If you’re unsure, pick the latter.
Last year, at the Make Law Better Conference, I spoke about how innovation is not a strategy but firms need an innovation strategy. I’ll provide a short recap but you can also watch a video of the presentation here.
Having an innovation strategy aligned to the firm’s strategy is essential. Beyond well-defined strategies, it’s important to design flexible tactical approaches to execute, embedding feedback loops to validate whether the strategy that was set for the firm still holds or a pivot may be suitable. Flexibility and feedback mechanisms become even more important under periods of high growth or uncertainty, such as the one we are now experiencing.
If invited back (and you are interested), I can discuss how we can leverage tactics such as lean startup, design thinking, agile business practices, system dynamics, among others, to programmatically test and execute a strategy. At the end of this essay, I’ll illustrate the critical role of flexibility, discussing how my team at Thomson Reuters adapted our strategy and execution this spring to deal with the challenges of the coronavirus.
A lot has been written about how to formulate a strategy: from useful frameworks such as Michael Porter’s Five Forces, see “How Competitive Forces Shape Strategy,” Harv Bus Rev (Mar 1979), or BCG’s Growth-Share Matrix, see Bruce Henderson, “The Product Portfolio,” Perspectives (Jan 1979), to how to think about strategy under specific circumstances, such as when an organization needs to preempt its own disruption, see “The Essential Clayton Christensen Articles,” Harv Bus Rev (Jan 2019), or operate in complex environments, see Gökçe Sargut & Rita Gunther McGrath, “Learning to Live with Complexity,” Harv Bus Rev (Sept 2011).
In its simplest form, however, a competitive strategy needs to address two questions: (1) where should a firm play (and where it won’t and why)? (2) how can it win?
Since we are focused on the legal industry here at Legal Evolution, let’s look at how certain types of organizations, specifically large US law firms, should look at where to play and how to win. Bruce MacEwen from Adam Smith Esquire does a great job summarizing the primary law firm models in his book A New Taxonomy: The seven law firm business models (2014), albeit some of the models are strategies while others are the outgrowth of common lawyer pathologies. Thus, Bruce’s analysis does beg the question of whether firms fall into these pathologies post-facto or whether they do it with strategic intent. But let’s use the categorization to illustrate how law firms could be thinking about strategy.
Out of the seven categories of firms that Bruce identifies, five could have strategic intent in their design:
1. Global players: are a one-stop shop for large corporate clients that achieve economies of scale through vertical integration and a global footprint.
2. Capital markets firms: are co-located with their financial services clients and specialize in high-margin practices.
3. Kings of their hill: possess a strong regional network and expertise on issues affecting regional clients.
4. Boutiques: specialize in niche practices or service delivery models, such as Intellectual Property or Tax.
5. Category killers: specialize in one broad but not necessarily high intrinsic-value practice. They are hard to beat from cost and value perspectives given the scale of their operation. Specialized Immigration or Labor & Employment firms come to mind.
The other two are hardly strategic:
6. The Hollow Middle: are full service one-size fit all firms that don’t possess the specialization or vertical integration of some of their competitors.
7. Integrated Focus Firms: integrate people, software and technology to deliver specialized services.
In the case of #7, integrated focus, their operational expertise may not be a strategy but it could certainly be part of an innovation strategy. Firms need both.
I’ve discussed a basic definition of strategy and how law firms could optimize their models by having one. Now I’ll try to summarize what I mean when I discuss innovation and innovation strategy.
Around the world, we celebrate innovation as: new to the world products, game-changing businesses, R&D-centric inventions, patent-laden processes, design masterpieces, etc. This idea is too limiting. Again, let’s overly simplify and define innovation by its dictionary meaning.
in·no·va·tion \ˌi-nə-ˈvā-shən\ noun
: a new idea, device, or method
: the act or process of introducing new ideas, devices, or methods
Source: Merriam-Webster Dictionary
So, innovation is either a new idea, device or method, or the process of introducing a new idea, device or method. I would argue that novelty here is not constrained by the state of the art (i.e., new in the world) but rather novelty within the organization (i.e., new to the firm).
If a competitive strategy helps the organization determine where to play and how to win, what should be the goal of an innovation strategy?
I tend to think of an Innovation Strategy as fitting the following definition:
how an organization is designed, and resources are allocated to systematically produce the types ‘innovations’ required to achieve the organization’s desired future state.
In other words, how is the firm built and resourced to programmatically overcome delivery hurdles and address strategic opportunities in novel ways?
