Why law firms need R&D investment

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Lawyers hardly ever talk about research and development. We might be the only major industry or professional sector that fails to do so.

Last year, total spending on R&D by the world’s 1,000 largest companies was about $638 billion, according to the Strategy& 2013 Global Innovation 1000 Study. The 10 companies that spent the most on R&D (from Volkswagen to Johnson & Johnson) shelled out a little less than $100 billion themselves. Five of the ten companies on that list were in the health-care industry. Typically, businesses invest about 3.5% of their annual revenues on R&D, a measure known as R&D intensity.

The commercial legal market generates something in the range of $300 billion in revenue annually (a figure that comes with some reservations). Applying a normal R&D intensity of 3.5%, we would conclude that law should be spending about $10.5 billion every year on research and development. The AmLaw 100 alone clocked in at around $77.4 billion in revenue, suggesting their R&D spend ought to be $2.7 billion. We all know, of course, that nothing like this is actually happening.

Money was spent on legal R&D in 2013 — but as Susan Hackett pointed out, it wasn’t spent by established by law firms, but by their suppliers and competitors in legal startups. A venture capital investment of $458 million is slightly more than 1% of total legal revenue; it’s not nothing, though it’s not a whole lot more than that. But preliminary estimates suggest 2014 will produce lower levels of outside investment in the legal industry. So if there’s going to be an imminent uptick in legal R&D, it will have to come from lawyers and law firms themselves.

Many lawyers have difficulty seeing how R&D would have any application to their businesses, probably because “R&D” conjures images of scientists and engineers in lab coats, conducting experiments in hopes of discovering some new chemical compound or medical miracle. But research and development is far broader than that: it refers to activities that a business undertakes in the hope they will lead to the development of new (or the improvement of existing) products, services, and procedures. It’s not limited to the scientific or manufacturing sectors at all.

How could a law firm conduct research and development? By considering possible new products and services for its market, or new ways in which its services could be created and delivered. Here are four types of R&D activities that law firms of any size could undertake.

1. New Products And Services: Think about emerging or overlooked possibilities for providing value to your firm’s current or desired markets. Look at it from the perspective of people and businesses within those markets, their needs and opportunities, and consider potential responses or solutions that you could offer. This isn’t a lawyer-centred “business development” exercise; it’s a client-centred “opportunities and solutions” exercise.

2. New Delivery Mechanisms: Brainstorm potential new client service protocols or enforceable firm-wide systems for client interaction. Envision new methods for delivering products and services online, directly over the Net. Could you package your firm’s expertise as an ongoing service? What delivery system changes would enhance the speed and convenience of service for your clients? What do clients wish law firms would change, but never do, about client service?

3. New Pricing Systems: Anything that truly moves your firm away from the billable hour is going to get clients’ attention. Effective pricing involves knowing your client, your competition, and your costs: what projects could acquire this information from the market or dig it up from within your operations? Identify the lawyers, practices, or client relationships most amenable to new pricing arrangements, and start coming up with experiments to try them out. (NB: Your compensation system will be affected, too.)

4. New Management Systems: There’s not a law firm in the world that couldn’t benefit from better processes and management practices. Rethink your assumptions around talent by exploring home-based or mobile workers and project lawyers, or by reconsidering your recruitment and training regimens. Study the potential use of project management on personnel, budgets and timelines. Could you harness your firm’s know-how to improve productivity or create value? Think of ways to reward people for good management.

Earlier this year, at a Legal Marketing Association conference, I delivered (along with Prof. Dan Katz of Michigan State Law’s Reinvent Law Lab) a day-long session on R&D to a group of law firm CMOs. The marketing directors were intrigued by the possibilities of law firm R&D, and in their breakout sessions, they came up with all sorts of great ideas and initiatives that could be planted and could blossom under such a program. 

Evolutionary Road

But when we asked them to identify the internal obstacles to developing an R&D functionality, many CMOs wearily raised the same objection: the partners wouldn’t go for it. Research and development, by its very nature, is an investment in the future, a short-term expense made today in order to generate revenue and sharpen competitiveness in the medium and long term. Many law firm partners, fixated on their annual profits, have no interest in reducing their income today in the hope that their income tomorrow will be multiplied (and that goes double for any partner in his or her last few years of practice).

This is most likely true. And I can’t help but note this reluctance in the context of the growing debate around non-lawyer ownership of law firms. Virtually every company in the Global Innovation 1000 is publicly owned, with shareholders renowned for their insistence on steadily rising value — yet these same shareholders have no difficulty approving the expenditure of millions of dollars annually on R&D initiatives. They’re quite willing to forego some profitability today if it could help sustain and improve the company’s prospects down the road. Yet lawyers, supposedly the guardians of higher-minded professional objectives, prefer to empty the entire piggybank every year rather than divert a few coins to enhance the firm’s long-term competitiveness.

But happily, there are exceptions. Earlier this year, AmLaw 100 firm Akerman LLP announced the launch of an R&D Council, “dedicated to creating new offerings that advance the business of law and redefine service delivery models, jointly helping Akerman and its clients overcome future barriers to innovation and growth.” Akerman has a history of innovation-friendliness, but their efforts here should demonstrate that R&D is neither impossible for nor irrelevant to law firms.

