Innovation, the child of intrinsic motivation

I read with great interest Richard Moorhead’s blog last week entitled “Big Law. New Law. Ethical Risk”.  I want to pick up one theme in my ongoing thesis that the model in which lawyers operate is broken.  It’s the ills of the model and the lack of genuine creativity in fashioning an alternative that are at the root of the travails of struggling law firms.  It may be that economic indicators are more positive as a generalization, but that will be of little comfort to practitioners large and small who face deeper structural challenges.

chitty

I want to play with the concepts of innovation and what it motivates or is motivated by.  The idea that innovation is more likely to result in a greater emphasis on extrinsic motivation or introduce a cavalier risk taking approach to practice is one dimensional.  There is a need to look more broadly at how intrinsic motivation can drive happiness, success and generate greater rewards. Yes,  you read it correctly. I did use the word “happiness” in a blog about lawyers, law firms and structure!  By starting the discussion with a question like “why?” rather than “what?” or “how much?” the parameters for debate change significantly.  A little “why” goes a long way in working out what motivates lawyers (well some of them at least!)

The practice of law is a profession that is, in the views of many lawyers I speak to, akin to a calling.  Granted not all lawyers would believe that there is a higher calling to be a hot shot deal maker as opposed to a champion of human rights.  But that would be to render the argument to a binary form which doesn’t reflect the complex array of reasons why lawyers become lawyers and develop the beliefs they hold.

Innovation is also not binary – by which I mean it is not just about trying something “different” at the expensive of ethical practice.  Innovation can be about the translation of concepts, values, practices, working methods, customs, structures, systems that already exist or that can be adapted from other parts of society.  They need not simply be different for the sake of difference.

Innovation is as much about re-birth as it is about new life.  I believe that there is a movement of change in the practice of law.  A restlessness.  The movement is most obvious from my conversations with “perspirers” and “retirers”.  The former working very hard in a traditional and flawed structure towards the promise of partnership, the latter no longer required as young blood pushes for its share.

Why is it like that?  Why can’t it be different?

The answer seems to lie in the structures within which lawyers practice – the vast majority of which are pyramid-shaped.  That they are this shape is beyond this discussion but the apprenticeship model has a lot to answer for when interpreted into law firms in the 21st Century.  The irony of the Pyramid model is that the risk taken is inversely proportional to the capital invested.  That may be why some perspirers are questioning the value of a partnership which leads to shared liability, financial exposure, decisions made by committees or not made at all and inertia in the face of the need to change – fundamentally change.

There is in addition a growing body of academic work that points to the failure of extrinsic motivation when seeking higher performance (for instance the work of Dr Bernd Irlenbush at the London School of Economics).  The days of the “carrot” and “stick” belong to an industrial age which is now behind us.  The knowledge-based economy is more sophisticated and requires much greater autonomy and self-direction.  In that regard I think lawyers have much to learn from Dan Pink’s now 4 year old, but still very entertaining, lecture on TED “The Puzzle of Motivation”.  A good use of 20 minutes or should I say 4 units!

I encourage a proper debate about the extent to which lawyers and their firms could develop and innovate if they started with “why” and the intrinsic motivation for “going to work every day”.  This could be based around a desire to innovate for the combined good of the lawyer and most importantly their client!

12 Angry Men

What a fabulous movie!  The idea that one can stand up and be counted and persuade eleven.  A great concept.

It got me thinking about, well, the thinking behind law firm structure.  First of all there is a status quo, a way of doing things, an approach to how a law firm should be structured that’s taken for granted.  Sure there are variations on a theme, but that’s all they are – variations.

There is so little choice for lawyers and in any event their training prepares them to follow the narrow routes to practice.  It’s like joining a cult when you leave law school (or maybe when you go to law school).  Without too much difficulty we sleepwalk to tomorrow and don’t stand up for change.

Well – inspired by Henry Fonda’s performance in Twelve Angry Men – it’s time to stand up.  Law is broken, there’s little to choose from variations on a theme.  So let’s start anew and in the words of Abraham Lincoln on the 1 December 1862:

It is not “can any of us imagine better?” but, “can we all do better?” The dogmas of the quiet past, are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise — with the occasion. As our case is new, so we must think anew, and act anew. We must disenthrall ourselves, and then we shall save our country.

Stand up and save our profession – it only takes one.

If you do what you always did, you’ll get what you always got!

 einstein“Insanity: doing the same thing over and over again and expecting different results.”  Albert Einstein

A tough topic for a blog about lawyers.  What’s the connection?

