What’s new? (first published in Managing for Success magazine by the Law Society)

by Katherine Thomas

So you want to be innovative? But where should you start? In the first of a two-part series, Katherine Thomas looks at what innovation is, why it matters, and how to do it effectively.

The notion of ‘innovation’ has been around longer than any of us, but it has only received serious attention in legal services for seven or eight years. Still in its infancy, innovation seems to have taken over the narrative of law firm business management, so that we can now hardly move for the word. Every week, a law firm announces a new innovation committee, innovation partner or innovation award. “Innovate or die”; “disrupt to progress” say the headlines. The message is urgent and suggests teenage-like unstoppable momentum and determination.

“Lawyers’ attitudes to work and life have changed immeasurably and they’re not changing back.”

Faced with this trend, it’s understandable that some firms feel unsure of their future and lacking in a clear understanding of how to compete in this new reality. Thankfully, there is a grown-up perspective in the midst of this adolescent fervour: one that provides a calmer, more pragmatic approach, centered on the potential for each and every firm to thrive through innovation.

So, take a deep breath and join me on a journey through grown-up innovation for grown-up law firms.

The context

The market for legal services is changing in more ways and more rapidly than ever. The consumption of legal services no longer necessitates input from a lawyer or a law firm. With deregulation, traditional barriers to entry have reduced, and the intensity and variety of competition has increased. On the demand side, buyers have more choice than ever, and they’re exercising it, resulting in pricing and efficiency pressures. On the supply side, lawyers’ attitudes to work and life have changed immeasurably and they’re not changing back. The traditional law firm model faces challenges on multiple fronts, and these challenges are not going away.

All this makes it an exciting time to be a lawyer. The changes in our competitive environment offer a wonderful opportunity to be creative, inventive and bold. Brave firms that are willing to adapt and change have a bright future.

It is within the reach of each and every law firm to adapt and innovate to meet these new market realities. Every firm has the opportunities and skills to adapt through innovation, if only they are activated and deployed in the right way. This article outlines how to do this.

What is innovation?

The word ‘innovation’ comes from the Latin ‘innovatus’, which means to renew or change. The etymology is clear, but the modern definition is not. There are as many definitions of innovation as there are professors of innovation, and there is no consensus around a single interpretation. However, a few common strands exist around which most thinking coalesces. Innovation:

Importantly, innovation:

This closer look at the definition debunks a number of misconceptions about innovation, including the following.

So we start to see that innovation is much more accessible and pragmatic than the headlines suggest. It’s less about the ‘lightbulb moment’ and more about hard work sustained over time. It’s less about inspiration and more about implementation. It’s less unreachable and more achievable than we might at first have thought.

Two types of innovation

As we have established, innovation can improve something that already exists, or it can create something entirely new. Consultancy Bain & Company has the most effective way of expressing this I have seen: ‘Engine 1’ and ‘Engine 2’.

Clever organisations of the past looked ahead and developed their services to meet the market’s changing needs. They found ways to do what they do better, more efficiently, perhaps at higher margins, while always improving levels of client satisfaction. In legal services, this might mean having moved manual discovery to e-discovery, or deploying project management techniques to execute a corporate transaction more efficiently. This is Engine 1.

Clever firms of the future will not only do what they currently do differently, but also do new things. They will spot gaps in the market and needs that clients don’t know they have, and they will create solutions to meet them. This is Engine 2.

Firms that are successful innovators will improve their core business through Engine 1, while simultaneously innovating and moving into new areas through Engine 2.

Engine 1 is characterised by routine, discipline and continuous improvement.

It requires curiosity about how we could be better at what we currently do. It is built on the ability to think of legal services as processes, from which we can extract waste. It depends also on an understanding of how to marry processes with client need, to focus on those improvements that achieve commercial advantage.

Engine 2 is characterised by innovation, creativity, risk, and rapid adaptation. Here, curiosity is still essential, but so are creativity, empathy, imagination, a willingness to take risks, and a readiness to fail.

Why innovate?

