How can a law firm, which is essentially a collection of several smaller businesses, successfully innovate, when everyone is running their own business?
Organizational structure is widely acknowledged as a key factor in determining companies’ ability to innovate. Some of the most innovative organizations in the world, such as Google and Tesla Motors, have delivered impressive innovation for years based on flat company structures and shared targets.
Law firms currently employ a different approach by operating within an organizational matrix where each business unit is controlled by individual partners. Essentially, a law firm is an agglomerate of several smaller businesses all operating under one roof. So how can a law firm successfully innovate, when everyone is running their own little business?
Law Firm Structures
Today, law firms are basically structured the same way as they were more than 100 years ago. The partnership structure was initially based on the philosophy that it is more efficient to conduct business as a group of lawyers acting as one entity, rather than working alone.
Essentially, a law firm is an agglomerate of several smaller businesses all operating under one roof. So how can a law firm successfully innovate, when everyone is running their own little business?
Realizing the need to innovate, larger law firms have recently begun incorporating business development units in their organizational matrix, in an effort to build innovative capabilities within the firm. Midsize law firms rarely have the resources to do so, which means that these firms have to build innovative capabilities among their lawyers. But in order to do so, they have to realize the need to innovate and understand the challenges they are facing.
Challenges to Innovation
The following three central challenges are related to the organizational structure and business model of the average midsize law firm:
1. Individualistic Business Approach
It is in the nature of law firms, that all partners are associated with a certain practice area for which they are partly or fully responsible. This business model has proven successful for decades, but in combination with a generally high level of resistance to change among lawyers, telling them to change the way in which they manage their specific practice area, risks being interpreted as an insult to their professionalism. This can in turn make them even more resistant to change and less motivated to embrace the concept of innovation.
2. Compensation Incentives
One of the most debated topics when discussing law firm innovation is the billable hours model. The most central arguments for why this is a major barrier for innovation, is that as long as you are billing based on the number of hours you work on a case, increasing your efficiency will cannibalize your total earnings. Furthermore, in the billable hours’ model, spending time on innovative efforts will be regarded as doing nothing of value, since you won’t be able to charge any client for the work you do.
3. Management Structures
Whenever strategic decisions to allocate resources to innovative efforts needs to be made, equity partners will have to agree to get a smaller equity share in order to invest in future earnings. This poses several challenges as some partners are reluctant to give up short-term earnings in order to gain potential higher earnings in the future. On top of this is the embedded reluctance to change the company culture, which also has a major influence at the management level, creating both economic and personal reluctance to change.
Organizational Incorporation of Innovation
To combat these challenges, law firms need to find a lever for innovation, such a group of individuals who desire to pursue the same goals in order to effectively change the way they do business. To do so, law firms needs to overcome their internal challenges to innovation. Shared targets and teamwork must be preferred over individual business incentive structures, and partners need to agree upon investing in the future.
A proven model for increasing teamwork efforts in law firms is the lockstep model. This model has been adopted in larger law firms such as the U.K.’s Slaughter & May and Denmark’s Bech-Bruun where the focus has been moved from individual earnings and My clients, to total earnings and Our clients. The lockstep model could perfectly well be accompanied by a designated team of people responsible for innovation in the law firm. This team should be comprised of dominant partners and employees with business acumen beyond that of lawyers. This team should work across practice areas and functions as a separate division within the organizational matrix.
Finally, a process for innovation should be established and driven by the team, and resources should be allocated to this. By incorporating the lockstep model, individualism can be reduced and economic incentive to innovate can be established. With the involvement of dominant partners, the willingness to innovate in the organization is demonstrated in a powerful way along with the willingness to secure resource allocated to ramping up innovation efforts.
In this way, innovation can simply secure the long-term survival of midsize law firms.