Today’s column is by Janet Stanton, Partner, Adam Smith, Esq.
It’s a truth universally acknowledged that Law Land resists change like the plague. And, yes, this is pretty widely attributed to the phenom known as the “lawyer personality,” characterized by an almost pathological aversion to risk. But let’s unpack this a bit to better understand why lawyers, in particular are so risk averse.
Lawyer-psychologist Dr. Larry Richard, the leading expert on the psychology of lawyer behavior has quantitatively established that a preponderance of lawyers share (among others) two personality traits that in combination scotch the very notion of experimentation. The first is “Resilience.” Somewhat surprisingly, lawyers score really low on “Resilience,” essentially the ability to recover quickly after a setback. On this trait, Lawyers score only 30%, which would be enough on its own to seriously dampen any appetite for experimentation.
But wait – there’s more. What won’t surprise anyone is that lawyers score really high on “Skepticism.” Dr. Richard’s work reveals that lawyers score 93% on this attribute (only 5% of the population is as skeptical). Lawyers can (and do!) poke holes in anything. So, any proposed change will be scrutinized and picked over to such a degree as to discourage all but the most stout-hearted.
These two characteristics, lack of resilience coupled with a high degree of skepticism are a double whammy to the notion of experimentation. Failure is perceived anything but “noble” in Law Land.
This inclination is under-girded by law firm governance policies. Specifically, balance sheets are stripped clean at the end of each fiscal year, with profits distributed to the partners. There is no line for “Retained Earnings” on a law firm’s balance sheet, so even if there were a taste for experimentation, a key mechanism for same, i.e., $$$s isn’t there. Moreover, our tax laws provide the final coup de grâce to establishing a fund for future investment; partners are on the hook for their proportionate share of earnings, whether or not they are distributed; fat chance that they’ll eagerly fork over cash that they’ll end up being taxed on.
Where does that leave us? Many law firms find themselves hobbled; less capable of effectively responding to the challenges inherent in a no/slow growth market where clients are driving increasingly hard bargains and more competitors than ever are nipping at our heels.
So, what’s to be done?
As many of you know, I did not grow up in the alternative universe that is Law Land; I spent the majority of my career in Corporate Land (hardly universally sane, but certainly more business focused) – and as we’ve seen before, there are some lessons from that other country that law firms could benefit from.
One possible solution is to introduce R&D at law firms. Specifically, establish an ongoing program to experiment with new ideas funded with a (very) small percent of revenue (we’ll get to that in a bit). In fairness there are a few firms with a robust commitment to exploring new ideas (and kudos to them!); they are, however, in the far, far minority. And, having a “slush fund” with ill-defined goals doesn’t really count.
Why an R&D program? The beauty of R&D programs is that there is absolutely no presumption that everything will work. Among Albert Einstein’s many noteworthy observations is this gem: “If we knew what it was we were doing, it would not be called research, would it?” We’ve all heard of “failures” that led to the most astonishing, even transformative discoveries. On a more quotidian level, think of 3M’s discovery of sticky notes (the scientist was actually trying to develop a super-strong adhesive). Of truly inestimable value to human kind was Alexander Fleming’s accidental “discovery” of penicillin in 1928.
In recent corporate history, Jeff Immelt tripled GE’s R&D budget from 2% of annual revenues to 6%. One very dramatic result is that previous to this GE introduced one new commercial jet engine per decade; now they introduce a new one each year. First off, think of the competitive advantage this affords GE over Pratt & Whitney and Rolls Royce; must give them fits! As important, is the much enhanced sense of corporate confidence; if perchance one year’s engine isn’t so hot – another will be on its way in 12 months.
A voice closer to home had this to say:
“If everything you’re producing is a success you’re probably not doing enough R&D.”— Tony Angel, former MP of Linklaters and DLA
And, more to the point – why R&D programs for law firms? First off, everyone is familiar with the notion of R&D. Heck, most of your clients have them. “R&D” is a benign and accepted moniker for experimentation, exploration and inquiry. An R&D program provides a safe haven, where “failure” is simply part of the process, thus, taking much of the sting out of trying new things and providing much-needed salve to lawyers’ skittish psyches. Moreover, there is a lower expectation for an ROI in the near-term. Truly dialing down the consequences.
What kind of investment are we looking at?
Before we go into what law firms might actually explore as part of an R&D program, let’s deal with what it might cost a firm. The short answer is: not much.
First, some stage-setting. R&D investments are ubiquitous at American corporations. Sure, there are industries where you expect to see significant commitments to R&D, and you’d be right. Here’s a sampling of R&D spending as a % of revenue by industry (sourced from Strategy&Co. 2014):
- Computers/electronics: 8%
- Healthcare: 11.5%
- Software/internet: 12.5%
- Telecom: 13%
But get this – the average investment in R&D for all North-American headquartered businesses (across all industries) is 5%. Think about this for a minute. This includes relatively low-tech industries such as shipping or warehousing or trucking – as well as, or course the very high-tech of aerospace developers. R&D is simply a pervasive fact of business.
