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World Masters: The digital evolution of GE and what it means for law firms
In the latest of a series of articles covering the recent World Masters of Law Firm Management conference in Sydney, ALMJ reports on global conglomerate GE’s embrace of the Industrial Internet and lessons law firms can learn from its experience.
At World Masters, Karim R. Lakhani, a Professor of Business Administration at Harvard Business School, addressed law firm leaders on the subject of Digital Innovation and Transformation: The New Dynamics of Value Creation and Capture Utilising Platform-Based Business Models. Discussing an era in which digital technology is becoming ubiquitous and rapidly transforming every process and industry, Professor Lakhani guided attendees through a case study of GE and how its chief executive officer, Jeff Immelt, has made digital innovation a priority for the company’s long-term business strategy.
Following is a summary of some of Professor Lakhani’s key messages from the session and how GE’s transformation can inform law firms as they respond to the challenge of digital disruption.
Businesses should invest in technology, not just use it
No law firm is ever likely to match the scale and resources of GE, a company founded by Thomas Edison in 1892 and which will forever be known for innovations such as the phonograph, the radio and the incandescent light bulb.
However, firms of all sizes would do well to understand how agility and an ability to adapt have helped GE survive – and thrive – during a 124-year history. They are traits that all businesses and firms will require as the digital revolution unfolds.
This desire to stay ahead of the pack also explains why Immelt and his senior leadership team have in recent years championed the notion of the Industrial Internet, a term it has coined to refer to the integration of complex physical machinery such as jet engines and wind turbines with networked sensors and software. The aim has been to create and sell software-enabled machines while at the same time collecting and analysing data to improve the operational performance of GE and its customers.
In 2011, the company launched GE Software, a business unit that concentrates on digital integration as it seeks to maximise the impact of all its physical devices. It has been adding digital sensors to its machines, connecting them to a cloud-based software platform, investing in modern software, building advanced analytics capabilities and facilitating crowdsourced product development. The upshot is that GE’s business model has been overhauled and the company has become an unlikely digital-transition success story, fending off challenges from big-data start-ups and specialists.
Professor Lakhani likens the present technological disruption to that of the Industrial Revolution of the 18th and 19th centuries and believes most, if not all, modern businesses will have to consider investing in technology rather than merely using it.
Although the move by software-licensing companies such as SAP and Microsoft to become investors in cloud software technology seems a logical evolution, Professor Lakhani notes that the likes of medical device-makers and even pizza company Domino’s are building digital capabilities and using data analytics to meet their customers’ needs. Major law firms, he suggests, will also have to follow suit. “Every company will become a software company,” Professor Lakhani says.
The key will be to take existing capabilities and client relationships and enhance them through the development of software-related skills and processes. In the taxi industry, Uber has done just that, shaking up a complacent industry structure while at the same time empowering its app-loving customers.
“In many ways digital change is spreading across industrial sectors and blurring the boundaries of industrial competition,” Professor Lakhani says. “We now have ‘taxi companies’ investing in autonomous vehicles and accounting firms competing with traditional law firms, all enabled by digital technologies.” He offers a checklist of new capabilities and strategies that will be required to execute digital transformation.
New capabilities
- Data gathering and management
- Advanced analytics
- Real-time monitoring and control
- Software development excellence.
New strategies
- Shifting from products to services plus products
- Cultivating platforms and ecosystems
- Developing new revenue and business models
- Fostering talent and new business incubation.
2. Ignore new modes of value creation at your peril
Reputation, trust, quality of advice – these are all key elements that most law firms still depend on to attract clients and create value for their operations. Such attributes are unlikely to be sufficient in the future, according to Professor Lakhani, who says firms and clients will increasingly strike contracts that are designed to deliver mutual benefits around broad outcomes such as revenue increases and cost savings. “You’re actually now saying to the customer, ‘I’m going to sell you an outcome’,” he says.
GE has shown the way with its capacity to aggregate and analyse huge volumes of data, a skill that is changing how businesses create value and make money in almost every sector. Legal services will not be immune, Professor Lakhani claims. Law practices will have to think about the new data they can accumulate from clients, and how they can derive value for those clients using analytics. People will still play a part. GE still needs salespeople and account executives who have strong relationships with their clients, but what they sell and how they sell it is undergoing a radical change. Likewise, Professor Lakhani has no doubt that people, and relationships, will continue to be important for law firms.
