useful.

Mary’s lessons can be summarised thus:

Innovate by using a series of disciplined experiments that are thoughtfully designed and carefully executed.
An experiment that is not examined for lessons learned is a failure — regardless of its actual outcome.
As you innovate, collect and share your knowledge to support further innovation by others.
Ensure that there is a clear and compelling vision of the intended results of innovation effort, and complement this with clear communication throughout the project.
Choose a sponsor who knows the value of second chance in the hands of an intelligent innovator.

Organisations that say they are innovative often display some of these characteristics. Very few manage all of them. In my experience, the one that is most commonly missing is the fourth — clarity of vision. Without this, successful changes can only be haphazard.

Curiously, the need for vision is often ignored (or assumed) in popular accounts of innovation processes. Consider this presentation by Tim Harford, for example.

Harford’s account contrasts two modes of innovation: long shots and marginal gains. Long shots are illustrated by game-changing great leaps forward like the Supermarine Spitfire, penicillin, and the work of Mario Capecchi creating the ‘knockout mouse’. They tend to be fuelled by the vision of their inventors or creators, but that vision fits within a broader social or community goal (improvements in military strength, reductions in disease and infection, or deeper understanding of genetic causes of ill health).

Marginal gains, on the other hand, are exemplified by the approach of Sir Dave Brailsford when he was performance director of British Cycling and team principal at Team Sky:

examining every aspect of performance to extract small advantages, which collectively add up to a decisive winning margin.

Some of the changes that Brailsford prompted are obvious (making bikes more aerodynamic, and so on), but the most eye-catching were things like: ensuring the team had their own tailored bedding rather than using those provided by hotels (so that their posture while sleeping didn’t affect performance the following day); requiring all team members to use hand-sanitisers (so that the risk of infections was reduced); or heated shorts (worn by track cyclists between races to make sure that their muscles stayed in the best condition to ride in semi-finals and finals).

Brailsford himself explains the philosophy in this video.

It is not an accident that the video combines two aspects of the management change that Sir Dave Brailsford brought to British Cycling. The CORE principles that he describes created a culture within the team that supported marginal gains. The culture defined the focus for the team: to do everything necessary to win races. That culture and vision helped people understand why marginal gains were important, and also gave them the means to describe why a particular suggestion would contribute to success.

The idea of marginal gains has become commonplace within organisations wishing to promote innovation. I have seen it used by law firms as a way of prompting people to submit ideas for improvement. Sadly, however, few firms have defined the purpose for which improvement is sought. There is no vision. (The cultural piece is often also missing, which doesn’t help either.)

Without clarity of vision about what needs to be improved, firms using marginal gains as a tool will often find that ideas are generated in a scattergun fashion. When the firm can’t express its own vision, it is left to individuals to find their own. Those individual perspectives aren’t always well-informed, and so can be misleading. Some people won’t be able to identify a purpose at all, and so will be unable to suggest changes (even though they might have some great ideas when prompted). As a result, fewer suggestions are forthcoming and, at worst, some of proposed ideas will pull in such different directions that little or no overall improvement is possible.

Writing with respect

14 May 2015 Mark Gould1 Comment

Recently, I have been helping a firm improve some of its marketing collateral. They had a really great message for their clients and potential clients, but it was hard to see because there was an expected way of doing things. When we moved beyond that template, we could produce something that actually expressed the firm’s value (and values) more coherently. Looking back, I think the key was making sure that the writing was done with respect.

Respect for time

Lawyers read and write for a living. For most of them, a ten-page marketing document is short and sweet, especially when it is on a topic that interests them. More often than not, clients don’t have the same interest. If the message can be conveyed in two pages, it should be. If the document can be structured differently so that the important material comes first, it should. (And you need to be really clear about the meaning of ‘importance’. That has to be judged from the perspective of the reader.)

Imagine your readers have only two minutes or less to decide whether they care about your firm. What do you want them to learn in that short time? Your answer to that question may mean that you have to push the things you find interesting to the back of the document. If so, you must.

