Balancing #biglaw innovation by measuring Innovation per Partner

My view of innovation can be summed up in a sentence: inventors turn cash into ideas, innovators turn ideas into cash. Businesses must invest in both to survive and grow in the long run, but neither is a short-term fix. These ideas don’t have to be new, and usually aren’t in my experience, but deciding whether any idea is worth pursuing requires consideration of the “turn into cash” part if you want to keep innovating.

It takes money to make money, as they say. Some firms I’ve worked with establish budgets for the “cash into ideas” part by creating and filling innovation roles, launching programs and building labs. Some ideas are focused on operational or client service improvement and roll into existing budgets, and some simply do not survive the “ideas into cash” part at all (see commercializing innovation). But pursuing any idea costs money.

In a professional partnership this money comes directly from the partners. If you are an innovator or “intrapreneur” in a law firm, the equity partners are your investors. Thoroughly understanding their expectations and inherent incentives is critical to your success. While this may seem obvious to some, I’ve worked with enough firms to see innovation efforts fail not because of a “bad idea” but because the partner/investors were not compelled to fund it.

This is further complicated when partners are also customers of your idea or the primary sales channel for your new client-facing product or service. But for now, let’s focus on funding.

I’ve helped many firms with the fundamentals of innovation accounting: cost and revenue allocations, investments and returns, NPV, IRR, and so on. This is not easy work for a variety of reasons, including translation from finance-speak to partner-speak, but important if “ideas to cash” remains the goal.

But this isn’t enough in a partnership. Quite often all equity partners are contributing to the “innovation fund” out of their pockets, directly or indirectly, but not all partners are directly benefiting from the investment. In other words, contribution and consumption are out of balance.

A harsh but real example: a global firm launches an innovation program focused on client service improvement. One or two large clients participate in this program and are pleased with the increased attention and value-added services they receive. Naturally, this pleases the one or two relationship partners involved and the investment is declared a win-win for everyone. So, the program continues with enthusiasm.

A year later, a small handful additional of clients and partners have joined the program and are also pleased. But then other partners begin to ask questions such as “How is this helping my practice or clients?” and “What is this really costing us?” and demand answers. Despite positive feedback from the participating clients and partners, proper innovation accounting reveals that those involved saw profitability decline due to the costs of the value-added (i.e. non-billable) services they are using or receiving. Frustration and resentment build, and now the partnership and program have a problem.

The moral of this story isn’t simply about the financials. It’s about transparency, communication, and engagement across the partnership; and about taking a different approach to funding innovation and demonstrating benefits to the partners writing the checks.

One way to address this imbalance is thinking in terms of “innovation per partner”. Most types of innovation I see in my work face similar challenges, namely that they are not scalable across or even applicable to all partners, practices, or clients. The fact is, in most firms there are few innovations that equally benefit all partner/investors. Which is OK as if expectations are set appropriately.

Innovation per partner (IPP) is not a singular metric of success. Instead, I use it as reminder to build transparency and communications into innovation processes from the onset. I firmly believe that firms must be open and honest about why and where innovation is happening, what it costs and who is paying for it, and what to expect in return as a partner. IPP addresses the “what’s in it for me” question that in a partnership can make or break any material change effort.

IPP is the opposite of black-box innovation: innovation is happening somewhere in this firm, and I think I’m paying for it, but I have no idea what the hell for. This approach is unfortunately common but rarely ends well, and minimally makes IPP an exponentially more difficult conversation for innovation leadership.

IPP requires strong and steady support from leadership, which is in my experience the greatest indicator of innovation success in any business let alone a complex partnership. An innovation leader is charged with responsibly investing the partners’ money. Without firm leadership to back you up on hard choices and to help when saying no, you or your innovation program may not last long.

I know this is easier said than done. But this is what defines an effective innovator inside an existing business. You must commit to the job, know when to push and how to handle difficult conversations all while existing to benefit a group of investors that may not all appreciate you the same way. Adopting this IPP mindset and studying what makes your investors tick will greatly increase your chances of long-term success.

Leading a firm is a similar but obviously larger and more challenging balancing act than leading innovation, frequently requiring difficult trade-off decisions to achieve a fair and equitable balance between fellow partners and practices. It is very common to see one practice subsidize another as market conditions changes, or partners who disproportionally contribute to the profit pool as others struggle. Handling these situations with care and balance is a required leadership skill.

In terms of IPP, balancing for an individual requires understanding the overall partnership’s culture, leadership, and mindset. If imbalance exists in other core areas, conversations about fair and balanced innovation contribution v. consumption will likely be imbalanced too. The connection strength between a firm’s innovation efforts and it’s strategy and leadership determine the effort to achieve this balance.

I’ve operated a partnership for nearly a decade and I, too, have faced these challenges and trade-offs. In my opinion, partners can and should ask about innovation costs and the benefits they are receiving as a partner, and leadership must be prepared to respond. Truly innovative firms create real and transparent connections between their partners and innovation efforts in an environment where these questions are easier to ask and answer.

While partners are the sole investors in a US law firm, innovators can learn from other emerging models for funding growth here and in other markets worldwide.

  • Public markets: In the deregulated UK legal market law firm partners can raise funds (and cash out) by publicly listing their firms. Six firms are now traded on the London Stock Exchange with more to follow, effectively converting from partnerships with partner/investors to corporations with partner/shareholders. These firms have performed well for the most part, creating new growth pathways without asking partners only to foot the bill.
  • Private equity: some UK firms and market segments are attracting professional money, and we are seeing private equity firms consolidate consumer-oriented segments such as conveyancing (residential real estate in the US) while implementing investor-led growth strategies.
  • US alternatives: Law firms are restricted from such activities in the US, but this is beginning to change as states like Arizona, Utah, California and others are implementing and testing similar changes. But this hasn’t prevented US firms from exploring other growth investment approaches such as private investment funds for partners or use of litigation finance.

Using “other people’s money” for growth may not be the right option for all firms, regardless of regulatory constraints. Outside shareholders become owners too which requires existing owners to give up some control. Nonetheless, they provide options for creative firms and innovators who choose to play a different game than their competitors and for partners willing to trade ownership and risk for growth capital.

Innovation is a broad, complex and sometimes controversial topic. It requires new tools and skills to be successful. Studying how other sectors invest in innovation is important but sometimes requires translation when applying to professional partnerships.

I left a lot to unpack here for future posts as I believe there is much to learn by looking at innovation from different perspectives. Like startup entrepreneurs, “fundraising” is one of many important skills for intrapreneurs and corporate innovators though the tools and approaches are different. Drawing on my experiences as both, my goal is to translate what I’ve learned into thoughts and tools you can use to better innovate in practice.

Legal industry entrepreneur; builder, investor, partner @ Nexlaw