The law firm business model of the past is under attack. Slowly, private legal is responding with things like developing knowledge management systems, establishing jobs for data analysts who can establish pricing of services and beginning to look at ways to outline workflows and processes. Unfortunately, corporate clients are impatient and are beginning to push harder for improved efficiency and increased speed of service delivery.
When you arrive at a crossroads, you have the following choices: 1) Stand still and don’t move. 2) Turn left; turn right; go backward. 3) Forge ahead!
The legal industry is moving quickly toward a crossroads. The law firm business model of the past is under attack. Slowly, private legal is responding with things like developing knowledge management systems, establishing jobs for data analysts who can establish pricing of services and beginning to look at ways to outline workflows and processes. Unfortunately, corporate clients are impatient and are beginning to push harder for improved efficiency and increased speed of service delivery. Clients believe efficiency should result in lowered cost of production for firms and thus lower cost of services to them. How do law firms respond to these increasing expectations? Will we Forge Ahead to remake our industry? Will we innovate?
Why Do We Need Innovation?
Other service providers, including Big 4 accounting firms, are eating away at the market. In early 2017, the Georgetown Law Center for the Study of the Legal Profession reported that the global market for alternative legal service providers is currently at $8.4B annually, and growing.
Our clients’ executives, many of whom have worked in law firms previously, know what we do and how we do it. However, many of our clients (people in corporate business positions, for example, who are not lawyers) do not have the same personality traits as do lawyers. They expect efficiency from their own employees in order to maximize profits and returns to investors. Why, then, would they not expect that of their legal service providers? Further, corporations are rewarding their legal departments and business people based upon how well they control spend and reduce budgets.
Can Law Firms Innovate?
What traits or attitudes have to change or be overcome to create a culture of innovation? The answers provided to Altman Weil in their 2017 Law Firms in Transition survey indicate that law firms have not yet created an attitude of willingness to change their service delivery model. See http://bit.ly/2gNQEJr. Of the 386 firms participating in the survey, 62% responded that law firms are “low” in seriousness toward changing the service delivery model. Unfortunately, 85% of corporate Chief Legal Officers Altman surveyed in October 2016 categorized their firms’ interests in changing as “low.” The law firm survey further reflects that since 2015, firms reported that the largest impediment to change, partner resistance, has increased by more than 21%, with the response for 2017 of 65% of firms citing this resistance as the leading impediment to change. According to the Transition survey, larger firms (more than 250 attorneys) are much more likely to be experimenting with innovative ideas and methods. Fewer than 50% of firms with less than 250 attorneys are experimenting with innovation.
Lawyers struggle to identify how they might practice differently. Could it be that lawyers’ analytical thinking hinders them from pursuing concepts they consider risky in any way, concepts not fully vetted by 10 other larger firms that have validated them, or just concepts that do not impact their personal practice? Many lawyers are unwilling to invest the time and money to devote resources (i.e., people, primarily) to work on business-changing strategies for fear of failure, loss of take-home pay and loss of autonomy. Law firm culture resonates with the idea that planning takes too much time and costs billable hours.
Many law firms lack a strategic focus, particularly one of innovation. Some law firms have a difficult time appreciating all of the assets within their walls. Law firm culture can be more oriented around individuals as opposed to products and services created by its teams. Further, in many firms, there is a cultivated lack of awareness of the challenges of today’s legal market. Clearly, innovative thinking (and implementation of those thoughts) is hard, hard work. It is costly, risky and time-consuming. But will ignoring innovative thinking or denying it ultimately be more costly?
Lawyers are typically proactive as opposed to reactive. Without research and development investment to identify innovation, many firms have nothing to which to react. Few firms have conversations around innovation, process improvement and improving efficiency. How large are law firm budgets for research and development? What corporation could survive very long without allocating at least 2% to 3% of revenues to these efforts?
Another trait that impedes innovation is low resilience. What about the impact of high skepticism (“that will not/cannot work, it’s not needed, my clients are not demanding it”)? The survey shows that only 57% of the firms that responded have proactively engaged in conversations with their clients about matter management efficiency.
Do law firm compensation systems measure or reward improving efficiency, let alone developing innovation? While 48% of law firms in the survey say they have made significant changes to improve their efficiency in the delivery of legal services, only 39% say they have made significant changes in their approaches to pricing these services.