Respect for language

I am ambivalent about jargon. On the one hand, it can act as a useful shorthand between peers. On the other, it can act as a barrier to good communication. The linguist Geoffrey Pullum calls it ‘nerdview’:

It is a simple problem that afflicts us all: people with any kind of technical knowledge of a domain tend to get hopelessly (and unwittingly) stuck in a frame of reference that relates to their view of the issue, and their trade’s technical parlance, not that of the ordinary humans with whom they so signally fail to engage.

So lawyers should avoid using a legal frame of reference in their non-legal writing. (I’ll leave clarity in legal writing for another time.) But this could be an opportunity to demonstrate a connection with your audience’s knowledge. If you can comfortably and genuinely use their technical parlance, you should.

This has to be natural. Only use the technical terms if your lawyers use them in their daily work. Many do. If that comfort comes across in the document, readers will get it. Any discomfort will push your material into the uncanny valley.

Respect for your people

Law firms like to put lawyer profiles on their websites. Most of them shouldn’t bother, because their standard template removes all the humanity by reducing people to their contact details and a lifeless account of career history and recent work. Sadly, this approach often finds its way into marketing material as well.

In my experience, asking people about themselves produces very different results. Let that come across to your readers. What does that partner see as the high point of their work in this sector? How did that associate get to grips with the tricky issues in that recent transaction?

I have seen some firms try this approach in combination with a standard template, especially when they what to show the more human side of their lawyers. This can make people uncomfortable: perhaps they don’t want to tell the world what they do at the weekends. Leave the template behind and ask open questions. Let the lawyers write their own account. Interview them and let their story come through.

Above all, respect for the reader

Marketing teams often struggle to get the attention of their lawyers. That is one reason why they resort to standardised documents and templates — they save time and effort. The result is often sterile, and lawyers know that. That’s why they don’t play along.

On the other hand, lawyers often spend a lot of their own time and effort making sure their clients get what they need. This isn’t just because that’s where the money is. Many (if not most) lawyers actually get a kick out of helping clients. If they see marketing as having the same aim, they are more likely to take part whole-heartedly.

Being more respectful may produce greater variety in your marketing materials. That is a virtue, not a weakness. The firm’s character can shine through, and your readers can decide much more easily whether it’s a character they like. Don’t be bland, because clients don’t want to find out too late that they have instructed a lawyer who doesn’t fit their needs.

If this interests you, and you’d like to have a longer conversation, please get in touch.

Make it easier for clients by standing for something

13 May 2015 Mark Gould2 Comments

Last week, the people of the United Kingdom made their quinquennial choice. The outcome was a majority Conservative government for the first time since 1997.

For some people (probably fewer than in previous generations), politics are easy — they cleave to the same party loyally from election to election. Parties have nothing to gain from courting these voters. The rest, whose choices are undecided until late in the day, need to be persuaded. This, as Dave Trott points out, is a marketing problem.

The point about marketing is, it’s not about what you want to say.

It’s about what your market (people) needs to hear.

What they need to hear are two things:

1) Clear and Simple

2) What makes you different

Bad marketing people don’t understand this.

Dave is discussing Ed Miliband’s promises set in stone. He shows that each of the six promises is neither clear nor simple, and none of them marked out the Labour Party as different from the competition.

What you are left with is a message “Carved In Stone” that tries to say everything to everyone.

It avoids differentiation in case it offends anyone.

It isn’t marketing, it’s just a list: a mind dump.

Thinking that a gimmick, like carving something in stone, is more important than what you carve in stone.

Many commercial organisations fail Dave Trott’s marketing tests too. Law firms may not be the worst offenders, but the legal sector as a whole has always struggled with differentiation. (We can leave clarity and simplicity for another day.)

The week since the election has been filled with navel-gazing. All the parties, apart from the Conservatives (who won much more convincingly than the pollsters predicted), the SNP (which won every seat in Scotland, bar three), and the Greens (who won many more votes than anticipated), are trying to work out what went wrong. For most of them, I think the answer is simple: either the electorate couldn’t tell what you stood for, or they could and they didn’t like it.

Much the same is true in commerce. Potential clients and customers need to know what they are buying. If you can’t tell them why your service fits their needs better than the other firms, they won’t buy it. You can’t even rely on existing clients remaining loyal. If another firm comes along that can say more clearly why what they do is better, your clients will jump ship.

