Jobs famously disembowelled the $5-billion/year iPod business by building the entire MP3 player into every iPhone—don’t think that didn’t prompt howls of outrage inside the walls of Apple!—and Page is spending something like $500-million on Google X. You may object that Google has the money, but query how many other companies that “have the money,” or the equivalent proportion given their balance sheets, are doing anything remotely similar. This takes guts, as does purposely making the iPod superfluous.
What’s a successful incumbent to do?
You’ve heard this before, but steal a page from startups: Visit some accelerators and incubators. (Remember, even IBM launched the original PC by setting up a skunkworks 1,500 miles from Armonk in Boca Raton, Florida.) Set up your own incubator and give it real resources. At Disney’s, for example, people get equity stakes so they can act like real entrepreneurs. Our panjandrums at the ABA won’t let us do that, exactly, but don’t tell me you don’t have creative corporate, securities, and executive compensation lawyers around.
We’ll give Gross the last word:
The equitization and the autonomy are the biggest factors. Because the thing that actually unlocks human potential is when people feel they have control over their own destiny and they can make a killing if they really succeed on their wild bet.
Autodesk’s Carl Bass on taking risks to innovate
Bass is blunt when it comes to the land mines on a large firm’s path to innovation:
[M]ost corporations [read: law firms] are set up and, in some ways, structured and designed to maximize profit and minimize risk.
We heard the same issue expressed differently by Gross in terms of the short term vs. the long term. Which tells me, at least, that the real issues here aren’t those of pure economics, finance, and organizational structure: They’re issues of human psychology.
And speaking of lawyers, we are risk-averse to a fault. This is both for better (representing clients) and for worse (running the firm). Lawyers are selected for risk-aversion at every step of their careers, meaning that by the time they emerge into positions of leadership at a firm they instinctively feel deeply threatened by risk. The fastest way to overcome that sense of threat is by invoking an even larger risk: The risk of inaction while the world moves on without you.
Granted, few firms are exactly perched on the famous “burning platform”—and for those unfortunate few who are, it may be too late—but if you adopt the perspective of, say, a 40-year career (there’s that nasty long-term perspective raising its unwelcome head again), the platform may look more like a beachfront house on a barrier island in Hurricane Alley. Beautiful today, but how sturdy for the long run?
Bass interprets the threat as that “of new disruptors,” but rather than retreating into denial, complacency, or paralysis, he counterintutively says:
As a matter of fact, for CEOs or management of existing companies, it’s the greatest thing that ever happened, in some way. It’s like the expression, “Don’t let a good crisis go to waste.”
What has this meant at Autodesk? Just for example, this year they are launching their first piece of hardware ever: a 3-D printer built on open-source standards. Now that’s different!
What would be the equivalent departure for your firm?
As they say in the tougher neighborhoods, “Lovely house you got dere. Shame if sumpin’ happened to it.” Like it or not, our neighborhood is getting tougher.
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.