Let me explain.  Let me start with some clues:

  • Halliwells
  • Cobbetts
  • Hill Dickinson
  • Manches

I could go on, but I suspect you are starting to get my drift.  I am thinking about large law firms that have sadly ceased to exist.  They’ve failed to manage cashflow or over-traded or made bad decisions.

There will no doubt be books written and research undertaken around how and why these large professional firms have failed.  No doubt common themes will be sought to rationalize the events and to aid learning.  All very interesting and highly important, but I’m not interested in that.

I am interested in the significant unifying factor that relates to them all.  They all contained bright, capable and successful lawyers.  Be clear – I am talking about legal skills – the ability to solve commercial legal problems.

It’s a shame that excellent practitioners of the law find themselves contained (and I imagine constrained) in flawed structures.

I know lawyers are risk averse.  They advise clients to manage, mitigate or transfer risk and so are not innately attracted to taking risks themselves.  I imagine clever psychologists will tell us that after a shock retreating to the familiar is a well understood reaction.

Well I don’t buy it.  I don’t understand (I won’t understand).  I don’t think bright, articulate capable people are like lemmings.  So why do lawyers from failed law firms seek the shelter of similar firms and structures as a reaction to the challenges they have had to face?

Is it fear of the unknown or perhaps a simple lack of imagination?  Is it that no compelling alternatives exist?

We are constantly bombarded with news of the “perfect storm” facing practitioners and of the arrival of new entrants to the ABS market. So either these new entrants are “not doing it” for lots of the lawyers or the lawyers are lemmings.

A question or two to provoke some reactions.  What does a good business model for a law firm look like?  Might it be built on principles of fairness, control, merit?  Do we need to revisit the “partnership model” and update it for a post-ABS world and if we do what does it look like?

Strength is the outcome of need; security sets a premium on feebleness”H.G. Wells

Are Law Firms Really Time Machines

time machine

Yes and No!

I want to suggest to you that law firms are time machines in one sense, but not in another.  The majority of law firms measure their services using time and build business plans and targets based on time.  The minority are time machines in the HG Wells sense of travelling to the future and then innovating in the present.

Changing Times

All lawyers know that we are in a time of unprecedented change in the legal services sector.  The simple fact is, however, that change is being forced on the profession by external factors – legislation, regulation and economic factors.  The sadness is that change is not, at least in the main, being driven by a profession that is fascinated with innovation.  Lawyers, are we are told, conservative by nature.  That conservatism is no excuse for a lack of innovation.  In all other sectors of the economy innovation is at the heart of the drive to develop, to grow and to succeed.

Let’s look first at where the majority of law firms are right now, before daring to picture a very different future.

Today’s time machines

Today’s law firms are time machines in that their currency is time.  They measure pricing and performance by units of time.  Time is even a reference point when fixed pricing is adopted.

There is nothing inherently wrong with a professional charging for their input or service by reference to the time spent.  Naturally, there are the issues of efficiency and experience which have a bearing on whether measuring service and value by time spent is the most appropriate mechanism. There is a real danger that in the modern climate, with talk of the demise of the hourly rate, that law firms wanting to be modern and different will ditch this tried and tested pricing tool.  That would be a mistake. Pricing according to time spent is one method of determining value that should be used when appropriate to the circumstances, it’s just not the only one.  It’s also not the basis for building a business plan for a modern law firm.

So, the real issue is not with time as the measure of price and performance.  The central question is with the business model that is operated by law firms.

Law firms need to change to become law businesses.  This does not mean the end of professional standards, independent advice, integrity and other important qualities that lawyers (and their clients) value.  Law and the provision of legal advice is about service delivery.  It is about solving problems, by the application of a particular tool kit – in this case the legal toolkit.  It is not about time at all.  Clients don’t buy time – they buy results.

So at the moment law firms are, in the main and despite what many will assert, still time machines in that they measure their services by units, minutes and hours.

What they are not is time machines in the HG Wells sense – travelling to the future and returning to the present to innovate towards that future.  My argument is that for too long there has been no reason to change and so lawyers have not changed.  But now there are multiple drivers for change that are irresistible it should come as no surprise that many lawyers – even those who are prepared to embrace change – do not have the skills to implement it.  They have accepted the “why”, they may even have ideas about the “what”, but they don’t have the skills to deliver the “how”.