Differentiation requires you to stand for something distinctive that clients are willing to pay for. You need to risk offending some people (by being too expensive or too cheap or too Lean or too bespoke…) in order for the clients that fit you to know that they fit. You might end up with a market share as small as the Greens, but at least you can be confident about its stability.

Being a client

30 April 2015 Mark Gould1 Comment

Bruce MacEwen has been interviewing law firms in an attempt to find one that can advise his church on a real estate issue in New York City. His experience hasn’t been good, as his account of the process shows all too clearly. Any lawyer should find it painful to read, but I wonder if the firms involved will see where they are going wrong.

To help them, Bruce concludes with a set of asymmetries that he sees in the market for legal services:

One asymmetry is that of consequences. If the client chooses a firm that delivers a wonderful result, everyone wins; but if the chosen firm delivers a disappointing or even deleterious outcome for the client, the firm gets paid. Pretty much in full.

The other asymmetry is one of disclosure and, to be pointed about it, candor: The client needs to tell the firm as much as honestly possible about the engagement and what the client knows, while the firm’s instinct and practice is to guard information, hedge predictions, and avoid definitive statements.

In addition, he notes that there is no real risk sharing — firms don’t have the same commitment as clients do; no account is taken of this. And there is no correlation between fees and value to the client.

Bruce concludes with a suggestion for lawyers:

If you wonder why clients are pushing back on fees and what that objectionable word “value” really means, all I can say is: You should try this for yourself some time.

This is something I have advocated for some time, but I am actually far from confident that lawyers learn much from being clients (of other firms or of other professionals). I think there are too many escape clauses, so that only the most self-aware will actually see a need to change their own behaviour. (And of course that group is more likely to be reflecting on their performance in any case.) Here are two for starters:

Being a critical client and seeing poor service might actually lead you to think that your own performance is good by comparison. “That lawyer is terrible; I’m glad I don’t do that kind of thing.”
If the firms in Bruce’s account recognise themselves, I suspect that they will have plenty of excuses for the answers they gave to his questions. “It’s really more complicated than he thinks. If he knew, he’d understand that we couldn’t have quoted a better price for the job.”

In reality, many lawyers are clients at various times in their careers. Firms often get other firms to advise them on major transactions — someone has act as the client in that relationship. As individuals, lawyers instruct other lawyers for personal transactions, and they may also instruct financial advisors, accountants, architects, and other professionals. With that wealth of experience being a client, how can they still deliver the kind of service that Bruce describes?

I want people to reflect on and learn from the widest range of experiences, including things that other people do and things that happen in other areas of work and life. However, I have to recognise that some people are impervious to that kind of reflection. They need much more direct feedback, of a kind that I hope Bruce gave privately to the firms he interviewed. If someone does a bad job, they may need to know why it was bad, and how it could have been better.

That said, the rest of us should learn from Bruce’s public feedback.

How do law firms stay alive?

31 March 2015 Mark Gould1 Comment

As the global financial crisis bit, and (in England and Wales at least) the regulatory landscape shifted for law firms, there was a sense that the coming years would see the collapse of a significant number of firms. That doesn’t seem to have happened. There have been a few notable failures (often due to specific local issues, rather than the market conditions), a few mergers and acquisitions, and some stagnation or downsizing. On the whole, though, traditional law firms have survived with often minimal changes to the way they do business.

This fact may be attributable to the generally slow pace of change in the legal sector or to the fact that new legal businesses have still to make a real dent in the market. I think there is another factor that needs our attention — firms survive because people keep them alive.

In technology circles there is a fairly well-known piece of work by Richard Cook of the Royal Institute of Technology, Stockholm (he previously ran the Cognitive Technologies Laboratory at the University of Chicago). He has studied complex systems for many years, and has distilled his insights into 18 points: How Complex Systems Fail (I was originally directed to this work by Jack Vinson, and I have stored this PDF here until it becomes available again at Prof. Cook’s own site).

