by Michael J. Anderson

When law firms finally realize that they are falling behind (minimal or non-existent profit growth, lower margins and/or declining market share), the first knee jerk reaction is to reduce costs and start to restructure. In law firms that usually means laying off associates and staff.

It wasn't that long ago that solid, major companies like IBM could expect to grow and prosper by simply by maintaining a steady as she goes approach because they had proprietary software that kept their clients locked into their hardware. Change occurred very slowly back then in the dark ages. We all know that the last twenty years has seen that incredible change has overtaken every industry. For years change was slow with companies like IBM or TWA or Xerox. Now look at them. What happened was that they were sluggish in realizing that the terrain changed shape faster than they could change their basic concepts, technologies and marketing definitions.

When law firms finally realize that they are falling behind (minimal or non-existent profit growth, lower margins and/or declining market share), the first knee jerk reaction is to reduce costs and start to restructure. In law firms that usually means laying off associates and staff. The sad thinking seems to be that since there is little chance that we can increase the total number of billable hours, we had better share those hours among fewer people and those people should be the owners. For some strange reason we choose to keep the people who cost us the most and let go those who cost less and who will provide a better long term and short term future for the firm.

The inevitable result of this kind of downsizing is a huge loss of employee morale. We keep telling employees, especially new recruits, that they are most valuable asset of our firm but then we treat them as the most expendable instead. That reaction to a downturn makes recovery even harder.

At best, this type of restructuring just buys a little time. It will usually not have any lasting effect on profitability. A study of large US corporations documented in the Wall Street Journal show that restructuring caused share prices to rise at first but, within three years, those same share prices were even further behind their industry growth rates than before they restructured. Some people even believe that when a company announces a restructuring, they should sell the shares rather than the common belief that this is a good time to buy them.

Don't get me wrong. There is a constant need, in good times as well as challenging times, to fine tune the operations of any law firm and small continual restructurings are a way of doing that. It is when restructuring becomes the primary strategy of the firm's management that we have started down the slippery slope to ever worsening profitability. The next step is to start making up all of the excuses as to why your partners will be earning a lot less in the coming year. Of course, the step after that is when your partners change the management group.

The usual second knee jerk response to a downturn in profits is to re-engineer the firm. Cut less profitable work, streamline our systems, improve client satisfaction, deliver greater value and quality and do all of these things in a short time. With re-engineering there is more hope of improvement than with restructuring. In both cases the firm gets smaller but with re-engineering, there is hope that we will also get better.

Again, re-engineering should be part of a constant strategy in both good and tough times. It is necessary to catch up with the industry. However that still won't make you a leader. Reorganizing and restructuring are ultimately dead ends.

It is now time for re-invention, innovation and a revolution in your strategic thinking. It is not What is everyone else doing? but rather, What can we do to set ourselves apart from the market? How will we become the leaders of our industry within our markets and consequently how will we improve our profitability?

Painters like Picasso, Pollack, Renoir and Warhol used their imaginations to create distinctive and new styles in art. Each also generated a large number of copy cats who, while some of them may have been successful, the copyists never reached the pinnacles that these great artists achieved through their innovation and imagination. In the legal business, what sets leaders apart from laggards is the ability to be uniquely innovative. And the courage to be first.

The competition in the future will be won by those who create and those who dominate emerging opportunities -- stake out the new spaces.

We are at the beginning of a revolution that goes far beyond, but impacts, the legal industry. There will be an environmental revolution, a genetic revolution, a digital revolution, a communications revolution and an information revolution. Each of these areas will offer great opportunities for those firms who are the first movers, the leaders. The existing industries that we now serve like health care, telecommunications, banking and retailing will all be profoundly changed in the very near future. Are you ready?

In the future, most of the industries that we will be serving will be global in nature while many law firms are presently local, regional or national but very few are global. Again, are you ready?

To compete in the future Managing Partners and Executive Committees will have to understand how competition will be different from today's competition. Those who only think in terms of current clients, current practice areas, current manpower, current technology and current competition will be in for a rude awakening when their partner compensation drops dramatically because they didn't keep up, let alone lead.

Question: What do these entities have in common?

Southwest Airlines

Dell Computers

Baker & McKenzie

Charles Schwab

Wal-Mart

Answer: They are all firms that changed their entire industries by being innovators. They all came up with a new way of doing business in their particular sectors and I am sure that you can think of many other companies that could be included in this list.

Discount airlines took on a whole new meaning when Southwest Airlines developed their system for airline passenger travel with no advance seating, no meals, and adding some fun.

Dell was one of the first to develop customized personal computers that could be ordered over the telephone or through the Internet and delivered within days.

Baker & McKenzie was the first real world wide law firm with offices in almost every major country in the world.

Charles Schwab created the phenomenon of discount brokers by doing away with analysts and commissioned salespeople.

Wal-Mart developed discount department stores that were all located outside of major cities.

