Legal Business Blogs

Guest post: Can Big Firms Innovate – and if so how?

‘Innovation’ seems to be on everyone’s lips these days. Among other things, the problems are: many people, lawyers in particular, are stumped when it comes to describing what ‘innovation’ actually is and business history proves to a fare-thee-well that it’s extremely challenging for successful incumbents to actually follow through with anything innovative.

And of course there’s a widespread, albeit largely unspoken, suspicion that innovation is not anything that can actually be encouraged effectively, much less planned out at an organisational level and deployed. But if we’re serious about innovation, what’s to be done?

One place to start might be establishing a dedicated R&D budget at your firm. Heck, we’ve even recommended this to some clients.

Pop quiz: Guess what percentage of revenue the following industries devote to R&D (I’m actually not eager to make my readers’ lives difficult, so I’m about to tell you):

  • Telecom: 13%
  • Software/internet: 12.5%
  • Healthcare: 11.5%
  • Law: 0.0%

(Source: First three, Booz Allen, summer 2014; Law Land, Adam Smith, Esq.)

All North American-headquartered businesses, cross-industry average? 5%.

And if the AmLaw 100 devoted just 1/4 of 1% of its revenue to R&D, the cumulative war chest would be north of $200m/year. That would endow a few nice professorships at MIT and Caltech.

But enough about what we’re not doing. Let’s talk about what other big companies have learned about how to innovate.

Our text for today is McKinsey’s ‘How Big Companies Can Innovate‘ and it harbors lessons from Intuit, Idealab, and Autodesk.

Scott Cook of Intuit on making innovation easier

The one critical insight here is that while you may not be able to change the nature of a large firm itself, you can change the way decisions are made: From decisions by bureaucracy, consensus, and PowerPoint—along with the status markers of power, position, and persuasive skills—to decision by experiment. (This is what R&D is all about, in case you were wondering.) At the heart of it is removing the encrustations, built over the years, of barriers and hurdles to getting ‘go’ decisions, and substituting systems and a cultural mindset to support the assumption—the expectation—that the firm stands behind passionate individuals who want to run an experiment to test their assumptions.

Strip the idea down to its essentials and try to run an experiment ASAP (this week? this month?) to test the idea. Devote minimal or, ideally, no resources to it (other than the opportunity cost of the advocate’s time).

Cook’s final, equally critical, observation has to do with how the ecosystem has to change to support these passionate advocates: ‘It can only work when it’s put in place by leaders. The innovators can’t do it.’

Bill Gross of Idealab on investing in innovation

Gross starts from the premise that the key functional barrier to large firms’ remaining innovative is the difficulty, nay near-impossibility, of balancing short term performance goals (client satisfaction, employee morale, revenue, profitability) with the long term perspective requiring sacrifice today for the sake of tomorrow. Evidence of how difficult this is is simply how rare it is: Gross cites Steve Jobs and Larry Page, who are iconic exceptions to every rule of conventional organizational management if ever there were.

Jobs famously disembowelled the $5bn/year iPod business by building the entire MP3 player into every iPhone—don’t think that didn’t prompt howls of outrage inside the walls of Apple!—and Page is spending something like $500m on Google X. You may object that Google has the money, but query how many other companies that ‘have the money,’ or the equivalent proportion given their balance sheets, are doing anything remotely similar. This takes guts, as does purposely making the iPod superfluous.

What’s a successful incumbent to do?

You’ve heard this before, but steal a page from startups: Visit some accelerators and incubators. (Remember, even IBM launched the original PC by setting up a skunkworks 1,500 miles from Armonk in Boca Raton, Florida.) Set up your own incubator and give it real resources. At Disney’s, for example, people get equity stakes so they can act like real entrepreneurs. Our panjandrums at the ABA won’t let us do that, exactly, but don’t tell me you don’t have creative corporate, securities, and executive compensation lawyers around.

We’ll give Gross the last word:

‘The equitization and the autonomy are the biggest factors. Because the thing that actually unlocks human potential is when people feel they have control over their own destiny and they can make a killing if they really succeed on their wild bet.’

Autodesk’s Carl Bass on taking risks to innovate

Bass is blunt when it comes to the land mines on a large firm’s path to innovation:

‘[M]ost corporations [read: law firms] are set up and, in some ways, structured and designed to maximize profit and minimize risk.’

We heard the same issue expressed differently by Gross in terms of the short term vs. the long term. Which tells me, at least, that the real issues here aren’t those of pure economics, finance, and organizational structure: They’re issues of human psychology.

And speaking of lawyers, we are risk-averse to a fault. This is both for better (representing clients) and for worse (running the firm). Lawyers are selected for risk-aversion at every step of their careers, meaning that by the time they emerge into positions of leadership at a firm they instinctively feel deeply threatened by risk. The fastest way to overcome that sense of threat is by invoking an even larger risk: The risk of inaction while the world moves on without you.

Granted, few firms are exactly perched on the famous ‘burning platform’—and for those unfortunate few who are, it may be too late—but if you adopt the perspective of, say, a 40-year career (there’s that nasty long-term perspective raising its unwelcome head again), the platform may look more like a beachfront house on a barrier island in Hurricane Alley. Beautiful today, but how sturdy for the long run?

Bass interprets the threat as that ‘of new disruptors,’ but rather than retreating into denial, complacency, or paralysis, he counterintutively says:

‘As a matter of fact, for CEOs or management of existing companies, it’s the greatest thing that ever happened, in some way. It’s like the expression, ‘Don’t let a good crisis go to waste.’

What has this meant at Autodesk? Just for example, this year they are launching their first piece of hardware ever: a 3-D printer built on open-source standards. Now that’s different!

What would be the equivalent departure for your firm?

As they say in the tougher neighborhoods, ‘Lovely house you got dere. Shame if sumpin’ happened to it.’ Like it or not, our neighborhood is getting tougher.

Bruce MacEwen is the president of Adam Smith, Esq. You can read his blog here.