There is also a video of a presentation on the topic, which touches on the same points:

Some of Prof. Cook’s points are more applicable to technical systems, but many are relevant to any kind of complex system — including a law firm. Two stand out for me:

12) Human practitioners are the adaptable element of complex systems.

Practitioners and first line management actively adapt the system to maximize production and minimize accidents.

And:

17) People continuously create safety.

Failure free operations are the result of activities of people who work to keep the system within the boundaries of tolerable performance. These activities are, for the most part, part of normal operations and superficially straightforward. But because system operations are never trouble free, human practitioner adaptations to changing conditions actually create safety from moment to moment. These adaptations often amount to just the selection of a well-rehearsed routine from a store of available responses; sometimes, however, the adaptations are novel combinations or de novo creations of new approaches.

For a law firm, I think there are three main ways in which people prevent failure:

Clients are often more loyal than economic rationality would suggest
Employees make allowance for, and work around, poor law firm systems and working practices
Partners continue to invest in firms when other funders might withdraw

The question of client loyalty is bound up with issues of trust that I want to explore in more detail another time. For now, it is enough to be aware that deep client relationships can cause clients to overlook shortcomings in the provision of service. When there is no deep relationship, or where the relationship is controlled by someone other than the person for whom the work is being done, there is a higher risk that bad work will lead to a lawyer or firm being dismissed. Firms need, therefore, to be nervous about procurement-led appointments and about client relationships that are not as sound as they might be. Those are the areas where poor quality work will inevitably lead to loss of income (whatever the economic climate).

Employee loyalty is no different for law firms than it is for many other organisations. It is entirely understandable that, especially in times of economic stress, people tend to stay where they are. It is equally understandable that, whilst in work, they will do everything they can to make things work for them. However, as soon as the market picks up, people will stop making allowances for their firms and will move to better places. That’s why firms should invest in better systems and practices when times are hard. Change takes too long to do it when things get better — someone else will have stolen a march.

If one looks at the firms that have failed over the past few years, one common factor is money. Some overstretched themselves with lateral hires or new property. Some just ran out of funding. Often the plug has been pulled by a commercial funder — a bank or external investor. I suspect that some firms have stayed afloat by depending more heavily on internal funders — their partners. In times of financial stress, the ability to reduce or postpone partner drawings or to make a capital call on partners makes the partnership model particularly attractive. Unlike external funders, partners are probably more likely to throw good money after bad. Their intimate knowledge of the firm (and their possibly misplaced confidence in its future) may blind them to fundamental problems. As a result, the firm may stay alive for longer than it would if it were dependent on the more impersonal decisions of a bank or investor.

It may seem good that partners can keep a firm alive longer than a bank would, but more money doesn’t necessarily make the firm any healthier in real terms — especially if it just goes towards meeting recurring costs. A poorly firm in a bad market may survive because it is in no worse a position than many others, but in a healthy market it is much more likely to be overwhelmed by vigorous competitors.

So, firms may look like they are staying alive, but some of them will be depending on life support provided by clients, employees or partners. A really healthy firm will have a different perspective on these three elements:

Are new clients turning to the firm (and staying) because of the quality of the work and service provided? (Rather than the firm depending on a loyal but little-changing client base.)
Do people want to work for the firm because it is a joy to be there and it is getting better all the time? (Rather than being kept there by inertia and the fear of a harsh job market.)
Can the firm provide a real return on investment, that is attractive to external funders? (Rather than being propped up by the captive goodwill of partners.)

Firms giving a positive response to all three of these questions will be in good shape to survive the upturn. Those that are more hesitant will need to spot where they fall short, find ways of fixing them, and act quickly.

Do you have the capability to differentiate?

16 March 2015 Mark GouldLeave a comment

As the global financial crisis started to hit law firms half a decade ago (coupled in England and Wales with major regulatory change), there was a sense that this would see off more than a few firms. In fact, whilst there have been some notable failures, and some smaller firms have collapsed or been swallowed up, my sense is that the BigLaw landscape looks much as it did ten years ago (allowing for mergers). Within that group, however, there are significant differences in performance. Some firms have merely survived, but others have thrived. Survival, often on lower profit margins than before, is not a sustainable business model. But what causes the difference — how can firms thrive instead?

