Fractal dysfunction and the mathematics of #biglaw innovation
A few times a year I attend an event outside the legal market. Last week, I attended the brilliant CB Insights TRANSFORM conference with the equally brilliant Jae S Um and left with some fresh perspective on innovation from the corporate world.
Read our live event coverage on Twitter using #cbitransform
Businesses across sectors are all facing similar macro-challenges: digitalization, globalization, comsumerization, millennialization, and other disrupt-izations that threaten their long held beliefs and business models. According to a recent CB Insights report, 85% of companies say innovation is critical to survival (yet nearly 80% are focused on small and incremental changes). These existential threats are real, and increasing.
Throughout the event we heard from and talked to large corporations about how they are responding to these challenges:
- They systematically design and test new products and revenue streams
- They launch corporate venture funds with measurable strategic and financial returns
- They invest in incremental improvements to their core business to improve profits and shareholder value.
- And across innovation efforts, the measure against defined targets and make hard decisions to continue or kill an initiative
There is a theme here: these businesses innovate for profit, growth and stakeholder value, and they measure their innovation investments against these goals.
Who owns innovation in these businesses, and who drives growth? It’s not always clear. Compare the above list to a typical law firm operating environment and common innovation approaches. The titles may vary, but the pattern of fragmented innovation ownership and effort is similar:
- Firm have added new business titles to the C-Suite to drive innovation, such as chief strategy or innovation officers, or more specific titles around pricing or client service.
- The C-Suite collectively have purchased and talked about new tech, particularly tech with innovative things such as AI or blockchain.
- They’ve charged existing titles and functions to drive incremental innovation from within, from marketing to technology to finance to talent.
- They’ve created net-new structures, dipping their toes into corporate venture capital and launching funds and labs to innovate for them, or have spun off subsidiaries that offer new and different products and services.
While corporations are are clearly facing similar challenges when it comes to defining and placing innovation into their organizations, they are clearly ahead when it comes to innovation as a business strategy that targets meaningful and measurable results.
I’m going to boldly cut to the chase here: most incumbent law firms do not innovate for measurable results like their corporate clients; they innovate for show. They innovate to differentiate but not to be different. Ironically as their competitors increasingly do the same. The targeted and measured innovation we are seeing in other sectors just isn’t happening. We can (must) do better.
Remind me — why are we innovating?
Much has been written on the state of the legal industry and the ‘new normal’, so allow me to recap.
For many years firm growth was a derivative of market growth, driven by increasing demand and tolerance for rate growth over inflation. Firms did not fight for market share, there was simply enough to go around for all to profit. And profit they did.
Today, incumbent firms face increased competition from insurgent legal service providers, new technologies and even from their own in-house clients who are being asked to reduce costs while keeping pace with their own core businesses. Demand for legal services has flattened, which means growth and sustainable business now must be fought for. And these are clearly not cyclical changes: the legal services provider market forecast calls for red oceans and not calm seas.
This fight to keep or add new business is a new form of competition for law firms. Strong brand and reputation are no longer enough. They need new strategies, new and competitive offerings, and new methods of understanding and serving the fragmented legal market. These changes, these new ways of doing business are, by definition, innovation. So innovate they must.
Fractals, vectors and fragmented innovation efforts
The term fractal, from the Latin fractus, meaning “broken”, was coined by the mathematician Benoit Mandelbrot. He defines a fractal as “a rough or fragmented geometric shape that can be split into parts, each of which is a reduced-size copy of the whole.” They are a never-ending and chaotic pattern, created by repeating a simple process over and over again in an ongoing feedback loop. Ah, math.
As a numbers guy, fractals get my nerd juices flowing. But fractals also present a good analogy as firms push the boundaries between status quo and meaningful change, often by repeating the same innovation patterns that all firms are repeating, recursively and in a variety of sizes and shapes that all look very familiar. Beyond the beautifully complex and chaotic fractal imagery, what meaningful change occurs as a result these innovation efforts?
To answer that question, firms must define what ‘meaningful change’ means specifically to them, empirically and honestly. This requires doing the hard work of analyzing and diagnosing their business to understand it’s strengths, weaknesses, opportunities and threats, the markets it serves, and the changes necessary to survive, grow and scale. In the corporate world, we call this strategy and competitive intelligence.
“…true innovation follows strategy and is guided by insights and analysis…”
Borrowing again from mathematics, innovation shouldn’t be an ever-spiraling and directionless fractal — it is a vector, which requires both direction and magnitude. It’s starting point and direction are determined by a thorough understanding of your competitive position and strategic direction, and it’s magnitude represents the innovation’s risk vs. reward. Without a starting point (problem), direction (goal) or magnitude (measurable ROI), innovation is nothing more than an abstract concept.
True innovation follows business strategy and is guided by insights and analysis. Yes, there is a time and place for free form R&D, ideation and exploration, which is often disconnected from the core business in the pursuit of growth without minimal self-disruption. But as firms face market and business challenges so clearly bound to their growth or survival, is pursuing untethered ideas and growth experiments the right starting point? Before investing heavily in these pursuits like our corporate clients, the first order of business for many firms is to problem-solve and course-correct before the market corrects it for them.
Insights before innovation, then plot the right vectors
Jae’s series on the mechanics of legal innovation, describing innovation costs and funding, targeting the right innovations and the talent required to execute, is a must-read for anyone focused on real innovation in the legal sector. But for each firm, where and how to invest begins with an empirical diagnosis of their competitive position and strategic direction to determine the innovation vectors specific to their business. The corporate world has a very technical term for this: hard work.
With legal innovation, WHY is essentially the same for all firms; but WHERE and HOW is specific to each firm. Innovation is situational, with widely varying starting points, directions and magnitudes depending on where you sit in the legal ecosystem, the current state of your firm, of your competitors, of the markets you serve and the macro environment that you and your clients operate in. But unlike vectors in math, you also need to define terminal points: measurable targets that shape the future-state of your firm.
“…with legal innovation, WHY is essentially the same for all firms; but WHERE and HOW is specific to each firm…”
The firms that can perform an honest and thorough business diagnostic, that can analyze and extract useful insights from the data available to them and make informed decisions, will pull ahead of the pack. They will better understand the economics of their firm and markets, supply and demand for their products and services and will intently focus on profitable and sustainable growth. Those that do not, or can not, may find themselves in a fractal mess.
Although I said all firms must plot their own unique innovation vectors, we plainly see consistent patterns when it comes to “innovating by the numbers”. Like fractals, these patterns repeat and converge across books of business, practices, firms and market sectors. For example:
- Market sets price, firms adjust rates/prices without corresponding staffing model and compensation adjustments, and they lose margin.
- Firms buy inorganic growth via lateral hiring and M&A, costs increase disproportionately to revenue, and they lose margin.
- Firms react by cutting costs, which impacts their business agility and adds to their management debt, and they lose clients, deals and/or talent.
Firms certainly try to recognize and address these challenges in different ways, at different scales. Yet many firms have yet to advance their strategy, analytics and intelligence capabilities in order to do the hard work of diagnosing the business to decide precisely where and how to innovate.
Firms need both the skill (talent) and the will (culture and incentive) to change. Firm leadership needs insights and understanding to pinpoint exactly where, when and how they must change in order to grow and profit. Their biggest business clients and their allied business professionals connect strategy, intel and innovation, and they manage innovation by the numbers. Successful firms are learning to do the same.
Most agree that winning is better than talking about winning. To plot vectors toward meaningful and often necessary changes, firms must avoid the fractal innovation theater — and do the math.