Nor is R&D limited only to large firms. I remember reading (and if I can find the link, will provide better details) about one moderately sized firm that gathered its young associates together, gave them a chunk of non-billable time, and told them to come up with ideas about markets the firm could be serving tomorrow if it started investing the time and effort today. One of the many ideas brainstormed in that session grew to become one of the firm’s top practice areas. That wasn’t a systematic, budgeted and ongoing R&D functionality; but even as an ad hoc event, it demonstrates what can happen when a firm gives its lawyers the permission and the space to be creative about what they do and how they do it.

Law firms probably won’t break the R&D 1000 anytime soon, but they don’t need to, either. Asking every partner in the firm to take 99% or 98% rather than 100% of their annual draw, and putting that money towards a well-funded research and development director who reports progress quarterly to the firm’s management — that might be all it takes to get your firm’s R&D started. And that investment, in turn, might be all that keeps your firm relevant and competitive as the legal market continues to redefine itself in the years to come.

Jordan Furlong is a lawyer, consultant, and legal industry analyst who forecasts the impact of the changing legal market on lawyers, clients, and legal organizations. He has delivered dozens of addresses to law firms, state bars, law societies, law schools, judges, and many others throughout the United States and Canada on the evolution of the legal services marketplace.

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4 Responses to “Why law firms need R&D investment”

  1. Marc Lauritsen

    I guess we shouldn’t rush to dust off our lab coats. But the paucity of R&D investment by law firms doesn’t seem sustainable. If left to lawyer-less competitors, academia, and short-burst hackathons and other ideation events, it won’t tend to favor innovations that enable law practice as presently organized to survive, let alone thrive. I’ve luxuriated for decades in various channels of cutting edge R&D, like the international AI & Law community, and have been astonished how little attention they draw from legal institutions that have a critical stake in following developments there.

  2. James Bliwas

    You identified correctly the issue: Partners not wanting to sacrifice this year’s draw for what may or may not be next year’s payoff. A colleague at a large law firm told me recently about presenting a carefully thought out and researched business development initiative at a practice group meeting, only to hear one lawyer shout back at her, “If this reduces my draw by $2,000 I won’t support it.” His comment was greeted with a lot of affirmative head nodding by the other lawyers around the table.

    What is especially startling is that even when something will pay off within 12 months, many firms and lawyers are reluctant to move forward. For example, very few firms are smart enough to measure the profitability of each client for fear of ruffling a few feathers. In fact, the smart firms that have done this find that it doesn’t mean partners or associates end up being fired; rather, the firm has a much better sense of which clients offer high growth – and higher profit – potential.

    I’ve worked in and with law firms of all sizes since the late 1980s. The amazing thing is that I can recall this same topic as a discussion point at industry meetings and managing partner forums for at least that long.

  3. Patrick J. McKenna

    I’m reminded of at least a dozen different partner retreats wherein I’ve had the opportunity of posing a question to the entire group to respond to, via those little electronic voting machines (look like TV channel changers and allow everyone to cast votes anonymously)

    The question I posed was this one: “How many of you have thought of some new idea, potential new practice niche or some new initiative, that conceivably could generate entirely new revenues for this firm?” Press 1 if YES, 2 if NO.

    The usual affirmative answer that I’ve received from all of these partner retreats is somewhere in the range of a low of: 69% to high of: 83%.

    So, Terrific News – I’ve discovered that you have a good number of potential innovators in most law firms – in that at least 2 out of every 3 of the partners have ideas to generate new revenues!

    Ahh, but there is a follow-up question that I always ask . . . and it goes like this:
    “For those of you that answered yes to that question, how many of you have shared your revenue generating idea with someone in the management of our firm?” Press 1 if YES, 2 If NO.

    And anytime I relate this experience, everybody laughs, because you know the punch line. The answer, unfortunately, is always NO.

    And the question has to be asked – why is it always NO.

    I’ve often joked with firm leaders . . . “Why is it that interesting, seriously “cool” ideas – about new services, new approaches, new methods, new niches, new ways to collaborate DO NOT bubble up with great regularity from every nook and cranny of your firm?”

    And the sad reality is that most firms do not have any formal system to nurture their new ideas and potential new innovations.

    Now, Please notice that I did say “most.” Today, I’m aware of a handful of firms – from a Baltimore-based firm of about 120 attorneys to an international 1200+ lawyer firm who have instituted internal Venture Funds – investment monies in excess of $100,000 made available for lawyers to put forth their ideas and have them encouraged and financed.

    Like most change it’s coming . . . slowly, but coming.

  4. Heather

    I agree that the partnership model prevents adequate investment in new services and products. However, simply switching over to a different model of ownership is insufficient.
    The focus on the billable hour discourages brainstorming of new ideas and does not provide the environment and processes necessary for innovation.

    Established firms with an entrenched culture will have a hard time imposing new processes that facilitate the creation of new services, products, and pricing.

    heatherdouglaslaw.com

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