The Innovation Imperative: Adapt or Die?

Volume 39 Number 4

By

About the Author

Erik Mazzone is the director of Center for Practice Management at the North Carolina Bar Association. 

Law Practice Magazine | July/August 2013 | The Big Ideas IssueThe pace of change since 2008 has been staggering. Lawyers have barely had a minute to catch their breath between financial and housing crises, technological innovation and disruptive threats to the profession emerging from seemingly every corner. Five years later, lawyers are looking at the changes wrought by the “Great Reset” and wondering what comes next. Law Practice columnist Erik Mazzone sat down with Bruce MacEwen and Jordan Furlong, two remarkable and insightful writers on law practice strategy, for a thought-provoking conversation on the future of the profession. Both MacEwen and Furlong have written extensively on change in the legal industry, MacEwen with the e-book, Growth Is Dead, and Furlong with his series, The Evolution of the Legal Services Market, available on their respective websites, adamsmithesq.com and law21.ca.

Law Practice (LP): Before we discuss where the legal profession is headed in 2014 and beyond, let’s begin with what we’ve just gone through. Every lawyer who has practiced long enough could tell his or her own story of weathering the Great Recession. But let’s pull the camera back and take a wide focus on what’s happened to the profession—and industry, to the extent that they diverge—as a whole since 2008.

Bruce MacEwen (BM): First off, a semantic clarification, just so everyone understands my fundamental perspective: There is no distinction between the profession and the industry in my mind. On the one hand, a sound economic basis is a prerequisite for the pursuit of a profession to even be feasible, and on the other, the highest professional standards are prerequisite to economic viability. (If you doubt the latter, try cutting ethical or quality corners with your clients and see how long your pipeline of business holds up.)

So, what have we gone through since the Great Reset of 2008?

First, we see a structural—not cyclical—change in (1) the relative market power of clients and law firms, and (2) the beginnings of a change in what lawyers actually do.

As for the former, I’ve long believed clients had bargaining power vis-à-vis their law firms in terms of pricing, timeliness and the allocation of work as between costly and less costly means of accomplishing tasks. However, clients either didn’t recognize they had that power, or preferred for various reasons, stemming mostly from hypercaution and tradition, not to exercise it. Has that ever changed! Clients are never going back to overpaying for underqualified professionals to do work badly and inefficiently because it serves the law firm’s leverage/pyramid staffing and financial model.

Countless general counsel tell stories of cutting 10 to 15 percent off their annual outside counsel spend (and perhaps of doing the same thing again the following year) with no diminution in quality. Even if they were tempted to revert to their clubby and careless ways (which most aren’t because they feel empowered by what they’ve accomplished), the CEO and CFO would never let them.

If you were to graph this in Econ 101, you would say that the demand curve for BigLaw services has shifted permanently down. That is to say, the price clients are willing to pay for any specified quantity of legal services has dropped.

As for changes in what lawyers actually do, if you reflect on what has passed for innovation in law land over the past decade or so, from the perspective of a market’s functioning, essentially all the activity has centered on one—and only one—technique or tool: labor market arbitrage. That is to say, shift work from expensive people in costly locations to cheaper people in lower-cost locations. This summarizes what every law firm setting up a captive operations center or hiring an outsourcing firm has been doing.

Don’t misconstrue what I’m saying: Labor market arbitrage is entirely respectable, rational and smart management. You could call it good operational hygiene. But it does not represent a fundamental change in what work is being performed.

To see how the nature of the work lawyers actually do might change, stay tuned.

Jordan Furlong (JF): Bruce, you make several excellent points. I especially want to sound my agreement with your observations that this is neither a cyclical nor a temporary shift we’re experiencing, and that we haven’t even begun to see what true (nonarbitrage) innovation in this market would look like. I don’t think lawyers appreciate these two facts nearly as much as they need to.

For myself, I actually would draw a distinction between the legal industry and the profession—but not the tired one most commonly framed as “law is a profession, not a business.” (It’s both.) My distinction is this: The industry encompasses the profession, which constitutes the largest contingent of sellers (and quite a few of the buyers) of legal services. But the industry (or market, if you like) goes on to include clients of all stripes, the courts, relevant state and federal entities, law schools, legal publishers and many other players. Lawyers have only one seat at this table, and the number of chairs is growing.

I agree with you that since 2008 clients have—to quote Gandalf’s description of the Ents—“woken up and discovered that they are strong.” The financial crisis and ensuing recession gave them a hard push in this direction. But so did the ubiquitous spread of legal knowledge and opinion enabled by the Web and social media. (Keep in mind that at the end of 2008, Facebook had “only” 100 million users and had just edged ahead of MySpace as the leading social network.) Along with that democratization of information came, I think, an acceleration in the gradual, long-term demystification of law that has emboldened clients to approach lawyers and the legal system with more confidence and fewer qualms.