Engine 1 innovation is vital for protecting what you already have. Increased competition, digitisation and buyer power are putting pressure on margins, making Engine 1 innovation essential for survival. The increased efficiency of Engine 1 is a non-negotiable in this environment.

“It’s less about the ‘lightbulb moment’ and more about hard work sustained over time.”

Engine 2 innovation is essential for developing the business of the future, because it’s not enough to get better at what you already do; you also need to find new markets and new ways to meet that market need. Professor Clayton Christensen explains why in his book, The Innovator’s Dilemma (Harvard Business Review Press, 2013). The “innovator’s dilemma” is the result of established organisations being threatened by ‘disruptive innovations’ that come from challengers which, in many cases, aren’t even recognised as competitors. This happens because most established firms don’t foster Engine 2 innovation. Instead, all of their targets, measurements and rewards are geared towards doing what has made them so successful in the past: meeting the needs of the best customers as profitably as possible. Everything about the firm – its vision, values, organisational structure, the way people are rewarded and the way people think – points to where the money is coming from now. Established firms do what seems to be the sensible thing: they follow the money. They speak to their most profitable customers, and when those customers make suggestions for improvement, they implement them. This is classic Engine 1 activity, which is valuable as a protective mechanism. But it doesn’t look ahead.

It doesn’t seek the gaps in the picture: the needs clients don’t even recognise they have. It isn’t Engine 2.

Many Engine 2 innovations start at the bottom end of the value chain, serving unattractive markets. They tend to go unnoticed, as the ideas are tested and developed within a less visible and certainly less profitable segment than established firms occupy. Along the way, some up-starts fail, and established firms use this as evidence that the model is innately unworkable. However, other up-starts succeed, and, in time, more sophisticated buyers become interested in what they have to offer. As a result, the new offerings move up the value chain. However, according to Christensen, it’s usually only when they become accepted by the mainstream that established firms sit up and take notice – by which time, it’s too late.

Kodak is a classic example of an organisation toppled by Engine 2 innovation: in this case, digital photography. Did you know that the person who first invented digital photography did it within Kodak, for Kodak? When he took his idea to his bosses, they explored it, but chose not to invest in digital photography over film because they didn’t see it serving the current market. Customers weren’t asking for digital photography – but that wasn’t because there wasn’t a need for it. It was because they didn’t know it existed. This latent need, exploited by Kodak’s competitors, ended up being Kodak’s undoing.

Law firms need to innovate to protect what they have now (Engine 1) as well as create a viable future (Engine 2).

How can law firms innovate?

Having established what innovation is and why it’s important, the next obvious question is: “How can law firms enable innovation?”. I have four key tips.

1. Start with the client

It is impossible for a law firm to be innovative without speaking to its clients. True innovation is rooted in a specific client need. Without first understanding clients’ pain points, aspirations and desires, it’s impossible to innovate.

When was the last time you spoke to your clients about their business strategy, their plans for the future, the way they manage their business risks and legal risks, the way they like to work with their lawyers, and what ‘value’ means to them? When was the last time you asked a series of open questions, and just waited for the answer? When was the last time you asked “why?”, “how?” and “what?”. When was the last time you asked your clients to share stories of things that matter to them?

Introduce a formal empathy and feedback programme. This is an ideal way of turning client feedback into value. Get under the skin of what your clients think by actively listening, as well as inferring needs from their expressions and behaviours. Implement a programme of client listening meetings, and shadow clients to understand how your firm’s service fits into your clients’ wider business. Client secondments provide a fruitful opportunity for feedback. Are you using your secondments in this way? Record all the feedback and information you gather, share it and act upon it.

Few law firms are using client feedback as an effective innovation tool. Last year, a survey by the Australian firm Beaton Consulting reported that 27% of in-house respondents didn’t consider any law firm they had ever encountered to be innovative. Could it be that firms are not as innovative as they think, or is it just that their innovations don’t meet client needs? Innovating without a client benefit isn’t innovation, so if you take nothing else away from this article, remember always to think ‘client’.

