“Innovation” seems to be on everyone’s lips these days. Among other things, the problems are:
- Many people, lawyers in particular, are stumped when it comes to describing what “innovation” actually is;
- Business history proves to a fare-thee-well that it’s extremely challenging for successful incumbents to actually follow through with anything innovative;
- And of course there’s a widespread, albeit largely unspoken, suspicion that innovation is not anything that can actually be encouraged effectively, much less planned out at an organizational level and deployed.
But if we’re serious about innovation, what’s to be done?
One place to start might be establishing a dedicated R&D budget at your firm. Heck, we’ve even recommended this to some clients.
Pop quiz: Guess what percentage of revenue the following industries devote to R&D (I’m actually not eager to make my readers’ lives difficult, so I’m about to tell you):
- Telecom: 13%
- Software/internet: 12.5%
- Healthcare: 11.5%
- Law: 0.0%
(Source: First three, Booz Allen, summer 2014; Law Land, Adam Smith, Esq.)
All North American-headquartered businesses, cross-industry average? 5%.
And if the AmLaw 100 devoted just 1/4 of 1% of its revenue to R&D, the cumulative war chest would be north of $200-million/year. That would endow a few nice professorships at MIT and Caltech.
But enough about what we’re not doing. Let’s talk about what other big companies have learned about how to innovate.
Our text for today is McKinsey’s “How Big Companies Can Innovate,” and it harbors lessons from Intuit, Idealab, and Autodesk.
Scott Cook of Intuit on making innovation easier
The one critical insight here is that while you may not be able to change the nature of a large firm itself, you can change the way decisions are made: From decisions by bureaucracy, consensus, and PowerPoint—along with the status markers of power, position, and persuasive skills—to decision by experiment. (This is what R&D is all about, in case you were wondering.) At the heart of it is removing the encrustations, built over the years, of barriers and hurdles to getting “go” decisions, and substituting systems and a cultural mindset to support the assumption—the expectation—that the firm stands behind passionate individuals who want to run an experiment to test their assumptions.
Strip the idea down to its essentials and try to run an experiment ASAP (this week? this month?) to test the idea. Devote minimal or, ideally, no resources to it (other than the opportunity cost of the advocate’s time).
Cook’s final, equally critical, observation has to do with how the ecosystem has to change to support these passionate advocates: “It can only work when it’s put in place by leaders. The innovators can’t do it.”
Bill Gross of Idealab on investing in innovation
Gross starts from the premise that the key functional barrier to large firms’ remaining innovative is the difficulty, nay near-impossibility, of balancing short term performance goals (client satisfaction, employee morale, revenue, profitability) with the long term perspective requiring sacrifice today for the sake of tomorrow. Evidence of how difficult this is is simply how rare it is: Gross cites Steve Jobs and Larry Page, who are iconic exceptions to every rule of conventional organizational management if ever there were.
My sense (not sure I have data) is that in most markets, customers migrate to innovative providers. For example, look at consumers, who have switched from lesser brands of coffee to Starbucks and from McDonald’s factory to Chipolte’s fresh. (See WSJ today on latter.)
That is, in most markets, successful innovators are rewarded. Do have evidence – data or anecdotes – that corporate clients reward innovative law firms by moving work to them?
Another option that corporate incumbents have is acquisition – Google and Facebook have struggled with innovation in its core business, but has successfully acquired start-ups that present emerging threats/opportunities. How much of a bargain does YouTube look now? Or Instagram? Unfortunately the capital structure of law firms prevent such steps – imagine if Freshfields picked up Axiom – what would that combination do?
The irony is that partnerships should be able to invest for the longer term than (listed) companies. CEOs are subject to analyst expectations and incentives based on EPS – of course profit per partner matters, but at least there is the “stewardship of the firm” argument to fall back on…
And now a more constructive comment! It is interesting that Bruce looks at McKinsey’s book. Note that it is NOT called “how professional service firms innovate”. McKinsey itself is a great example of how to do it. And here is their secret…
Until very recently (see the caveat at the end), McKinsey barely “innovated”. I am an ex-lawyer turned McKinsey consultant, and learned first hand that the real skill of McKinsey’s “innovation” was to be able to spot something small happening in the market place, usually a boutique, and scale and replicate fast globally. In professional services – until recently – there is very little that cannot be replicated. There are no patents, no physical assets to acquire that a group of smart people cannot figure out.
In fact, “big I” innovation is often antithetical to McKinsey partners – they all want to innovate and come up with their own ideas on every project – it is fun! Precedents? What are you talking about 😉
The firm has made significant investments in R&D through the global institute, make a significant investment in knowledge development through the Quarterly, and try to shepherd ideas through the mass of partners by consensus/loose structures, but I would not have described them as an “innovative” organisation in the sense that they will come up with the “next iPod”.
All of that has to be given a huge caveat – I left McKinsey ~5 years ago, and in that intervening period they have gone through significant business model transformation. It has been impressively quick, and they have fundamentally reinvented their standard engagement model, pricing model and how they provide clients with access to their IP. That is a whole other story though.
What can law firms take from this? Either be prepared to reinvent the business model – as McKinsey has recently done – or if not, to create the conditions that enable a firm to identify, replicate and scale innovative ideas fast. This means market knowledge, client insight, and agile partners. If it was entirely new, and Skadden(?) invented the poison pill defence tomorrow, how soon would you know it existed? How soon would you have a team working through its mechanics? A crack team of partners stress testing your new version and on the phone to every client to insist that they deploy it? How many of your partners would switch their practice to be an expert?
The other trick is to anticipate and invest. I have used this story with many clients, but when the GFC hit, McKinsey did not make consultants redundant (they learned in the previous recession that it would come back to bite them). One option was to bear the cost. The global utilisation average would have gone down by a few basis points, and profits would fall in line with productivity. The alternative path – which they took – was to identify the ~60 people “slack”, and deploy them on a global project to build healthcare knowledge, expecting this to be the next growth area in a few years. Result – productivity was maintained among the rest of the consultants, and the firm made an investment in new thinking.
Anyway, as you would expect, I’m sure some of these anecdotes have been simplified as I heard them to make the points they were intended to – hopefully I have not distorted them too much further. It is a remarkable firm and it was a privilege to be part of it for so long. Unfortunately consulting to law firms was not a sustainable client base at their fees!
Can big law firms innovate? They should be fertile grounds for innovation. Just as an organizational structure, they are much better suited for it than most publicly held corporations. Will they? Sadly, except around the margins, I don’t think so. Forget for one minute that most firms have no R&D budget line item (covered extensively by Bruce in these pages). Successful innovation is usually a top-down exercise requiring rigorous (almost religious) management and execution. Senior management really has to believe it. Very few lawyers that I’ve seen are capable of that kind of approach to innovation, and even fewer partner-level lawyers are receptive to being managed in that way. Big law firms will continue to take what they perceive to be the easier, softer way. Framing price differently, offering discounts, further labor arbitrage and consolidation. By its nature, innovation requires self-critical examination and analysis that most law firms do not have the DNA for.