Because Edge International has dealt with almost 1,000 law firms all over the world, we are often asked, Given that it is not our training or natural inclination to move very far from precedent and tradition and because we are much more comfortable being risk identifiers than being risk takers, how do we get our lawyers to start thinking in a more innovative way?

Well, the question is not a simple one and the answer has many facets, but it is safe to say that for a firm to create an innovative atmosphere, the initiative must start at the top. Most long term thinking in law firms must be done by the Managing Partner and/or the Executive Committee because our partners are too busy dealing with the day to day struggles. To determine whether your firm is already innovative, you might start with a series of questions:

• Does the Executive Committee have a clear and broadly shared vision of where the legal industry will be in five or ten years time?
• In our markets, does our firm regularly define new ways of doing business, developing new capabilities, introducing new practice areas and setting new levels of client satisfaction?
• Is the Executive Committee aware of new and unconventional forms of competition on the horizon?

Are we driving change in our legal market or are we only reacting to our competition? Do we lead or do we follow?

After exploring the vision of the Executive Committee, you may well wish to take the pulse of the partners as to their perception of the firm as innovators. A survey would probably go a long way to telling you what your partners really think. And no, you really don't know what they are thinking, you just think that you do.

A survey might include questions like:

• How prominently should innovation rank in our mission statement?
• In our firm, is innovation widely regarded as a critical competitive advantage?
• What percentage of our partners have had any innovation or entrepreneurial training?
• Is innovation recognized and rewarded in our firm?
• How much of our practice group plans deal with innovation?
• Is it unusual for a particular partner to be significantly and financially rewarded for a particular instance of innovation?
• Does the firm have a formal innovation process? Is innovation encouraged? What does an individual do when they have an innovative idea and does the firm fund the experiment in any way?

If your firm is like most that we see, you will probably discover that everyone thinks that innovation is important, that there is very little of it being done and that there is no generally acknowledged process to follow when you have an innovative idea.

A second step would be to ask a series of questions of your partners that will give you a sense of what your capabilities are and which areas need to be addressed. This should probably be done in a retreat setting with generous amounts of time available for discussion. Some examples follow and each question should be answered in two ways, being a.) the relative importance (needed to play, needed to compete and needed to win) and b.) our current status (worse than our competition, as good as our competition and better than our competition)

• Do we really differentiate ourselves from our competition?
• Do we have strong name recognition?
• Are we good at identifying and establishing new areas of law?
• How good are we at identifying and abandoning marginal practice areas?
• Are we aware of trends in the industries that we serve?
• Are we perceived as providing real value to our clients above and beyond what they would have expected?
• Do we constantly ask clients about their future needs?
• Have we developed target lists of both clients and industries that we would like to serve?
• Are we maximizing technology to deliver our legal services?
• Do we have substantive knowledge that could be packaged for clients?
• Are there ancillary businesses that we could create?
• Do we know what our growth options are and are we aggressively pursuing them?
• Are we developing industry and client groups that cross all practice areas?

With the results of questions like those exampled above in hand, break out into small work groups that will then identify several things that we can do right now to improve and several things that should be longer term goals.

Another workshop concept would be to assign industries to each break out group and ask them to report back to the combined group what they would do to be innovators in that industry. An example might be the hotel industry and an innovation might be to rent rooms on a 24 hour basis (i.e. check out time is 24 hours after check in, not arbitrarily noon of the following day - much like the car rental industry).

The second break out session would be to have the same groups then identify actions they can take to get to know these industries better, discuss how to communicate their willingness to be innovators to that industry and to create a target list of potential clients and assign marketing to those clients to individual partners.

In both of these cases, the results should be goals that require the individuals, the group and the firm to stretch. A firm's innovation strategy should be an ambition that stretches far beyond the normal or past capabilities of the firm.

A goal for firms that choose to become innovators should be the creation of research and development as a part of the firm culture which identifies who will do what research and how the firm will support them. Some firms have created an innovation fund that sets aside a portion of profits to be used solely for continued innovation research and trials. Most industries spend 5 to 10 percent of their gross revenues on research and development and most law firms spend nothing.

Becoming an innovation firm is not easy. It must be done in a step by step basis and the key to moving ahead is to just get started. As our friend David Maister is fond of saying, Don't look at the entire diet process because it is too daunting. Pick a small first step, complete that and then pick a second step and so on.

And yes, you will have partners who will be enemies of innovation for many diverse reasons. Some of them are empire builders and see this as a threat to their control, others have narrow minds and a real fear of change and still others will want to concentrate on income before investment (let's just make as much money now with what we know rather than invest in creating an even more profitable firm in the future).

We all know that the only constant in the legal industry today is change. Firms that don't recognize that are doomed, firms that change with the times will survive and firms that innovate will prosper. What kind of firm do you want to be?

Michael J. Anderson is a principal of Edge International, a global firm consulting to the legal industry.
He can be reached at 800-283-0150 or at anderson@edge.ai