Strategic Innovation as an Emerging Firm Function: Structuring for innovation

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The following is authored by John Alber, futurist, International Legal Technology Association for Ark Group’s publication Strategic Innovation as an Emerging Firm Function. John will also be the keynote speaker at Ark’s Mid-Sized Law Firms: Start the Revolution in the Middle conference taking place May 23rd in Chicago.

Firms making up Big Law have heard the “i” word and they are responding. Innovation is on the lips of chairpersons everywhere, innovation committees are cropping up, innovation chiefs and partners are proliferating, and strategic plans are being amended to include a new imperative. “We must innovate,” is the command of the hour, of the month, of the year.

Which is where you come in. When the firm declares innovation as a goal and begins looking around for whom to pick and how to proceed, you’ll likely be in the crosshairs. So, how do you go about innovating when the boss tells you to do that? Where do you begin?

You’ll be tempted to think about structure right away. After all, the firms that are recognized innovators seem to multiply special groups like rabbits in spring. My old firm (Bryan Cave Leighton Paisner) has received awards for structuring innovation groups focused on client-facing technology, practice economics, and legal process insourcing. Efforts like Dentons’ Nextlaw Labs and Seyfarth’s SeyfarthLean Consulting have received widespread recognition as well.

How do you do what they did? What groups do you have to build? What reporting lines do you have to establish? What’s the first foundation stone you have to lay?

Change or die

Before we get to any of that, it’s worthwhile to ask why we care about innovation in the first place. How can we decide what to do until we know exactly why we have to do it (beyond that the boss wants you to)? It turns out that the why of innovation is a very big why indeed. It concerns life and death. Innovation is a mortal proposition.

Mortality? In business? And in law, especially? That can’t be.

The disconnect comes because we tend to view the overall business marketplace as a relatively stable and safe environment. And that was once certainly true. An S&P 500 company of the 1920s was expected to survive 67 years on average, and that average stayed high for decades.

But, the digital revolution changed all that. If the civilized competitive environment of yesteryear was akin to a park landscape – static and tranquil – today’s increasingly digital marketplace has become more like life in the Galapagos Islands – harsh, unforgiving and decidedly mortal, ripe with enough predation and extinction to be worthy of Darwin. Indeed, today’s highly dynamic global marketplace kills businesses faster than at any time in the history of business. The average lifespan of a company listed in the S&P 500 now may be as little as 15 years. Businesses have gone from being 300 year-old sea turtles to evanescent Darwin’s finches. Life hangs in the balance every day.

And where is law in all of this mortality? It would certainly seem to be insulated from change, immune to the harshness that surrounds most client businesses. Firm foundings – some more than 200 years ago – look more like vampire birthdays than business inception dates. Law firms never seem to die.

Or do they? The names survive, but what happens to the many businesses that live inside firms? The digital revolution has certainly wrought real changes there. Take document discovery as an example. That once was a thriving line of business for, especially, larger firms. In its heyday, document discovery and due diligence accounted for as much as 20 percent of a firm’s revenue. But no more. Automation and outsourcing have erased most of that revenue stream. And we can expect the same sorts of extinction within many other sub-businesses inside the organizational shells of firms. Too much of what law firms do is repetitive, highly automatable work. And automation will kill that work as surely as steam looms killed the weaving trade of Ned Ludd (who gave his name to the Luddite movement).

The billable hour revenue model for law firms may well have insulated law from a certain amount of change. That model forgives a good deal of Luddite behavior. But the marketplace shows no signs of leaving law as a protected reserve. Indeed, the Galapagos-worthy digital predators of law have engendered a whole new category of business – New Law – and put a name to that form of mortality.

So, notwithstanding vampire birthdays and the billable hour hiatus Big Law has enjoyed, all businesses begin to die the day they are founded, even law firms. And the highest mortality rate arises in those businesses that resolutely stick to their business plans, no matter the circumstances. Like big law firms.

For all the new strategic plans that come along, for all the innovation language injected into those plans, the fact is that law firms continue to thrash the same old business plans, year after year. Nothing material changes. And that is like dozing at a water hole ringed with predators. It cannot end well.

