Experimenting in the lab

Over the past 20 years, most professional services have gone through a phase of radical innovation. Accountancies, management consultancies, and banks have all come under enormous pressure from their clients to renew the way they do business. This has resulted in some fundamental changes to their operations. For much of this time, law firms have been allowed to escape the pressure, perched comfortably inside their glass-towers, with little incentive to innovate or keep hourly rates from rising.

But times are changing, there is growing pressure to do more with less, and traditional partnerships are now forced to consider innovative strategies to survive.

One way to go about it is to partner with external innovation hubs — also known as garages and incubators. Law firms tend to call them laboratories.

It’s a term that conjures up images of people running around in white coats, with safety goggles on, mixing various substances to create something new. The reality isn't far off. Enterprises all over the world set up creative spaces as subsidiaries working tirelessly to find the next big thing that will give them a competitive advantage. These externalized innovation hubs are regarded as safe spaces for trial and error. They host captive alternative legal service providers who can then test new things without putting “the mother brand” at risk. Operating under a separate legal entity also helps in properly allocating resources to projects, and it enables the management of these entities to break with established corporate processes.

All of which should be appealing to law firms. They should be jumping at the opportunity of investing in R&D and mitigating their risk by servicing tech-savvy clients in an environment to which they can relate. Allen & Overy and Freshfields, both billion-dollar law firms, are already leading the way, and have invested heavily into creating successful innovation labs. Much like anything else related to innovation, laboratories require commitment and hard work but offer a great platform to initiate the journey of innovation.

Of even greater value, laboratories set law firms on a path to open innovation and client centricity. The co-creation of services and products with clients is widely regarded as a necessary part of innovation. Collaborations can help forge a stronger bond with clients. Research shows that products and services developed through client-driven innovation have a higher probability of success. They tend to grab more market share after five years, make for a better strategic fit, and are more original. The laboratories are well-positioned to become a platform for this to happen when appropriately leveraged.

Before establishing a laboratory, there are three factors law firms must consider. The first is a real commitment from the partners. By setting up a laboratory, there is always at risk that equity partners will simply check off “innovation” on their to-do list. Then, like for a gym membership that that one never uses, a lot of money gets wasted on something that isn't helping you achieve your goals. Appointing partners with technological acumen as part of the board overseeing the laboratory can drastically help to reduce the chances of this happening. These partners will also help anchor innovation in the law firm and influence a higher allocation of resources.

Second, the involvement of clients is essential to the lab’s success. Collaboration will strengthen the bond between the law firm and its clients who pay the bills and can exercise some influence over the kind of service they want from their lawyers. It can also be an incentive for employees who are keen on innovation projects.

The third factor is the allocation of resources. Investing money is important, of course. But firms also need to set up incentive structures, both formal and informal, that will support the effort. There must be an understanding that working on innovation is valued – not only billing hours. Firms must encourage their people to spend time in the lab, and in the absence of financial incentives, it becomes tough to drive collaborative innovation across the organization.

Law firms that overcome the challenges of establishing a functional laboratory will be in a great position to meet the future of the legal industry with open arms. And who knows where the journey can lead? After all, it was in the garage that Amazon, Apple, and Google all started.