Law firms do not use their data well; they don’t know where to find it or how to easily access or collect it. Unfortunately, data is scattered among accounting, payroll, client relationship management, document management and other systems. Piecing it together is very difficult. Firms also do not use industry data very well. Firms are challenged to value their work, to understand profitability metrics and to adjust the metrics driving profits. Profitability holds us back from innovating. Only 58% of firms surveyed have developed data to understand their underlying costs of legal services. This is a huge impediment to being able to effectuate improved pricing. Of that 58%, only 28% believe the use of this data has led to significant improvement in performance. It seems that law firms are not proactive in providing value-based pricing and only do so when clients request it or the threats from competition necessitate it. Oddly, those firms report that value-based pricing projects are as profitable, if not more profitable, than hourly-priced projects.
Where to Go and What to Do
- Imperative 1: Law firms should have multidisciplinary teams (attorneys and non-attorneys) meet with clients’ multidisciplinary teams (attorneys and non-attorneys) to talk about solutions clients need. Devising something innovative requires the voice of the client driving the work. Create diverse teams; low diversity, inherent in most law firms, leads to a lack of diversity of thought.
- Collect regular, written feedback from clients (ideally at the conclusion of each matter). Consider capturing three simple questions provided to clients in their preferred format (email, online survey, written document, etc.): what worked well; what didn’t work well; how can we improve our service to you in the future?
- Create a source of innovation at your firm, ideally, a team of people who are problem solvers, are open minded, who can think like clients (empathetic). Find people who have strengths of ideation and strategic thinking. Use Tom Rath’s “Strengths Finder 2.0″ (2007, Gallup Press) to help identify these strengths in individuals. During meetings, get input flowing by using blank 3 x 5 cards initially to capture suggestions (claim it later if they want … this is not about attribution); vary the locations of the team meetings (outside, in the park, at a parking garage, at a client’s office, etc.). The group has to see things differently or from a different perspective in order to think differently. Recruit people who are divergent thinkers, who will work hard and have a passion for the effort, who are good leaders (not managers), who have respect for the ideas of others, who will fail and get back up to run another race (especially in the face of unending criticism) and who have natural curiosity.
- If the billable hour of today is more important to a person than his or her investment in their and the firm’s future, you have the wrong person for this role. Pay this committee a significant amount of money when ideas are generated and another amount once ideas become innovation (i.e., they have been executed). Allocate a portion of profits generated by the innovation on an ongoing basis to these committee members.
How to Achieve Innovation
- SHARE! Great ideas and innovation can only occur in a culture that promotes creative thinking, challenging the status quo, celebrating failures, talking about problems and challenges. Bring representatives from all practice groups, industry teams, administrative departments, etc. together to generate conversations about efficiency and innovation. Oddly, you may quickly find that a group has a solution that can be used by another.
- Follow Corporate Legal Operations Consortium (CLOC; see http://bit.ly/2tm7h4Q) and other law department operational groups. Chapters of these groups are springing up across the country as well as internationally. CLOC’s vision is one of a seamless legal ecosystem that delivers corporate legal support to small, medium and large businesses with peak efficiency. Law firms can learn a great deal from collaborating with these groups and attending their conferences.
- Blockchain, a digital ledger in which transaction data is digitally recorded, cryptographically encrypted and shared on a trusted computer network, will bring technology to the practice of law as well as the business of law in a way unfathomable today. If you have not spent any time learning about this new technology, do not let another day pass without doing so. This technology will likely impact the business of just about every client a law firm has as well as its own. The impact of blockchain on business will likely exceed the Internet revolution.
- Eighty-five percent of law firms surveyed believe that using technology to replace human resources is a permanent trend, yet it seems that few, if any, are focused on creating, implementing or exploring that technology. Get up to speed on artificial or augmented intelligence (AI). Examples are springing up in many places already. According to Brian Kuhn, co-founder and leader of IBM Watson Legal, the Watson-based product Outside Counsel Insights provides a view into the billing data provided to large corporate legal departments by their law firms that have the departments paying attention. See http://bit.ly/2tmGu8n.
- Forge Ahead! Innovating is likely one of the most difficult things your law firm will ever try to do, but the alternatives are worse.
***** Teresa J. Walker is Chief Operating Officer at Waller Lansden Dortch & Davis, LLP, Nashville, TN, and a past president of the Association for Legal Administrators She can be reached at Teresa.email@example.com.