Federalism & Foundations

This article first appeared in AmLaw Tech, March 2003 and served as the basis for a presentation at the Cap Gemini Ernst & Young Center for Business Innovation forum on “Can professional service firms innovate fast enough to keep up with their clients,” Cambridge, Mass, December 2002)

ABSTRACT: An article that proposes a model — a combination of federalism and foundations — that law firms might adopt to encourage continuous innovation. Firms can behave like grant-making foundations and budget money specifically for innovation. Practices can behave like states, proposing innovations that best meet their “local” conditions and competing like grantees for scarce funds. Innovations that work for one practice can be replicated in others.

Until recently, large law firms focused their technology efforts on building computer infrastructure. Now most firms see infrastructure and upgrade decisions as tactical. The strategic focus has shifted to the use of technology in order to gain competitive advantage. Most firms post some useful content on their public Web sites; many host extranets to share documents or billing data; some send e-mail alerts about legal developments; and a few offer interactive legal or compliance training services.

Since innovations can be copied, keeping a competitive advantage requires ongoing change. This article proposes a model — a combination of federalism and foundations — that firms might adopt to encourage continuous innovation. Firms can behave like grant-making foundations and budget money specifically for innovation. Practices can behave like states, proposing innovations that best meet their “local” conditions and competing like grantees for scarce funds. Innovations that work for one practice can be replicated in others.

Law firm technology initiatives often fail for two primary reasons. Firms don’t know how to measure the impact of investments, and lawyers often don’t use what is built for them. This model seeks to address those failings.

Companies sometimes overinvest because they do not know what customers want. For example, in the era of regulation, airlines could not compete on price nor freely change schedules and routes. So they set themselves apart in other ways — with fancy flight attendant uniforms, for example. After deregulation, some airlines continued investing in uniforms or other nonessentials. Those investments were a waste. Passengers were interested in price, flight frequency and convenient connections, not minor, nonessential attributes.

Law firms make the same mistake. For example, 10 years ago one firm spent heavily to develop its own advanced litigation support system to manage documents in the discovery process. The system worked well, and the firm’s lawyers liked and used it. Efficiency and effectiveness notwithstanding, the firm failed to gain any client benefit. Eventually the reason emerged: While clients penalized firms for litigation support problems such as privilege mistakes or cost overruns, they did not reward firms for outstanding litigation support.

Once basic computing needs are met, businesses should generally innovate and invest in those areas customers care about, and not in cul-de-sacs that don’t lead to greater client satisfaction. Firms should be reasonably sure that their clients have an interest in technology initiatives aimed at them. It may be impossible to measure the benefits precisely, but firms at least need to sound their clients out about whether a technology investment makes sense. Without at least a crude ability to gauge results, firms cannot determine whether innovation is working and the investment paying off.

Some innovation and investment is meant to improve internal efficiency rather than client service (a firm may try, for example, to increase lawyer utilization with capacity management software). For those projects, firms need to know that the money is well spent.

There is another reason for overinvestment. Firms fail to understand what lawyers and staff want and will use. The best example may be customer relationship management systems. Many firms have made heavy investments in this tool, only to discover that lawyers do not use it.

The world is moving from a “push” to a “pull” approach, and many firms do not understand the difference. In the last 20 years, information technology departments, firm management and enthusiastic lawyers have pushed PCs onto often-unwilling lawyers. The push method worked for infrastructure and basic productivity applications; most firms now have current versions of common systems, and they are better off for it.

The push method fails, however, when firms move beyond basics to practice-support systems and client-facing technologies. Unless lawyers pull for a new tool — unless they want a new tool and are willing to learn it — they will not adopt it. Examples of systems that require pull include systems that manage customer relationships and knowledge management. Even if you build these systems, however, lawyers will not necessarily use them.

The pull cannot come just from the “true believers” who argue and agitate for the latest and greatest. Computer enthusiasts are invaluable. They are willing to screen ideas, to test, and to help persuade others to use computers. They can also antagonize users. Their energy needs to be harnessed and directed carefully. Their desire for a new tool is insufficient evidence that large numbers of lawyers would use it.

How can law firms increase the chances that innovation and investment will serve clients (or internal purposes)? Combining federalism and foundations — two models from outside the business world — provides a useful approach to address these concerns.

In the federal system of government, each state solves problems as it sees fit. This allows local variation while, at the same time, it creates potential best practices for other states. Grant-making foundations do not set up operational programs. Rather, they advertise the fact that grants are available for specific purposes and seek applicants. The competition for grant money is part of the process of identifying how best to achieve goals and spend limited dollars.

According to this model, a law firm could view itself as a grantor. It could budget a set amount of staff time and dollars available as “grants” to practice groups or departments. Those funds would be for innovative projects conceived to create competitive advantage — money over and above the budget for basic infrastructure.

As in the world of foundations, practice groups would act as grantees. They would have to develop proposals and convince the grantor (the firm) of the merits of the proposal. Not all grants would be funded. Practice groups would act like states in the federal system. Each would develop proposals to meet “local” needs. As good ideas emerged locally and proved successful, other practices could adopt them.

To make this system work, lawyers would need IT help to brainstorm about technologies and to develop well-crafted proposals. But IT would play a limited role, ensuring that the lawyers would “own” the idea, work hard to develop the rationale, and explain clearly how clients or the firm would benefit from the proposed investment.

This model would help address some of the difficulties in measuring returns on technology investments. This is a tricky business, especially in a firm. Firms must rely on the lawyers closest to clients to determine the impact of technology on client service.

Treating practices like grant applicants puts the burden on those serving clients to come up with the ideas and the metrics to judge success. Of course, the firm would be the ultimate arbiter, guided in part by mileposts established in the applications.

By making lawyers think of and advocate new approaches, firms increase the likelihood that lawyers will change the ways they work. The obvious objection — that lawyers will never take the time to draft grant applications — is actually an asset. If a practice group is not willing to develop a proposal, then it is not ready for change.

Assuming that several practices submit applications, the firm can select the best. In comparison to typical, top-down approaches, this model makes it more likely that practice groups will support change. If worthy proposals don’t emerge, that may be a sign that the firm is not ready to innovate or change.

This model has its risks. Two prominent ones, however, can be managed. First, foundations do not always follow grantees closely enough to make sure the money is being spent wisely. Firms would need to monitor progress on a regular basis. Perhaps individual practices would have to provide reports (as specified in their proposals), or lawyers not directly involved in a particular project would interview clients.

Second, federalism can create duplicative and conflicting approaches. A firm could end up with unconnected efforts or too many variations on a theme. To avoid such outcomes, a firm should consider favoring proposals that would be a benefit to more than one section.

Innovation is difficult. Law firms are collections of strong-willed individuals. Relying entirely on either individual or institutional effort has not proven to be a successful way to innovate. By rethinking the approach to innovation and tapping a combination of individual and institutional effort, firms might be able to encourage the adoption of new technology and other innovations.