Why law firms need R&D investment

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Posted in: Innovation, Management, Research

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. [do_widget id=”text-7″ title=false]

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.

Staff cuts and short-term thinking

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Posted in: Management, Recession, Research

That sound you hear is the rapidly accelerating crash of dominoes. The mainstream legal media is tracking, body blow by body blow, the shocking personnel reductions taking place at law firms throughout the US and UK. One after another, firms are laying off employees, and it seems each firm’s announcement gives three others the confidence to go ahead and announce their own. I’ll be exploring this in greater depth in a post early next week, but for now, I wanted to point out an interesting subtext in all these cuts: the extraordinarily high rate of staff-alone layoffs.

It’s not just that firms firing lawyers are also firing two to three times as many non-lawyers; an unusual number of firms are firing only staff. Here are just some of the staff-alone cuts reported in the last couple of months: 9 at Squire Sanders, 14 at Ice Miller, 20 at Moore & Van Allen, up to 25 at Buchanan Ingersoll, 30 at Fish & Richardson, 36 at Fenwick & West, 38 at Cassels Brock & Blackwell, 40 at Goulston & Storrs, 60 at Edwards Angell Palmer & Dodge, 65 at Akin Gump, 72 at Dechert, and an astonishing 106 at Ropes & Gray and 115 at Reed Smith. Remember, these aren’t part and parcel of bigger, organization-wide cuts — each of these firms let go of staff, but no lawyers.

The official reason for these layoffs, of course, is the recession, though the actual causes and motivations will vary from firm to firm. But a staff cut without a corresponding lawyer reduction is a little odd. If a firm chops 30 or 40 associates, you expect to see another 60 to 90 staff go with them, on the theory that these support staff no longer have lawyers to support. So what does it mean when a firm jettisons scores of staff members but leaves the lawyers untouched? Beyond the well-known fact that many firms view and treat their staff the same way golf and country clubs do?

One possibility is that firms have to cut fixed personnel expenses somewhere, but they fear the recruitment black eye that comes from associate layoffs and the seismic impact of partner cuts, so it’s the secretaries, paralegals, IT and marketing people who get the heave. Another is that these firms were overstaffed to begin with, not an unreasonable guess — everyone was living large in the recent boom times, and if a one-to-one ratio of lawyers to assistants made some of the fee earners happy, it was all worthwhile. A darker possibility — that associates are keeping the administrative tasks to themselves to maintain their billable hour totals, depriving assistants of work — is all too likely.

It’s also very likely that in many of these cases, the firms either don’t realize or don’t care about the negative effects of deep, across-the-board staff cuts. Aside from the damage to morale, chopping people in key areas like marketing is just foolish, a reflection of the belief that marketing is a cost center, not an essential element of the firm’s business model. Ron Friedmann rightly points out, in two recent posts, that indiscriminate staff cuts reflect the fact that the “firm has no idea what support is really required. Evenly distributed cuts imply that rational decisions were made in the past, that support needs remain constant over time in spite of the march of technology, and that wild gyrations in practice group revenue have no impact on support needs.”

It looks like many firms are missing an opportunity here to carefully and intelligently review their support needs and re-engineer both their personnel and their infrastructure investment accordingly. Simply cutting staff jobs provides only a short-term bottom-line assist while creating many other short- and long-term problems, whereas a more creative approach could both save money and improve the firm’s operations at the same time. Here are just a few possibilities:

  • Equip every lawyer with voice-recognition software, so that memos and messages need no longer be dictated or even typed out. Ditto for real-time docketing and billing programs.
  • Get lawyers blogging about their areas of practice, the release of relevant decisions, changes to applicable laws, and more — instruct them in 21st-century personal marketing.
  • Outsource or offshore functions like human resources, IT or even research and other quasi-legal tasks — firms have already done this, from West Virginia to India.
  • Then, save jobs through upsizing: convert legal secretaries to workflow managers, specialize assistants by assigning them to practice groups, train marketers to conduct client meetings and do cross-selling — basically, give your non-lawyer employees the chance to show what else and what more they can do for you, rather than automatically putting them first in line on the chopping block.

There’s a better way to cut costs than simply throwing staff overboard while keeping lawyers around — all it requires is a little more ingenuity, far-sightedness and courage than law firms are used to showing. And as 2009 unfolds, we’re going to see all three of these traits evolve from nice-to-haves to full-scale survival skills.

Crowdsourcing legal research

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Posted in: Collaboration, Innovation, Research

A terrific discussion is underway at SLAW, prompted by news of a new Canadian online research service, about the future of commercial legal databases. Ever since the LII system (Legal Information Institute) got rolling, the writing has been on the wall for fee-based online caselaw databases — how much longer can you charge a price for what a competitor is giving away free?

The answer lies in value-add, which is where I think the really interesting developments will emerge. What will be the killer app for online legal research? At SLAW, Wendy suggests commentary and analysis, Laurel recommends a winnowing function, and Simon C suggests citation frequency tracking — all excellent ideas that an enterprising database provider should move on right now.

My contribution is the idea of a Digg-like function that would allow those viewing a case to determine how helpful it had been to previous readers in a given subject area. It would harness the wisdom of crowds to help determine what is and isn’t an important case. It could adopt the simple Digg click approach, or the slightly more detailed Amazon “Was this review helpful to you?” five-star format, to let users signal whether a given case is worth future researchers’ time. It’s not that far off from the old library rule that a well-worn book with marked pages and wrinkled binding shows its heavy use and utility to those who have come before.

But what I especially find appealing about this idea is that it would help bring about the democratization of caselaw selection. During my time as editor of The Lawyers Weekly, I discovered something important about front-page news: it’s arbitrary. As a news consumer, I had accepted the unspoken presumption that what a newspaper placed on its front page, above the fold, was the most important news of the day. Then I was put in charge of choosing what would run above-the-fold-on-front. I chose front-page stories, and cases to be reported on, for a variety of reasons, and precedential significance was only one of them. Take a look at your local paper for confirmation that what’s on top of page one isn’t what you’d necessarily agree is the top story. Ditto for what leads off the newscast, local or CNN.

The same goes for the printed law reports that all of us (save the newest arrivals to the profession) grew up with. Who decides what gets reported and what doesn’t? One person, or a small handful of people, who may or may not have viewpoints, interests or biases that affect their choices. With every case now online, and tagging systems increasingly sophisticated, there’s no reason to keep assigning the editorial function to an elite few. The crowdsourced approach to online caselaw rating allows the entire legal community to weigh in on whether a given decision is important, and why. Given the choice between the expert and the crowd, I’d like to hear from the crowd.

It’s the natural next step towards an overall collaborative approach to legal research. Thanks to JD Supra, we can already see what a collaborative precedent and document database looks like. What will come next? Collective annotation of key statutes through a wiki? A multiplicity of online law reviews like The Court? More law school case summary services like Twistlaw? The discussion about the future of legal research won’t center around the commercial providers much longer. It will center around which free, collaborative sites create the best ways for lawyers and legal professionals to collectively improve everyone’s ability to find the legal information they need.