It has become common among law firms to brand innovation as the cure to all business illnesses, as the obvious key to prosperity, as an omnipotent god to be worshipped on the spot and without hesitation. Innovate or die.
But beyond the usual slogans, what is the real challenge for lawyers in relation to innovation There are two. First, lawyers (like any other business in an open market) need to differentiate, and innovation may sometimes help to achieve that. Second, lawyers must decide how to address the much-publicized emergence of innovative technologies (the famous legal techs) that fuel the digital transformation of the practice of law.
Innovation and Differentiation
Is differentiation essential for lawyers? Yes. In today’s world, it never happens that a legal department is unable to find a lawyer. Supply exceeds demand. In this highly competitive market, lawyers must provide good reasons to their clients and prospects to choose them, and that’s what differentiation is all about: developing and communicating a distinctive competitive advantage. Nothing new here: The need to differentiate has always been felt in mature markets. To succeed, differentiation must relate to criteria that matter to clients. Painting the walls of the office in pink would make a difference compared to other firms, but this difference is unlikely to be strategically relevant because it does not relate to a client’s criterion for selecting a firm. That seems obvious, but many firms ignore it and keep bragging about so-called competitive advantages that nobody cares about (“We are an independent firm”, “We are the largest firm”, “We have been around for 60 years”, etc.). What makes the differentiation effective depends on the clients and the circumstances: a relationship of trust with the customer, reputation and prestige, lower fees, fee predictability, understanding of the client’s business, the ability to deliver simple, clear, decisive and actionable legal advice, specialized expertise in a niche area, responsiveness and speed. Etc.
Is innovation necessary in order to differentiate? No. For example, a law firm can differentiate itself by offering lower fees than then competition; it can be a very effective strategy, yet it has nothing to do with innovation. A firm could offer specialized expertise and in-depth experience in a particular industry: again, this differentiation has not much to do with innovation. A prestigious firm can differentiate itself by engaging brilliant and well-connected graduates from top notch law schools. Here again, there is differentiation without innovation. We could multiply the examples of successful differentiation that are not based on innovation. Innovation is therefore just a path - among many others – to achieve differentiation. The creation and implementation of innovative software could allow a law firm to process certain transactions quicker, cheaper and better, all the while maintaining a good profit margin. This would give a decisive competitive advantage in attracting this type of transactions. Innovation can be technological (big data, artificial intelligence, web applications, digitalization, block chain, etc.), but it does not have to. A firm can innovate in the way it is organized, in the way it processes work, establishes predictable fees, manage associates, etc.For example, launching a joint venture with another business or abandoning time sheets and moving to prices based on other metrics than time spent would be innovations that are not technology-driven. However, whether innovation is technological or not, it is not the innovation as such that constitutes the competitive advantage, but it is the added value it creates for the customer: the reduction of cost, increased service speed, better reliability, … Innovation is nothing more than a means to improve the customer experience. It is not an end in itself.
How to articulate strategy and innovation? In conclusion, lawyers, before diving head-first into innovation, would be wise to formulate a strategy. Before thinking about innovation, they need to think about the strategic differentiation and the competitive advantage they wish (and are able) to offer. Strategic thinking may lead to the conclusion that innovation is needed (or not), but to be convincing, this should be the outcome of a structured exercise of strategic thinking, and not an unquestioned assumption. Innovation only makes sense if it fits into a predefined strategic framework.
Addressing Innovative Technologies
After the need to differentiate, the other innovation-related challenge for today's lawyers is to come to terms with the disruptive technological innovations that are expected to upset the profession, or already doing it. Not a day goes by without a new technological innovation in the legal field making headlines. The combination of the Internet, big data, blockchain technology, and artificial intelligence is an explosive cocktail of which more and more commentators announce the disruptive effects for lawyers, some even suggesting the end of lawyers. It would be irresponsible for lawyers to deny what is on the horizon, even if the apocalyptic forecasts of some are unlikely to come true. But concretely, what can lawyers do about the legal tech surge?