Fundamentally, however, what happened in the past five years was the inevitable realization that lawyers’ business practices were hopelessly, painfully, out of touch. We work inefficiently. We market ham-fistedly. We form terribly unsophisticated enterprises. We don’t really “price” our services at all. We are awkward and aloof with clients and the general public. And we generally regulate the market not for society’s benefit but in our own financial interests. These and other failings have existed for many years, but we got away with it because our clients were isolated, intimidated, poorly informed and without recourse to other options. Those barriers were always going to fall eventually; it just so happened that they all began falling in the space of five years.

So I think we agree that since 2008 the demand side of the legal industry has undergone dramatic changes, while the supply side (i.e., lawyers) has, for the most part, just staggered backward in confusion, blinking repeatedly. The ball’s in our court now. What will we do with it?

LP: You’ve both referenced a dearth of innovation in the profession as a factor in the structural change we’ve undergone. Where are the opportunities you see for law firms to innovate now and in the coming years? Is there reason for optimism to believe that we can do so?

JF: To the extent most law firms have embraced innovation up to now, it’s been a brief and rather awkward hug. Quasi-innovative tactics (chief among them labor arbitrage, as Bruce has identified) have delivered quasi-effective results: a pinch of efficiency here, a touch of discounting there. That’s no longer going to cut it; the next rounds of innovation will need to strike to the heart of workflow, pricing and infrastructure. Here are the prime opportunities I see.

  • Workflow. Providing and enforcing sensible frameworks around the creation and delivery of work product is key. Legal project management is the easiest and most effective current method of setting standards and expectations for performance, regulating and monitoring execution, and measuring the effectiveness of outcomes. Firms simply must recognize that much legal work is process work and will benefit from systematization.
  • Pricing. Lawyers are terrible at pricing—let’s just admit it. So real pricing innovation—and it can be done, as the law firm Seyfarth Shaw LLP demonstrates—is still a huge market differentiator. Abandon rates and hours, and focus instead on tailoring fees for individual client situations, based on a
    clear grasp of your internal costs of production and on market prices. More work, more complicated? Definitely. But more satisfying, more profitable and incredibly powerful for client retention.
  • Infrastructure. Firms are poking around the edges of this problem by cutting their associate ranks and exploring nontraditional talent options. Innovative firms will, as part of workflow re-evaluation, probe more deeply: Who and what do we need to accomplish x tasks? Must these resources be on-site, full time, human? Can’t we better align skills with task requirements? And how should we compensate our people, anyway? (That’s opening a can of cobras all by itself.)

Optimism that this will happen? Low. Well, more accurately, it will happen because the market will require it, but I see few incumbents (read: Am Law 200 firms) that can realistically undertake and execute these steps without destroying the firm itself. Boutiques spun off from BigLaw, new-style firms like Clearspire, new models altogether like Axiom, alternative business structure (ABS) firms (yes, they’re coming to America, one way or another)—these have the pole positions. I see little reason for optimism elsewhere.

BM: A few months ago at a major conclave of law firm leaders discussing my new book, Growth Is Dead, I was accused of not writing anything substantive about law firms’ efforts at innovation. I replied to the forum that I plead “guilty, with an explanation.”

“Guilty” in that I have not written nearly as much as I’d prefer on innovation in law firms.

“With an explanation” meaning it’s extremely difficult to generalize about effective and market-changing innovation. In general, you don’t know innovation until you’ve seen it, and then it’s slap-your-forehead obvious. Rather than trotting out the familiar example of iPads and iPhones, I have a more pedestrian innovation to suggest, which fits the bill: wheels on suitcases. Suitcases have been around for centuries and wheels for millennia, so what took us so long? Beats me. Who among us doesn’t think they coulda/shoulda thought of that?

But back to law land.

I agree with Jordan that workflow, pricing and infrastructure are the places we must start. Jordan covers these quite nicely, and the only editorial comment I would add is that “your internal costs of production” (in the pricing discussion) is emphatically not your clients’ problem, nor should it be. And pricing must orbit around value in the eyes of the client.

Now, the main question: Am I optimistic about law firms’, meaning lawyers’, ability to innovate?

No, I’m pessimistic, and I truly, honestly, deeply hope to be proven wrong.

Why am I pessimistic?

  • Lawyers’ instinctive response to anything new is, Who else is doing it? And that’s posed as a likely indictment and not an opportunity.
  • Lawyers, in terms of psychological profiling, rank two standard deviations above the normal population in a trait called skepticism. So, yes, this means we can find fault in anything—and enjoy doing so. It doesn’t matter if the fault is immaterial, hugely improbable or quasi-imaginary.
  • This has repercussions. Churchill remarked that “the pessimist sees difficulty in every opportunity; an optimist sees opportunity in every difficulty.” In that apothegm lawyers are the pessimists.

