Innovation, Effectiveness and Efficiency

Until January 2012 the legal sector was protected to a degree by the regulatory framework which prevented non-lawyers from entering the market, and had the by-product of holding back innovation.

Since then the regulatory barriers have been lowered and the legal market, and legal business management, are becoming more similar to other sectors.

Essential Innovation - Drucker in the Legal Sector

In these circumstances innovation becomes essential. I had the good fortune to chair a Law Society conference on innovation earlier this month and, whilst reading around the subject, revisited the works of Peter Drucker - including the following quote, which feels very close to the bone.

“The people who work within these industries .. know that there are basic flaws. But they are almost forced to ignore them and to concentrate instead on patching here, improving there, fighting the fire or caulking that crack. They are thus unable to take the innovation seriously, let alone to try to compete with it. They do not, as a rule, even notice it until it has grown so big as to encroach on their industry or service, by which time it has become irreversible. In the meantime, the innovators have the field to themselves.” - Peter F. Drucker, Innovation and Entrepreneurship: Practice and Principles.

I was further reminded of the relevance of Drucker’s work in an excellent article by Patrick McKenna and Ed Reeser. They start by quoting Drucker’s maxim that “Efficiency is doing the thing right. Effectiveness is doing the right thing” and go on to highlight four areas where firms are currently focusing attention on efficiency, perhaps to the exclusion of effectiveness.

Of course this does not mean that firms should ignore efficiency, and anyone who is outside the top quartile when compared to sector benchmarks has little option if they wish to stay in the game but to improve their efficiency rapidly - but at best it is a necessary condition for survival, not a sufficient one. As our article on the impact of technology in knowledge industries acknowledges, there are some megatrends firms need to address. We have written on previous occasions of the market dynamics that are likely to lead to the UK legal market splitting into a number of recognisable sectors.

The Gastric Band

The top end can be expected to prosper with UK firms retaining global leadership positions, while a vibrant and innovative mass-market, particularly for consumers, will emerge with technology to the fore (and a consequent need for funding and investment). In the middle ground there is likely to be a formidable squeeze, which we have termed ‘the Gastric Band’, in which firms will have to be both efficient and effective. We see the growth of niche specialists in a variety of areas as part of the answer - including not only firms specialising in a particular area of law, but firms that specialise in serving a very discrete and recognisable client base.

Successful firms will have to achieve a delicate balance - they must relentlessly drive out any unwarranted costs, but very few will be able to justify the levels of investment that will make them the lowest cost producers - so they will have to offer something that can justify an element of price premium. For most firms operating in the Private Client or owner-managed business sector this will have to be based on developing a relationship that the client values. In particular, firms and individual fee earners will need to focus on the art of conversation. Time will need to be built into standard processes to allow for the kind of human interactions that will make a client pay more for services because they feel that you care. This is not about improving the measurable service quality, such as speed of response, as these things are increasingly taken as a given - it is about creating the intangible feeling in the client that they really matter to you, so that you can matter to them. The Australian dentist and business author Paddi Lund terms these attributes as “Critical Non-Essentials”.

The problem for many firms is that, to quote Peter Drucker again “People in any organization are always attached to the obsolete - the things that once were productive and no longer are.”

Unfortunately, the list of people with these attachments often includes many of the senior decision-makers who have been used to operating in the comparatively protected markets where the only competition was from like-minded lawyers. However, the UK legal market has been opened up to external competition and open markets can be very unforgiving, so effectiveness and innovation are now even more important than efficiency. New skills and approaches will be needed, but the rewards for the courage to innovate could be considerable indeed.