Adapt smoothly A first strategy would be to adapt smoothly and to gradually integrate technological innovations, as and when they arrive on the market in the form of mainstream products (leaving it to the mavericks to do, at their expense, the pruning and development of these products). Lawyers who adhere to this strategy will gradually equip themselves with artificial intelligence and other tools as they have in the past adopted fax machines, printers, word processing, email and websites. The qualities required to succeed in this gentle transformation are neither innovation nor creativity, but rather curiosity, prudence and patience. It is all about scouting the market to identify and implement innovations that have been successfully developed and implemented by others. The key is to set up an effective “tech watch”: What are our competitors doing? What are our customers expecting? What are suppliers offering? Other key competences to succeed are will project and change management. Indeed, in most cases, the biggest hurdles have nothing to do with technology, but everything to do with human resistance to change, die-hard habits, and poor governance. However, this soft adaptation strategy is only valid for law firms that are not directly threatened by legal tech or new entrants into the legal market. Previous technological innovations (email, for example) were not rivals of legal advice and services providers. But what is happening now, and which will become obvious with the development of artificial intelligence, is precisely that: the rise of technologies, and businesses based on these technologies, which have the capacity to snatch part of the legal market right under the lawyers’ noses. Faced with the emergence of these new competitors, the strategy of slow adoption of technological innovations might be another example of this famous recipe for failure: too little, too late.
Investing in Innovate Confronted with the existential threat mentioned above, or simply driven by the ambition to act as pioneers, some law firms might embrace a more radical strategy and aim at becoming leaders of the digital revolution, either by investing in start-ups that could overshadow them, or by developing innovative solutions themselves, within the firm or within a new venture. Law firms, acting in close collaboration with technology firms, would thus become champions of technological innovation. But is this scenario plausible? Are lawyers capable of doing so? Two conditions must in any case be fulfilled.
The first condition is to rethink the value of a lawyer’s work. The billable hour forms the alphabet with which the life of the lawyer is now written. In an association of lawyers, almost everything is measured by or in reference to the billable hour. The lawyer's business model is to maximize the number of hours he or she will perform and in turn charge to clients. By definition, technological innovation is about reducing the time needed to complete tasks and thus reducing the number of billable hours. To innovate is to saw off the branch on which one sits. Technological innovation will therefore be interesting, and economically viable, if it is coupled with an innovation in the fee structure of lawyer services, whereby the time spent by the lawyer would no longer be but one variable among others, or perhaps not a variable at all.
In addition, carrying out innovation projects requires non-billable work, often spread over several years. In this configuration, while firms set annual billable targets for their members on which everything depends (remuneration, promotions, bonuses, etc.), which lawyer would be crazy or stupid enough to jeopardize their career by spending less time on client billable work and more time in research and development?
As long as lawyers continue to think exclusively in terms of billable hours, and with an outlook that does not go beyond the next twelve months, calls for creativity and innovation will remain vain and the official elevation of innovation as a core value of the firm will not change anything. A new way of valuing and remunerating lawyers within their own firms and by their clients is a prerequisite for successful innovation.
The other condition is to be able to make a financial investment. Law firms tend to distribute all the profits to the partners at the end of the year. Don’t we say that lawyers are rich, but that their firms are poor? Would they agree to substantially reduce their remuneration to fund investment in innovation, with all the risks involved? Bearing in mind the propensity of partners to move to other firms in order to optimize their remuneration, which firm would take the risk of losing its best performers by reducing their remuneration in order to invest in innovation?
In conclusion: the dilemma of the lawyer
This profound and radical double transformation of scrapping the billable hour as a basic principle of the business model and reserving a substantial part of the profits to invest would be in itself an interesting innovation, a prelude to many more. But, except for a few large international law firms, we hardly see it coming. The billable hour has crept into the last nooks and crannies of how firms and associations (and the mindset of lawyers) are managed, and dislodging it seems an insurmountable task. For these reasons, it seems unlikely that lawyers will engage en masseto take on technological innovation. Many lawyers, if given the opportunity, will favor the creation of a competitive advantage through cheaper and less risky channels, limiting themselves to going with the flow of mainstream innovation. For some this will be at great risk, as this leaves the door open to start-ups and other companies ready to innovate and take a share of the market.
About the author:
Antoine Henry de Frahan is the co-founder of management consultancy FrahanBlondé. He advises law firms and legal departments on a broad range of partnership, strategy, business development, and management issues. Antoine is also a lecturer at Edhec Business School (France). He is a graduate of Columbia Law School and has practised law with Clearly Gottlieb and Linklaters before starting his management consulting firm.