Peter Drucker, perhaps the most esteemed management theorist in all of modern business, explained the nature of this mortal peril in his book, Management Challenges for the 21st Century:

“[I]in a period of upheaval, such as the one we are living in, change is the norm. To be sure, it is painful and risky, and above all, it requires a great deal of very hard work. But unless an organization sees that its task is to lead change, that organization – whether a business, a university, or a hospital – will not survive. In a period of rapid structural change the only organizations that survive are the “change leaders”. It is therefore a central 21st century challenge for management that its organization become a change leader.”

So, Drucker says, the lesson of businesses in all sectors is change or die. Adaptation assures survival. We innovate not because the boss says so, not because clients demand it, not because it’s in the strategic plan, but because we need to adapt to changing market conditions that, if ignored, can kill us. Will kill us.

Seven sources

In a seminal article on innovation1 in the Harvard Business Review, Drucker posited that there are seven sources of innovation – four within a company or firm and three external to it. Internal sources include unexpected occurrences, incongruities, process needs, and industry and market changes. External sources include demographic changes, changes in perception, and new knowledge.

We haven’t the space here to explore each in detail, but we can see how innovation plays out in one area in the legal sector: process needs. Then we can map what we learn there into the other areas.

The opportunity begins with this fact: law practice is ripe with inefficiency. It’s almost as if it was designed to be inefficient. Some extended manifestation of the legal principal of stare decisis appears to operate to assure that how we have always done things in law is how we shall continue to do them. And that, it turns out, amounts to a nap the water’s edge.

Legal Process Outsourcers (LPOs) were the first to pounce. They exploited the rampant inefficiency and high cost structures inherent in document discovery. And, in doing so, they transformed the economics of eDiscovery and completely reshaped the expectations of the marketplace. No longer do we pay legions of associates hundreds of dollars an hour to review documents. Streamlined, highly designed and automated processes yield much more accurate results than before, and at a fraction of the cost.

And some Big Law institutions have noticed. Firms like Seyfarth are building brands based on process streamlining. They have become a bellwether, leading both clients and other firms toward the adoption of lean process disciplines. An old way of doing business (associate manual document review) has shrunken to a point of near extinction, and a new species of service provider is thriving in the vacated niche.

This Darwinian mechanism that operates in connection with filling unmet process needs works just as well with the other six sources of innovation. An entrepreneur identifies a disconnect in the marketplace – either internal to the business or external – and then fixes that disconnect and monetizes the market shift, leaving to starve the maladapted business that could not serve the unmet needs.

Entrepreneurial LPOs identified the inefficiency inherent in manual document review and saw both a business and a technological opportunity to streamline those processes. According to Drucker, that systematic search for unmet needs and under-exploited resources lies at the heart of innovation.

Notice that, while process improvement was a plum waiting to be harvested, structure had nothing to do with exploiting that opportunity. Indeed, the early LPO efforts were ad hoc, almost accidental, rather than planned outgrowths of institutional structures. I would suggest that structure should come after entrepreneurship, not before it. Inverting that order creates bureaucracy rather than innovation. Drucker says, “innovation is the specific function of entrepreneurship”. And by using that word, he doesn’t mean what we have come to think of as entrepreneurship – underfunded start-ups populated by 20-something wunderkinds. To Drucker, entrepreneurship means the “effort to create purposeful, focused change in an enterprise’s economic or social potential”.

Purposeful, focused… and lean

Entrepreneurial innovation is, according to Drucker, the exact opposite of the shoot-from-the-hip approach we expect from dot-com startups.

Entrepreneurship is a function of discipline, he says. It is the purposeful and focused search for opportunities in the seven areas that are sources for innovation. So the question of structure becomes one of how, inside the particular culture of your organization, you foster that kind of discipline and focus effectively.