So, to sum up: If innovation is to occur in law firms, it will have to be driven from the bottom up, but with permission from the top down. And that permission means permission to fail. We hate to fail and we hate to try the untried. Not promising.

LP: You both identify pricing, workflow and infrastructure as the areas to begin innovating in law firms. For lawyers who heed your call to strike at the heart of these areas, what structural elements do they need in their decision-making apparatus to approach the challenge? In other words, how does a firm management or executive committee create the space within the firm for innovation to occur?

JF: Even with their top-down chains of command, corporations have a hard time introducing innovations to their corporate culture and making them stick; law firms have all the same challenges, multiplied by a partnership model in which authority is widely dispersed. So unless your managing partner is Abraham Lincoln, you’re going to need to approach innovation cautiously and indirectly. Some suggestions:

  • Start small. When my kids want to test a new marker color, I tell them to scribble in a discreet corner of the page. Find a discreet corner of your firm and plant your innovation flag there. I’ve made more progress with lawyers using the term “pilot project” than you could believe.
  • Find fertile ground. Most lawyers resist change of any kind, but there are always some flexible outliers; find them. Some practice areas seem to fight innovation (e.g., corporate/commercial, wills and estates), while others at least listen (e.g., IP, family, even litigation). Start on friendly turf.
  • Choose persuasive metrics. You must be able to show results, or at least progress, to justify the (perceived) risks that lawyers take with innovation. There is no more convincing metric than profit, so make it your initial aim to grow revenue or streamline costs. New clients are always a bonus.
  • Build in encouragement. Lawyers have a mortal fear of failure and the embarrassment that accompanies it. Google might be able to make workplace failure okay, but law firms never will. So create positive incentives for innovators: laudatory media coverage, internal praise and client appreciation are all good.
  • Consider a “greenfield” operation. If these first four aren’t promising and/or you’re feeling confident, try something radical: Open a small separate firm, parallel to the incumbent, performing similar tasks but in a brand-new way. This is Clayton Christensen’s model, and it has succeeded in the law (e.g., Lawyers on Demand).

Circumstances will affect your chance of success: Tough times might motivate openness to change, although they might also result in fists clenching tighter. The threat of mortal peril will probably do the trick, though. Remember the wise words of Ernest Rutherford: “Gentlemen, we have run out of money. It’s time to start thinking.”

BM: Jordan notes that “lawyers have a mortal fear of failure,” and I think this is the pivotal observation upon which all else concerning innovation will stand or fall. The only way innovation will ever happen is if senior firm management explicitly, repeatedly and without backtracking gives lawyers permission to fail—even enthusiastically encourages it. (More on that in a moment.)

But first, why are lawyers so bad at failure?

  • We’re enormously skeptical, two standard deviations more so than the average person, on typical personality tests. This means we can find fault with anything.
  • Much of what we do for a living—be we litigators or corporate—is focused on identifying and assigning responsibility for failure, or taking every rational (and some irrational) steps to ward it off in future or at least to constrain the consequences.
  • Going back to the lawyer personality type again, we’re pessimists—again, as against the average person. I mentioned Churchill’s quote about pessimists above. You get the picture.
  • Finally, we’re (again) more than two standard deviations less resilient than average people. Resilience, psychologically, means how one handles setbacks. We don’t handle them well at all. We’re actually rather brittle and insecure. This goes hand in glove, to my mind, with our pessimism. The great original sin in America is not, after all, being knocked down; the sin is not bouncing right back up. We don’t bounce very well.

So management needs to encourage and even reward failure. A recipe for insanity, you say?

Here Jordan’s other point about “pilot projects” comes into play. Keep your failures—and your successes, for that matter—very small. But cut the losers and double down on the winners. Think of every innovation you pursue as a petri dish; you don’t know beforehand what will grow (if anything), but you’ll probably be able to evaluate in relatively short order whether it’s useful, innocuous or dangerous.

Finally, if you’re going to fail, you have to be disciplined about what you learn from failure. The great genius of the scientific method is that experiments that “fail” still teach valuable lessons. One of the legendary “failed” experiments was that of Michelson-Morley in 1887, attempting to verify the existence of the “luminiferous aether” through which all matter was thought to move. While the experiment failed to detect the aether, it launched a chain of inquiry that ultimately led to the Special Theory of Relativity. Some failure!

One last thing: Don’t fail the same way twice. Or, as Yogi Berra immortally put it when asked why the Yankees had lost a particular game, “We made the wrong mistake.”

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