HG Wells Calling

A modern legal advisory business that you might visit in a time machine set to 2020 should look very different.  It’s business model will have been constructed with a different mindset.  Sophisticated business people see legal services as one of a number of tools available to them to help them to work on, and in, their businesses.  So in delivering a legal service we need to make sure we have the right tools for the job and make them available to the clients in the right way, at the right time, with the right price, quality and most importantly result or outcome.  To labour the analogy people buying drills in a DIY store are not really buying the drill they are buying holes – the result.  Trite maybe, but if lawyers approached every client engagement like that the results would be amazing.

Working with a client to understand the business outcome and then to interpret this into a packaged solution, competitively priced and which delivers a profit for the law firm is not easy.  It brings together a range of skills that are themselves professional disciplines.

If that is the case why expect the lawyer to do all of these things?  Why not assemble within law businesses the different skills sets required to deliver the client outcomes?  Why not accept that lawyers are themselves highly skilled technicians and use those skills in the right places within the service delivery to the client?  Why not package the service solution in a way that brings together the fruits of the collaboration I have described?

So a 2020 model law firm might have the following features:

  • A central service hub that manages and controls service delivery to clients by a range of professionals
  • Some specialist, highly technical lawyers (even offering advice on hourly rates in some cases);
  • Programme and Project Managers
  • Customer Relationship Managers
  • Sales Managers
  • Process Designers
  • Procurement Experts
  • Relationships with offshore or outsourced service providers
  • Flexible resourcing
  • Flexible premises

Imagine a world in which a client was visited by a Programme Director and a Lawyer from a law firm.  A consultancy process would follow.  The client would be lead through a “factfinding process”  that would allow an understanding of the issue and most importantly the client’s objective and reasons for seeking that objective.  The Lawyer, skilled at interpreting the legal issues, would work alongside the Programme Director to build a process that would deliver the client’s objective – the business result required.  A project team would then be assembled across disciplines, not just across practice areas as happens today.

Through collaborative working in a project lead by project managers the legal toolkit deployed by the project would work alongside the other commercial areas within the client in a multi-disciplinary team delivering a connected business outcome.

That business outcome delivered at a price that was highly competitive but was still profitable for our 2020 law firm with its flexible business model.

This model and process is, of course, just a thought starter and is designed to provoke discussion….but what if it worked?

The Challenge of “who” and “how”

Richard Susskind in his recent book “Tomorrow’s Lawyers” has repeated his previous suggestion that the solution to legal issues comes in “multi-sourcing”.  This approach has much to recommend it.  There remain a number of questions.  These are how do clients source, assess and select providers of multi-sourced solutions?  If not clients then how do law firms do this for their clients?

Lawyers are not equipped through their training or practice to be process engineers and solution designers.  That is not to say they are not capable of developing these skills.  Clearly some will have more interest and aptitude than others.

Learning to be time travellers

There are so many consequences that would flow from building a law business like the one described here and they can’t all be discussed here.

Law firm models need to change, they can’t do this overnight.  But practices (not businesses) that run on overdrafts and are not themselves inherently profitable and which have no retained profits or reserves are standing on burning platforms.

The point is that if lawyers don’t shrug off the cloak of conservatism and take a ride on the time machine to a vision of an innovative future they will be overtaken by events.  There is still time to change, but the time is now.  This is the time when winners will be born.

Damages Based Agreements: A Capital Idea

money pile

April Fools’ Day 2013 sees the arrival onto the changing legal landscape of Damages Based Agreements (“DBAs”).  In simplistic terms these allow lawyers to enter into arrangements with their clients that result in the client not paying legal fees during a piece of litigation, but which offer the lawyer an agreed percentage of damages on a successful outcome (in commercial litigation up to 50%).

These arrangements offer enterprising law firms the chance to recover something approaching a “value based” reward for their efforts, but the risks are also obvious.

I want to focus here on two forms of capital – first capacity and then capability – essential for law firms to play in the DBA market that will emerge in post April 2013.

Mind the gap

The capacity of a law firm to engage in DBAs in litigation cases will to a large extent be determined by its financial strength and access to capital.  The demise of some large law firms like Halliwells and Cobbetts has demonstrated that even these big practices are financially vulnerable.  Financial management is critical in any business, but more so in a business that is engaged in delayed gratification.

So how will law firms manage with the shortfall in cashflow while waiting for the eagerly anticipated victory in a DBA case or better still its portfolio of DBA cases?

The answer lies in the financial engineering and management of the law firm.   It’s inevitable that firms on low profit margins with weak balance sheets are going to struggle to play in the DBA space.  The opportunity seems far richer for those who have already recognised the fundamental need to change the shape, business model, cost base and indeed the very business of the law firm.  If the client is not paying profit costs for the duration of the DBA-funded case the need to bear down on costs through the use of technology, lower operating costs and a more flexible cost base will be the priority.  So I return to my soapbox about the need for law firms to change and suggest that they accept the challenge from Alan Kay who said “the best way to predict the future is to invent it”.