The temptation will be to go big – to create a whole new group (or several groups) aimed at entrepreneurship. You could look at the groups I started and certainly think I’m guilty of that. But those structures didn’t come first. Something much smaller did. And on that point, Drucker has a warning:

“Effective innovations start small. They are not grandiose. It may be to enable a moving vehicle to draw electric power while it runs along rails, the innovation that made possible the electric streetcar. Or it may be the elementary idea of putting the same number of matches into a matchbox (it used to be 50). This simple notion made possible the automatic filling of matchboxes and gave the Swedes a world monopoly on matches for half a century. By contrast, grandiose ideas for things that will ‘revolutionize an industry’ are unlikely to work.”

Taking Drucker’s instruction, the structural question might be best put as, “What is the smallest structural change necessary to enable the disciplined examination and exploitation of opportunities in your market space?” How do you find the simple, powerful ideas that become seeds for vast change?

I would suggest that, at a minimum, you need a structure that gives priority to that search. And, very often, that entails removing responsibilities. Let’s say you’re a senior technologist or a practicing partner. Can you possibly give priority to the disciplined examination of opportunities if you’re also charged with keeping Russian hackers out of the IT infrastructure, or with billing a couple thousand hours a year?

The answer should be obvious. No! Assuring the survival of your business is not a part-time job. And this gives you a filter for deciding whether you should accept your boss’s charge to innovate. The first question isn’t whether you have a budget, or a title, or a named group. The first structural question is whether the organization takes innovation seriously enough to make it someone’s principal responsibility.

Mining the sources of innovation

Let’s say you’re given the kind of charge that offers some potential for success. You now have time and resources enough to begin a search. What next? Now it’s time to start building groups, right? Not really.

Because before you ever get to the stage of executing on innovation strategies (which is what targeted groups can be good for), you have to begin to figure out what those strategies might be. And for that to happen, you need to begin mining the sources for innovation that Drucker described.

How do you do that? The temptation will be to put your feet up on the desk and think your way through the problem. Or maybe search the Internet. And, once you have thought enough and searched enough, the radically innovative solutions will emerge. That certainly would prove to be a low overhead means of innovating. One person, one desk, and voilà.

Unfortunately, the best opportunities are discovered rather than created. They are buried in the details of how your clients operate and in how you interact with those operations. So, exploiting such opportunities is more like mining and less like art. There may be some art in it, but mostly there’s digging.

To mine those opportunities, then, you need eyes and ears in the places where those opportunities present themselves. To get those eyes and ears you need to create a network of connections that can help assure a continuing flow of opportunities. If you can set up such a network inside of a year, you’re an all-star. It can take a career to create a reliable pipeline of opportunities. Indeed, if you’re a chief innovator, that is your career.

So this is your empire-building opportunity, right? You obviously need a group to go out and “network” with clients and others in order to discover opportunities.

Nope.

The group you need already exists. Your own lawyers are already established on the front lines and in daily interaction with clients. They furnish as many connections as you’ll ever need to establish an opportunity mining network. The question becomes one of how to access those connections. Here’s where the discipline comes in. The ability of lawyers to recognize and respond to opportunities will certainly fall along a roughly bell-shaped curve. Some lawyers will be absolutely terrible at it. Most will fall slightly one side or the other of the median, which is to say the line of indifference. And a few will be truly extraordinary. These few are the true entrepreneurs who will start filling the pipeline of opportunities to exploit. Your job is both to cultivate them as resources and teach them how better to exploit the opportunities they find. Often, that will entail teaching them opportunity-spotting skills and giving them a verbal, technical, and numerical vocabulary with which to enlist their clients in opportunity mining.

Once the pipeline is primed, then executing is a matter of plain old management: prioritizing, identifying resources, working to budget and schedule. And managing expectations. One of the foremost hazards of cultivating an innovation network is disappointed expectations. Everyone who identifies an opportunity wants it to be first priority. Mismanage those expectations and your pipeline will dry up. Nurture them and your efforts will be sustained for years to come.

So, what’s the bottom line to structuring for innovation? Forget about structure. Focus on cultivating the sources for innovation. Then prioritize, resource, manage. The structure will take care of itself as you do those things.

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