To get a sense of what an R&D investment might look like for law firms, we did some rough calculations and somewhat arbitrarily looked at 0.25% of annual revenue as a starting point (yep, that’s ¼ of a percent, or 20 times less than that of the average for American businesses). For an AmLaw firm with, say $100 million in annual revenues, this would come to an R&D budget of $250,000. Not insignificant, surely. That said, to put this into context this equates to about 20 hours of work out of one year. Put another way, this is less than the annual cost (salary and benefits) of a 1st year associate. You can do the math for your firm.
Investments in R&D may qualify for Federal and State tax credits which partnerships can pass through to partners; with the potential of mitigating some of the tax “bite” from non-distributed earnings. (Assuming tax credits are renewed for 2015, as they have been 16 times since 1981.) Worth looking into.
Now that we’ve established the advisability of an R&D program – and the modest investment called for – the next question is what “R&D” could look like for a law firm? Again, the short answer is almost anything you’d want. (But short answers never seem to suffice in Law Land!)
For guidance, let’s take another brief detour into Corporate Land.
The Internet first began flexing its commercial-use muscles in the early 1990s. The first web page launched in 1991 and the first graphical browser (Mosaic) was introduced in 1993. Quite rightly, none of us mere business types had a clue as to how to capitalize on this new (truly) whiz-bang technology. A few enlightened, though hardly impetuous, corporations decided to begin to explore the Internet. But they took prudent baby steps. Not betting the farm nor exposing themselves to great financial risk.
Warner Lambert (now part of Pfizer), set aside less than 5% of what they spent in the US to advertise its many highly recognized consumer brands (e.g., Trident gum, Lubriderm lotion, Benadryl allergy medicine, etc.) to test different approaches on the Web. They had their first consumer-facing website up in 1995. This allowed them to learn what the Internet could do for its brands – and how the Internet worked in concert with “traditional” media venues to effectively reach and communicate with consumers. As the web evolved into previously unimaginable capabilities, Warner Lambert was well ahead of its formidable competitors who hadn’t had similar foresight.
How to approach R&D at a law firm
So, back to Law Land – and how firms could use an R&D program. First off, your R&D program should be a key enabler of your firm’s strategic plan. (If your firm doesn’t have a strat plan, perhaps we should have a little chat) That is, rather than investing in an olio of random ideas, R&D programs should focus on agreed-to priority opportunity areas for the firm or be used to explore solutions that help ameliorate detrimental shortfalls or gaps. Look into ways to enhance your firm’s reputation, what services you offer to whom – where and how, opportunities to enhance your competitiveness, profitability and sustainability. Some ideas may yield incremental benefits; others may be truly pioneering.
A critical part of the process is to generate ideas on an ongoing basis. Not only from partners. Seek inputs from the business/administrative folks at the firm. Look to external sources and inspirations – beyond Law Land. Be open and curious. Then use the lens of your strategic priorities as a filter, identifying those ideas that represent near-term possibilities, those to explore longer-term and others that, frankly, just don’t cut it.
No firm has infinite resources to pursue all possible opportunities. In fact, “doing a little bit of everything” is pretty much a recipe for disaster. Therefore, developing an effective program entails saying “no” or “not yet” to some – the question is: how do you decide which opportunities represent the greatest potential for your firm?
A disciplined way to help develop and hone a short list of R&D programs is structured brainstorming sessions keying off your strategic priorities.
How would it be managed? Probably the most logical way would be to form an R&D committee, representing key areas (practices, geography and business functions) with oversight from the Executive Committee or Board.
So, to get the juices flowing, we’ll toss out some thoughts – again, underscoring that what each firm chooses need to relate to their own specific issues and opportunities. A few possibilities include:
- Explore the opportunities and business practices of adjacent practice areas
- Engage in more robust business intelligence efforts – on industries, clients and prospects
- Beta test new technologies that may enhance efficiencies or effectiveness
- Conduct external audits to see how the market (prospect clients or laterals) may view your firm
- Examine more directed client management and cross-serving initiatives
- Assess different training and development approaches
- Pilot new pricing initiatives in one or two practice areas
- Try out more efficient recruiting solutions
- Pilot succession planning alternatives
- A/B test different allocations of marketing funds to different partners
- Explore conferences or other industry-specific venues to interact and keep top of mind with clients and prospects
- Invest in “free days” – where the client team at a firm offers to spend a day at the client’s office – and the client sets the agenda, “off the clock.” The purpose is to better understand the client’s business issues and help cement the relationship with that client.
- Consider augmenting your secondments program – maybe a two-way street with your clients?
- Etc., etc.
The list could go on – but we think you get the point.
Some gutsy souls may go so far as to explore IBM Watson’s astonishing potential.
Some final thoughts
Despite persistent hand-wringing and gloom-and-doom prophesies, Law Land is a robust industry with ample resources to invest in a sustainable future and innovation. How each firm approaches this will, and should vary depending on its history, what the partnership is capable of and its strategies for success. We hope this provides sufficient reassurance that a deliberate, strategic program to explore new ideas isn’t so scary after all and can help firms better prepare for tomorrow.
R&D is a fact of life in the rest of our economy – why not in Law Land?
Adam Smith, Esq.