But the process of re-invention will not happen overnight and so there is likely to be a funding gap between the current state business model of a law firm and the desired future state.  Of course this is the stuff of the management consultant working with its client – the determination of the desired objective or outcome, the understanding of the present position and the acceptance of the resources needed to make and survive the change process.

There are well known sources of capital in the shape of banks and of course the partners of the firm.  Litigation funders have also begun to throw their hats into the ring.  The latter not just in funding cases but also in considering funding firms with cases.  It remains to be seen whether other financial products will emerge to securitise the bets placed by lawyers.

Getting the right people on the bus

The second significant consideration that falls from the recognition of the capacity challenge is to assess the capability of the firm to deliver owners returns on capital through DBAs.

Lawyers are generally intellectually able, but this does not of itself deliver the expertise and experience that will be needed to manage a DBA litigation portfolio.  I guess what I am saying is that lawyers are not financial engineers, they are not asset or fund managers.  In addition, the law firm failures point to the potential absence of “proper” risk management within law firms or as a core competency in their business planning processes.

I suggest that considering behaviours in other markets might assist lawyers in determining what capability they have and what they need to get.  DBAs appear to me to be a simple investment proposition.  The underlying asset is the claim itself and the price of achieving the return on the asset is the costs to run the litigation.  The role of the lawyer is to assess the merits of the claim and then through skill and experience to maximise the return for the client using the litigation process as the toolkit.  But the DBA requires a further range of skills in origination, finance and risk management.  Read across then to the world of the investment fund manager.  At the high level they are considering countries or asset types or both; considering likely future performance and return on investment; assessing risk at macro and micro economic levels and then forming a balanced view to assist in decision-making on what to buy, hold and sell.  I suggest that the skill set of asset managers will be needed within law firms to consider and determine the portfolio mix by type, claim size, costs and expected duration.

An investment management committee might be a useful way of applying firm wide discipline, control and management to DBA’s.  Such a committee would bring together litigators with finance managers and risk managers within law firms, but importantly would add in asset managers – collectively mandated to have the ultimate decision on which cases to undertake on DBAs.

Perhaps there is also a deeper linkage that could be developed here.  Funds investing in law firms that do DBAs placing their fund managers on the investment committee to assist in decision-making.  Not only a skill set but a potential source of funds in much the same way as a private equity investor puts some of its team on the board of its investments.

It seems at least sensible for law firms intending to offer DBAs to consider how they will decide which cases to back with DBAs, how they will capitalise to sustain themselves in the leaner times, how they will satisfy the SRA that they have adequate capital or access to adequate capital.  More importantly than all these considerations how will they satisfy their owners that they have robust disciplines in place in relation to DBAs.

SRA meet FSA

I have referred above to the adequacy of capital.  Law firms are under an obligation to run their businesses “effectively and in accordance with proper governance and sound financial and risk management principles” (Mandatory Principle 8 of the SRA Code of Conduct 2011).  Look across again at the world of financial services, which after all experienced outcomes-focussed regulation before its migration to legal services.  The FSA’s approach to stability in financial services calls for businesses to maintain reserves of “ring-fenced” capital to satisfy regulators of their ability to “weather storms”.  Only yesterday  (27 February 2013) Lord Turner, chairman of the FSA announced that such capital requirements applied to banks would in future differentiate existing players from new entrants or so called “challengers”.  Now imagine two things – the first a requirement for law firms engaged in certain activities – say betting on litigation, deferred gratification or DBAs or call it what you will – be required to hold capital to satisfy SRA of their stability and prudence and to demonstrate in a tangible way their compliance with Principle 8.  Then go on to imagine that in some way challenger new market entrants experienced lower capital hurdles.  Is it so unimaginable when we look at the implications of DBAs and the weakness of firms of all sizes?  One could argue that new challengers come to the market with an inherent advantage in the absence of legacy systems and out-dated thinking, but to add lower costs of capital would generate some heated debate!

There’s gold in them there hills

So DBAs are not for the faint-hearted firm.  Leaders need to satisfy themselves that in financial and human capital in the shape of both capacity and capability before taking a decision to enter the world of the investment banker.

Owners, investors, partners, regulators and most importantly clients should demand that firms undertaking DBAs can demonstrate they have the processes, people and capital essential to win in the DBA market.  For those that can it won’t be fools’ gold.