2. Nurture Engine 1 and Engine 2 innovators

You’ll recall that Engine 1 innovation is characterised by routine, discipline and continuous improvement. Engine 2 is characterised by innovation and rapid adaptation.

Let’s face it, even Engine 1 is not a strength of most law firms, let alone Engine 2, but to have a bright future, firms need both. Engines 1 and 2 require skills that aren’t part of typical lawyer training, making them highly valuable and important to nurture. Yet in the risk-averse environment of most law firms, this is a challenge. So if you are serious about innovation, you will need to make a conscious organisational effort to identify, recognise and value these skills within your business. Then nurture and use them. Firms that don’t do this risk becoming the next Kodak.

3. Make it a team activity

The lightbulb is a useless visual emblem to represent innovation, for two reasons. First, it suggests that this particular innovation was as quick and easy to create as flicking a switch. In fact, it took over 70 years between the first experiments into artificial light and Thomas Edison taking out a patent on the lightbulb. Second, it gives the impression that innovation is a solitary activity: a moment of genius on the part of one individual. Invention and creativity might be solitary, but innovation is a resolutely communal activity. It takes a village to turn an idea into an innovation.

“Get under the skin of what your clients think by actively listening.”

Armed with the results of your client feedback / empathy / listening, identify specific issues worthy of further investigation. Turn those issues into a problem statement: a question that teams can work together to answer. For example, a firm might identify ‘ability to budget’ as a common concern from clients. This might be reflected through a problem statement that asks: “How can we become a firm that structures our prices in a way that helps our clients budget?”.

Then the magic happens. Encourage everyone to share their ideas, however crazy, however prosaic, on sticky notes on the wall. This approach is a fantastic way of achieving in 10 minutes what it usually takes two hours to do in a roundtable discussion. There are five rules for this activity.

Once all ideas are posted, group them into themes and look at what emerges. Common themes will start to become clearer. From these, identify one or more ideas that are worthy of becoming prototypes. This process of generating ideas as a team is sometimes known as “ideation”. Ideation is a fast-track way to generate a whole host of potential innovations.

4. Be prepared for trial and error

Next, test your solution. The key here is to develop a prototype or “minimum viable product”: something that is sufficiently developed to be tested, but doesn’t require a significant amount of investment to create. Prototypes take many forms, depending on the issues involved. A new process, new template, new technology, or even an entirely new service line: all are possible prototypes.

Find a small group of clients for whom the prototype provides value, and ask them to trial it. The key is for the experience to be real and for everyone involved to test the innovation through practical application. Put a timeline on the trial period. Seek feedback as you progress, as well as at the end of the trial. This is important because if you wait for the ‘grand reveal’, some pieces of feedback will be lost. The important thing is to gain feedback in whatever way your clients choose to provide it to you, rather than as a neat concluding exercise. That said, it is worth guiding clients around the feedback. Provide them with a series of initial open questions that will provoke their thinking.

When seeking feedback, don’t forget your colleagues who are delivering the prototype. Ask them how it is working from their perspective: what’s working well, and what can be improved?

Use the feedback to refine the prototype until you have created a solution that is ready to be launched. You now have an innovation: an implementable development that has commercial value to you and your clients.

Conclusion

With all the hyperbole, headlines, publicity and excitement around innovation, you could be forgiven for thinking that it’s a flash in the pan, a childlike obsession, the latest fad that will soon pass. The sensationalism will diminish, no doubt, but left in its wake will be thoughtful, durable Engine 1 and Engine 2 innovations that will enable traditional law firms to adapt and thrive in changing market conditions by providing greater value and choice to clients. Firms that are serious about innovation will eschew a ‘shiny’, PR-driven approach, in favour of hard work that creates more enduring innovations rooted in genuine client benefit. Innovation just grew up.

This article has covered why innovation is important in law firms, the kinds of innovation available, and ways to innovate effectively. Part 2 will be published in the next edition of Managing for Success.

You can also read the full article on the Law Society’s website by clicking here.

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by Katherine Thomas

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