In the classic "The
Innovator’s Dilemma," Clayton
Christensen analyzed how companies at the top of their game, with
brilliant and successful products, and focused on their core
clients, could be undercut and eventually dethroned by small,
pesky start-ups with demonstrably inferior technology. No
less than Andy Grove had this to say:
“This book addresses a tough problem that most successful companies will face eventually. It’s lucid, analytical-and scary.”
If you haven’t read it, first of all, shame on you, but second
of all, here’s Christensen’s key insight: Market-leading, highly-functioning
firms that are (rightly) focused on their best clients will ignore
newly introduced "disruptive" technologies which typically begin
life cheaper, smaller, and easier to use—but far less capable—than
the market leader’s offerings. The leader’s best clients
know and appreciate the fully-featured products they buy, and
have no use for what the inferior upstart
sells. Meanwhile, senior and middle management of the market-leading firm
has no incentive to adopt the new, inferior technology either,
since (a) their best clients have rejected it; and (b) at least
initially, the market niche is so small it would contribute negligibly
to the firm’s growth, and could even dilute profitability (cheaper
generally being associated with lower-margin).
We all know what happens next: The emerging technology
matures quickly, becomes competitively capable, and the market-leading
incumbent is caught flat-footed. If Christensen’s book
has been consistently criticized for anything, it’s that he
doesn’t have much to say about what the market leader could
do differently to avoid being dethroned—which I interpret
not as a failing of Christensen but as a reflection of how
intrinsically difficult it is for the market leader in such
a situation: Revolutionizing themselves to meet the threat
on its own terms means taking their focus off their best clients
and investing in somewhat unproven, low-margin products with
an uncertain future.
What has this to with "the economics of law firms?" Legal
Week reports:
"Some of the fastest-growing, most innovative
firms in the UK are found not within the confines of the City
[of London] but out in the regions. Here, unencumbered by the
tradition, expectation and expense of running a London operation,
they have succeeded in building up legal businesses whose capacity
for growth may soon see them encroaching on their capital equivalents’ territories."
And what have these firms in common?
"Change. As businesses which have come a long
way in a comparatively short time, they are used to embracing
it as a constant."
One could argue that the impending Clementi Commission reforms
give UK firms greater incentive to innovate (or greater fear
if they don’t) than their less immediately challenged US brethren,
but the firms Legal Week discusses don’t sound fearful
and don’t sound bashful. A partner at Liverpool-based
Silverbeck-Rymer (no, I hadn’t heard of it either—but for
a taste of something
"completely different," check out their website)
says:
"The companies outside the profession currently being
touted as potential providers of legal services are in a position
to provide a much slicker service at a much reduced cost. If
law firms are to survive they must embrace change or face extinction”
while another says "[we] have no God-given
right to make money and will have to adapt and innovate to survive."
Incidentally, Silverbeck-Rymer has all of four partners
and revenue of £16.4-million (about $29-million),
so don’t be too hasty to scoff at their business model.
What are the "business models" of these firms in general?
- Heavy investments in IT to propel efficiency.
- A strong culture of client-service orientation, including
call-tracking and case management systems: "anything
focused on keeping the client happy," as one managing
partner puts it. - A "virtuous circle" whereby the investment in efficient,
standardized systems and a stable workforce lead to satisfied
clients receptive to cross-selling, which increases profitability
and enables more aggressive investments in IT and marketing.
Now for the most disruptive innovation of all: Discarding
the partner-manager model entirely.
Drastic? Not to Tim Hastings,
chief executive of Midlands-based firm Nelsons, who
says bluntly (emphasis supplied):
“We found many years ago that the pace of change in today’s business world is too rapid to suit the partner-manager model. It
simply took too long to make a decision.“A corporate-style model, however, allows us to emulate successful
non-legal businesses. Most big companies have been built up by delivering consistent,
high-quality products to their customers. This
can be applied to legal services too, which is why we need a [corporate-style] decision-making
process.”
Is this starting to sound familiar? Innovation
arises from small, regional upstarts who offer inferior
services ("standardized," "commoditized," not bespoke)
at a lower—and
fixed!—price.
Granted, UK firms staring down the barrel of Clementi
may have little choice; but those like Nelsons and
Sylverbeck-Rymer who enthusiastically embrace change
may be showing us all a model for the future. Win,
lose, or draw, they’re doing what Christensen found
so threatening to incumbents: Breeding new ideas,
experimenting with different processes, and using their
rapid growth to invest in more of the same.
