A burning platform – why enabling and measuring innovation is such a hot issue

[Australasian Law Management Journal,Finance & Accounting,General Management,Strategy & Leadership] September 19, 2019

Amid all the talk in legal circles about innovation, change and the death of the billable hour, there is real tension as to how law firms can best measure innovation and drive productivity, writes Mark Andrews.

Best-selling author John Kotter describes the importance of the burning platform in establishing a reason for change in organisations. In short, he suggests that successful change typically starts with a sense of urgency.

The burning-platform analogy is helpful in the debate about innovation and productivity as traditional law firms grapple with forces of change on three key fronts and rethink how they perceive and measure value.

1. Client pressure on pricing models

The legal profession had a long and proud history whereby precision of language and the importance of each and every word had been a basis for the calculation of professional fees. Of course, we made the enormous (or perhaps not) step of moving from charging by the word to the six-minute increment.

Unquestionably, there are now alternative pricing models in place, but the industry has not as a whole adopted these arrangements. This is hardly surprising when even a partner in a moderately profitable firm can earn a substantial sum based on existing hourly rates and traditional pricing models. There is, of course, a catch – the client. Clients are no longer as accepting of traditional pricing models. This pressure for change is not new, but it is worth restating.

2. Advances in technology

Technology-enabled innovation is the next important force of change to consider. Artificial intelligence (AI) can right now perform some of the tasks that lawyers perform and it can do some of these tasks more consistently and faster than lawyers. This is a simple fact – it is not vendor pre-sales talk.

3. Demand for better work-life balance

The push for a healthier work-life balance, and a reduced desire to work the hours required to progress through the firm on the path to partnership, creates another pressure within the profession. This is, in fact, a favourable condition for the adoption of technology because the right technology, applied effectively, can reduce required effort from lawyers and paralegals.

If these three elements represent burning platforms that could potentially undermine the success of law firms, then it is clear that legal leaders need something akin to a very large fire extinguisher as a means of self-protection. In the past, a focus on productivity gains had been widely seen as a way to put out spot fires and safeguard firms. Indeed, utilisation (the proportion of total hours spent on billable client work), productivity and realisation (the proportion of total hours spent on billable work that is actually recovered from the client) are still the building blocks of the financial measures in law firms.

From a lawyer perspective, the emphasis tends to be on utilisation/productivity, where the assumption is that time spent performing work for a client is the most valuable activity that can be performed in the firm. Firms encourage all time to be recorded and they school their lawyers on the importance of entering time in a timely fashion. Lawyers are indoctrinated into a mindset that the timesheet is a measure of productivity and therefore value.

It is important to note that utilisation does not reflect productivity or efficiency; realisation is a far more accurate measure of real productivity and the gap between the two is where technology and artificial intelligence can play a role.

A change of mindset

Many psychology studies affirm the change-averse nature of legal professionals compared with the average population. This leads to the question as to whether somehow law firm leaders think they are immune to the changes described above and that they can navigate their way through them without any significant negative impact.

Denial is, of course, a natural and early reaction to change, but it is not one that lets firms deal effectively with change. Change inevitably presents an evolving series of new firestorms that cannot simply be extinguished through ongoing attempts to improve productivity. Law firm leaders need to accept reality and recognise that they are genuinely standing on a burning platform and need to re-evaluate their protection strategies.

One of the biggest inhibitors of change is how productivity is measured in many firms. I am not one to argue about the death of the billable hour, but we need to rethink what represents value for firms, and reconsider how we measure and price our investment in innovation. There are some very practical steps we can take to improve the situation.

  • Focus on realisation, not productivity/utilisation – realisation represents what clients are happy to pay for and thus is a measure of value. The relationship of utilisation and realisation gives a clue to where inefficiencies may lie and where there could be innovation potential. All lawyers should be familiar with and focused on realisation, and they should consider moving their targets from productivity to realisation.
  • Conduct a value analysis – consider the work of every lawyer in your firm and classify it in percentage terms across the five categories listed below. This is an activity that individual lawyers can and should do – it does not need to be a firm-wide initiative. The value of this analysis is to shake people’s thinking as they realise that there is less activity in point 1 than they first thought.

1. Specific – activities that only a specific lawyer, or a very small group of lawyers can perform, or where the costs of training someone to be able to provide the same expertise are prohibitive. Activities in this area may not always be billable ones.

2. Human – activities that can only be performed by a human, but where there is some more flexibility around who can perform the activities. These activities are client-focused, but not necessarily billable. In this area, it is important to consider related activities; things that are necessary to perform to be able to provide effective client service, such as continuing education.

3. Replaceable – activities that can be performed by a human, or which can be automated.

4. Borderline – activities for which clients resent paying, but for which they do currently pay.

5. Other – any activity that is not captured by another category.

  •  Factor in direct effort – law firms typically do not manage non-billable time with the same rigour that they manage billable time. This is a big mistake. We need to start treating this time as an investment fund that we can direct at specific problems and challenges. In fact, we should try to carve out some of this time – not for individuals to do their own thing, but to ensure more collective effort can be focused on defined business challenges.
  • Put a price on technology use – do not give away your technology smarts for free. You took time to develop the technology, so put a price on it, even if that is a small utilisation-based charge, or a charge based on data volume.
  • Consider performance measurement – be honest, you are probably focused on measuring productivity and overweighting this in performance evaluation. Firm leadership needs to be bolder and start talking about the star performers who develop new technology-based revenue streams, or those who rework processes to drive greater efficiency and raise client satisfaction.

Fundamentally, we need to challenge the mindset that productivity = good and everything else = bad. Putting out evermore dangerous fires by ramping up productivity will ultimately become unsustainable. Investing in innovation must instead be part of the equation, along with keeping a record of such spending on research and development.

Conclusion

As described, the risk-averse mindset of lawyers, coupled with their reliance on time billing as a measure of productivity and perceived value, is a major obstacle to innovation within law firms and other organisations. We must challenge the existing mindset and make adjustments to how we perceive and measure value in firms. It is possible to monetise R&D investment, but we must have the rigour to track the investment and calculate transaction costs both of non-technology-based service and for technology-based service.

The billable hour may not be dead, but as lawyers we must think differently about innovation, or run the risk of being superseded by those who do. Be sure, we have a burning platform.

Mark Andrews is Director – Global IT Service Delivery at Baker McKenzie. He has a varied background, including time in the public and private sectors, along with considerable professional services experience. He has held roles ranging from HR to management consulting and has previously been a guest lecturer as part of University of Technology, Sydney’s Executive MBA program.