The short answer is that the most successful firms stand out for some reason. And, crucially, the market must value that.

The marketers call this differentiation. Being different alone is not enough — the difference needs to be attractive.

That just pushes the problem to the next level — how can firms differentiate? And more importantly, how can they sustain the advantage they get from standing out?

While the market was good to firms (which was probably true for most of the last century), it was enough for lawyers to be good at the law and well-connected with clients. That is no longer true.

Almost any form of differentiation depends on good use of the firm’s knowledge. This is not simply knowledge management as firms have traditionally understood it, but development of the firm’s knowledge capability. This is defined by David Griffiths as:

…the ability to deploy knowledge to constantly design, develop, deliver and maintain products and/or services that its current and future stakeholders will find valuable – put another way, an organisation’s Knowledge Capability is an indicator of its adaptive capability (its ability to anticipate (sense) and react to change).

This is more forward-looking than traditional knowledge management, which in law firms tends to concentrate on gathering and redeploying what is already known. That work is still necessary, but it is only sufficient to support survival — no firm will thrive merely by doing what it currently does more efficiently.

Importantly, the knowledge needed for an organisation to thrive is not just that which is known by the leadership. In fact, those at the top are likely to have such a partial view that their knowledge is actually suspect. Hayek made this point in a very different context as long ago as 1945 in his essay, “The Use of Knowledge in Society”:

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources—if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

Hayek’s response to this problem in economics was to argue that only the market can coordinate and value knowledge properly. The alternative for him, a single controlling mind, could not do the job. Unlike Hayek, however, we can see other mechanisms for drawing out what is known and applying it. We can address this as a social problem, rather than an economic one.

This approach requires the firm to use the knowledge of as many people in the firm as possible, as well as to engage with those outside (clients and suppliers). This insight will help define first of all what is important — which things are valued most or will have the greatest impact. Once that is understood, the firm needs to learn about itself — what is it capable of? Only then is it possible to decide what actions might be taken. Those actions need to be testable, so that the firm knows what works and what doesn’t.

It isn’t enough simply to ask direct questions to draw out this knowledge. Lawyers are particularly prone to entrained patterns of thinking, which means that the leadership will only hear what people expect them to want to know. Direct questioning also risks people putting a gloss on their experiences in order to make sense of them. It is more important that decision makers are able to see and evaluate for themselves the experiences reported by a wide variety of people. I use a variety of Cognitive Edge methods, rather than traditional facilitation techniques, as they are much better at showing decision makers what is really going on.

Firms that take this approach, rather than merely copying others or being browbeaten by their suppliers, are likely to find a better niche for themselves and so thrive for longest.

If you are interested in knowing more about the methods that can be used, please feel free to get in touch.

Understand the question or rush to solutions?

10 March 201510 March 2015 Mark GouldLeave a comment

“Hey farmer, how do you get to Little Rock?”
“Listen stranger, you can’t get there from here.”

(Michelle Shocked, Arkansas Traveler)

There is a variant on this, which is a joke told in many cultures. A tourist stops to ask for directions back to the big city. The response: “Sorry sir, I wouldn’t start from here if I were you.” These apparently foolish answers may be more sensible than overconfident directions. A meaningful response demands more information that could be drawn out by additional questions. Does the traveller need to arrive quickly or via a scenic route? How much do they know of the area already, to help in providing sensible guidance? Do they really want to get to the city, or do they just need a bed for the night?

Many organisations (but especially law firms at the moment) are like the disorientated traveller. They know that they need to do something to deal with changes that are going on around them. Unfortunately, there are few wise fools answering their requests for help.

Instead, there is a cacophony of technology suppliers, consultants, service providers, all shouting the merits of their particular product or approach. This thing, they argue, will fix everything and work for anyone.

Depending on who is speaking, the panacea for law firms will be greater use of technology, artificial intelligence, paralegals, alternative business structures, process mapping, automation, outsourcing, diversification, boutique practice, better client relationships, big data, and so it goes on…

Enough.

There are few simple answers. (I think there are none, but I may be wrong.) All of these ‘solution providers’ are starting from the wrong end of the problem. They have something to sell, so it doesn’t help them to discover more about their potential customers in case it turns out that their thing would be useless.