“Relationships won’t go away – they’ll be even more important. But in order to do this effectively you’ll need the data and software to be able to create value and capture value.”
In essence, law firms will have to apply a digital lens to their existing services. What aspects of client service can better be delivered through instrumentation and connectivity? Which components of legal services are most challenging for firms and their clients? It will be up to law firm leaders to address these questions – and come up with the right answers.
3. Find new ways to capture value from clients – or pay the price
Given that GE was generating well in excess of US$100 billion in revenue a year before it unveiled the GE Software initiative, why did it feel the need to reinvent itself? In short, it was concerned about being superseded by major technology companies and start-ups that wanted to move in on GE’s industrial-equipment customers and add value to them using advanced analytics and algorithms based on the data generated by that equipment. Immelt’s reasoning was simple: “If we don’t do this, someone else will.”
Rather than being blindsided, GE went on the front foot. For example, instead of just trying to sell more wind turbines to its customers, GE now offers sensors which wirelessly transmit data on the performance and maintenance of the turbines. The turbines run more efficiently and breakdowns and parts failure have been minimised, while GE has implemented a new pricing model. It charges customers a percentage of the incremental revenue from the improved performance of the turbines. While GE sells less hardware, it has developed a mutually profitable long-term partnership with its customers.
What about law firms? Could you get better at tracking the actual value your business creates for others? Could you better monetise that value, through either value-based pricing or outcomes-based models? Professor Lakhani notes that in the past pricing has been the key element of value capture. “The price (of the service) must be greater than the cost. It’s the oldest value-capture model in the universe.”
In this new era, he believes law firms will require enhanced pricing skills – in addition to greater sales expertise – to ensure they can capture new value from their clients, especially on complex deals. The other option for law firm leaders is to rest on their laurels and hope that the status quo will prevail. Such an approach shapes as a risky strategy.
4. Get used to outcomes-based business models
Amid this focus on value creation and value capture, Professor Lakhani believes the switch by GE and other companies to outcomes-based business models will become the new norm for the smartest operations. This will create new dependencies and risks, as well as revenue opportunities.
The Google example is instructive. The tech phenomenon has disrupted the advertising market with a model that turns traditional revenue models on its head. The scatter-gun approach of the past saw customers place ads in newspapers and magazines or on television and they were charged a fee (a relatively large one) regardless of the impact of the ad. It was a hope-for-the-best model. With Google’s game-changing model, millions of users who search on Google browsers pay no fee at all, while advertisers automatically pay a fee (a small one) to Google only when a user clicks on an ad. It is the ultimate outcomes-based model through which Google’s pay-per-click gamble only pays off if it delivers to advertisers.
Professor Lakhani says Google, just like GE, is spending a fortune to develop superior infrastructure that ensures it leads the market and gets rewarded appropriately. “So in this case the business model is actually very different. Most companies create value for their customers and capture value from the same customers. In Google’s case you create value from one set of people, but you capture value from a completely different set.”
For law firms following the GE way, Professor Lakhani suggests that no longer should they expect to simply give clients sound advice, send them on their way and then largely forget about them. The focus should be on supporting those clients to operate more successfully, and profitably, and to reap a percentage of the benefits as their clients’ revenues increase. Of course, the risk is that a firm’s performance will be very closely tied to the performance of a client – and the firm will as a consequence be exposed to the same economic trends and potential shocks that affect the client.
Therefore, the adage that the customer is always right will not necessarily apply, according to Professor Lakhani. “In this case, the customer may be wrong and you are going to tell them they are wrong.” As a result, firms will have to be more proactive with their clients to protect their mutual interests.
Professor Lakhani points out that there has already been a strong trend towards an outcomes-based model in the legal sector courtesy of the growth of class actions that rely on contingency fees – the no-win, no-fee model. He expects this focus on outcomes to lead to further changes in the sector.
As they ponder the future, Professor Lakhani advises law firms to ask three broad questions: why are clients buying services from us; is the value creation or value capture scenario changing; and what alterations to the operating model will be required to adjust? To pursue the sort of change that GE has embraced, Professor Lakhani says it takes a significant cultural and financial commitment from senior leadership. “If it’s not actively supported and managed, it’s not going to happen.”