The better place to start is to work out in detail what the real challenges are. Those aren’t the macro-level pressures that we can all see — regulatory change, market aversion to traditional billing models, and the like. The real challenges are different for every firm. What does their market (and their clients’ markets) look like? What financial constraints do they have? What appetite for change is there? How strong is the leadership? Are there any geographical issues to consider? What about other cultural expectations? Does the firm’s demographic structure help or hinder? What do clients want, and are they getting it? These might not even be the right questions — other factors may be relevant.

The important thing is to draw out the right knowledge about the firm, and work from there. Often this body of knowledge will surprise the leadership — it may contradict what they have been indoctrinated to expect by their usual suppliers. The firm might also have an incomplete understanding of what their suppliers are offering, and so be unable to articulate a sensible request for help.

Armed with self-awareness the firm is in a better position to challenge suppliers to provide services or products that actually meet its needs, so asking the right questions (and getting sensible answers) in the first place is actually beneficial for all.

This also applies to the way firms serve clients, of course. The lawyer who just rattles off a quick contract to the client’s specification without inquiring more deeply into the motivation behind the instruction risks doing the client a disservice (especially when the client is ignorant of the range of possible options).

I don’t have answers. I am more interested in helping firms find their own way.

Testing… How can you be sure you aren’t doing the wrong thing?

12 February 201529 April 2015 Mark GouldLeave a comment

I had a long walk today, accompanied by a number of podcasts. One of them was new to me (although it has been going for some years): The Infinite Monkey Cage. This episode was on the appropriation of quantum physics by various strands of pseudoscience. It was a really interesting discussion about the way scientific concepts are misinterpreted and what might motivate that.

At one point, one of the guests, Jeff Forshaw, made a really important point about the nature of scientific investigation that is often lost on non-scientists. Where does confidence in science come from, given that (by definition) research is providing answers to questions that have never been answered before. At 37′ 42″ in the podcast, he says:

My trust in other scientists comes from — and I often ask this when i am doing things like PhD exams — “so what did you do to demonstrate that this isn’t wrong? How much have you tried to break what you’ve done?” I trust the professional scientists who have spent a lot of time [doing this] (and I expect the answer to that to be “yeah, we tried everything: it just won’t be wrong”).

(I have slightly tidied up the transcript for clarity.)

This process of challenge is inherent to good science — it is built into the peer review that all research goes through before publication. Actively welcoming criticism is also part of scientific culture, as another guest, Ben Goldacre, pointed out at an earlier point in the discussion (34′ 55″ in the podcast):

You know, the Q&A after a work-in-progress seminar or a conference presentation is often a blood bath. But it’s all consensual. In general people don’t take it personally — its a consenting intellectual S&M activity — and we know that it’s good for our soul. We welcome it, and we want it because we know that’s how we will purify our ideas.

This made me think about decisions made in other contexts. In particular, how often do clients challenge the advice their lawyers give them in this way. I know that some will — and hard. Equally, I am sure that some are looking for reassurance that their preferred course of action is permissible and so are not inclined to push their lawyers to prove that what they are hearing is not wrong. Similarly, when firms make their own business decisions, can they always be sure that those decisions are pure and trustworthy?

One of the Cognitive Edge methods can be useful here. This is Ritual Dissent, which can be seen as a way of using Jeff Forshaw’s questions in the context of business decisions or choices — subjecting them to robust critique and testing so that the wider organisational community can comfortably trust them.

This technique, along with others derived from the same source, has the power to lead organisations to much better decision-making. Please get in touch if you are interested in knowing more about how your firm might benefit.

Knowledge as a foundation for innovation

10 February 201510 March 2015 Mark GouldLeave a comment

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.

Of 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.

Measuring the difference: law firm metrics

27 January 201527 January 2015 Mark Gould1 Comment

One reasonable response to my recent posts suggesting KM delivers most value when it acts as some kind of irritant to conventional law firm practices is to ask “how can one know when things have improved?”

I have tried answering a question like this before, but this time I want to approach from a different direction. Previously, I looked at how much a firm might reasonably invest in knowledge management (the input). This time, I am more interested in outcomes.

When considering law firm financial matters, my first call is usually to Bruce Macewen’s site. As expected, I was not disappointed. A commonly used public measure of law firm health is a simple one — profits per equity parter (PPEP or PEP). The legal media like it because it gives them a handy figure to build into headlines and league tables. But actually it tells us nothing meaningful — it is too easily gamed. Bruce dislikes it too, and in one article suggested a host of alternatives that firms could use for themselves.

On the quantitative side:

Revenue Per Lawyer

Compound annual growth rate (CAGR) of revenue over a multi-year period

Realization rates (implying, I would argue, clients’ perception of value-for-services-received)

Associate retention rates (or attrition rates, measured negatively)

Percentage of business from clients of long-standing duration (say, more than 3 or 5 years)

Percentage of all legal spend from top 10 (20/50/100) clients

On the qualitative side:

Client satisfaction

Lawyer morale

Commitment to and investment in professional development

Commitment to and investment in such things as diversity and pro bono

The quality of firms the firm takes lateral talent from and the quality of firms they lose lateral talent to

The quality of firms the firm wins assignments from and the quality of firms they lose assignments to

Quality and morale of professional and support staff.

Any one of these would be a good starting point for assessing the value of any activity within a firm. If one makes a change and then sees a shift in one or more of these measures, it is possible to ascribe the shift to the change. However, there are two very important caveats.

First of all, it is important not to cast any of these metrics as targets. Setting a target doesn’t help people understand what they should do to meet it (and also implies, rather rudely, that people aren’t already doing all they can to help the firm perform at its best).

Secondly, many of these performance indicators depend on a huge number of interrelated variables. Take the first, for example: revenue per lawyer. (I would prefer to measure this by reference to all employees, not just lawyers, especially as law firms come to rely increasingly on non-traditional roles for client service.) This is a metric approved by McKinsey, and is easily measured and reported. It makes particular sense in a business that depends on people to deliver a service. A large firm with significant fixed costs (buildings, insurance, technology and other infrastructure, for example) will find it hard to make a real change to this number without also affecting some of the intangible factors — client experience, staff turnover, etc. It would be foolish to hope that a single activity (whether that be better knowledge management or improved marketing) could be responsible for a real change in the firm’s financial health. Things are too messy for that.

So how should we approach the problem? This raises four questions for me:

Which factors matter most to the firm?
What variables might affect the selected metrics?
What does the firm know about those variables?
What can be done to improve things?

The first should be obvious. There is no point addressing revenue per lawyer (or profit per employee) if the firm is actually more bothered about its exposure to a small number of key clients than about its profitability at present. This is a strategic question, but I think few firms have such a clear view of their priorities without seeing a list such a Bruce’s of the issues that might concern them. Once they do, it is important to work out which factor is the most important — which will always command more investment than any other?

The second point is an expression of my second caveat above. Once we know what really drives the firm — what is its highest priority — we need to understand how performance in that area is influenced by activities, actions and culture within the firm as well as the wider environment. That might be possible as a desk exercise, but it is a task better done by engaging with a wide cross-section of the firm.

This is the third point — in most situations, the collective knowledge of the firm itself will give the best insight into how things are now and what might be possible in the future. That engagement could uncover knowledge about clients and their markets, about the firm itself and the people within it, and about infrastructural or other opportunities and challenges. Exposing this knowledge is something that should be at the heart of the firm’s knowledge activities. A survey won’t do — what people say when they mean what they say needs to be carefully uncovered and intelligently analysed.

Once there is a better understanding into the way things are, the firm can start to think about what activities and actions might change things for the better. Sometimes that will be an obvious choice, but often it will be necessary to test a number of different actions and see which ones make a lasting difference.

Sadly, many firms start with the fourth step. Worse than that, they invest significant sums in large-scale activities that they cannot then prove to have the benefits they expected. The result? At least, wasted time and money. At worst, disenchanted clients and people, to the extent that the firm risks collapse.

If you are interested in going about things the right way, using this four-stage process (or something tailored to your needs), please get in touch: I can help.