If a firm has a well-defined innovation strategy, it should expect innovations that are partly validated hypotheses and partly serendipitous outcomes. Serendipitous does not mean random. In fact, a well-designed and disciplined innovation strategy should produce a portfolio of innovations of different types and impact ambitions.
When looking at the types of innovations, I like the Doblin framework displayed below. See Larry Keeley, et al., The Ten Types of Innovation: The Discipline of Building Breakthroughs (2013). The framework categorizes the space or business area improved by an innovation. Doblin calls out 10 areas and has developed over one hundred tactics to further break those down. The short version is that innovation is not just about bringing new products to market, or in the case of law firms, new legal services (e.g., Martin Lipton’s poison pill in the early1980’s). Cf. Post 071 (discussing Type 0 substantive law innovation). Innovation can also happen in the firm’s operating model (e.g., captive legal process outsourcing) or in how it manages customer experience (e.g., professional sales and account management teams).
Another view for an innovation portfolio is by ambition or desired impact. Rita Gunther McGrath suggests that we look at innovation projects as real options with different risk, payback levels, and exit points. Viewing innovation initiatives as part of a portfolio allows us to allocate resources across multiple horizons of impact. See “Building a Proficiency for Game Changing Innovation and Growth: Mastering the Opportunity Portfolio,” Rita Gunther | McGrath (June 24, 2019).
According to a study conducted by Deloitte, firms that outperformed their peers — typically realizing a P/E premium of 10% to 20% — were allocating resources in an optimal ratio. See Bansi Nagji & Geoff Tuff, “Managing Your Innovation Portfolio,” Harv Bus Rev (May 2012). A general rule of thumb is 70% to enhancements of core offerings, 20% to adjacent opportunities, and 10% to transformational initiatives.
You may think that this ratio doesn’t apply to law firms or other professional service businesses that rely heavily on managing cash flow delays between the high cost of producing a service and the realization and collection of the service. I’d argue that having innovation ambitions is no less important for professional service firms whose strategies may be even more vulnerable to short-term shocks.
For instance, an innovation ambition model may allow a firm to experiment with delivering their services in new markets without the commitment and cost of M&A (i.e., adjacent opportunity) or benefiting from their clients’ growth through conflicts-shielding investment vehicles (e.g., transformational opportunity). Even if disciplined innovation is not seen as a growth strategy, viewing it as a risk mitigating strategy should be appealing to law firms.
Innovative firms should have a programmatic way to develop and test new ideas related to all three solution themes and all impact horizons. However, experiments and scaling efforts should be aligned to the firm’s business strategy. It makes no sense for a firm to incubate projects in fields or practices unrelated with where they want to play or setting initiatives reactively, out of fear of missing out.
Strategy versus capability
If we go back to the definition for innovation strategy, we can quickly come to the realization that more than a strategy, we are referencing a capability. It is the capability to systematically produce new outcomes. How do we frame a strategy as a capability?
When I was asked to help design an innovation strategy for the Legal business of Thomson Reuters (my employer), one of the first things I did was to create another framework to benchmark where we were in the capability and where we wanted to be.
Inspired by the Carnegie Mellon Capability Maturity Model, I identified parameters (levers) that we wanted to develop. Through interviews and by researching best practices, I also mapped what we meant by different stages of maturity. The exercise is simple, but it does help identify gaps in resourcing and focus.
As part of these efforts, we realized that we needed to be more open to co-development and co-designing solutions with external partners if we wanted to hit some of the strategic goals of the business. We also identified opportunities to better leverage enterprise resources such as a network of labs and an emerging technology investment vehicle. Framing is the easy part. Managing the change and creating a culture is much harder and requires distributed ownership of the strategy (e.g., catalysts and process).
Putting the pieces together
In summary, when setting an innovation strategy for the organization, we should keep in mind the following:
- Innovation strategy must align with the organization’s existing business strategy and core processes
- There is not a one-size fits all and it should be bespoke to your organization
- It should reflect innovation of all types and ambitions:
- Product, Experience and Operational
- Core, Adjacent and Transformational
- It leverages enablers available to the organization:
- Internal: Capital allocation, existing tools & resources, talent, culture, communication channels
- External: Partnership governance, investment vehicles, innovation best practices
- It can be broken down into components and hypotheses that if proven, can accelerate a Vision
- It has clear KPIs: measures activity (inputs) and results (outputs)
As alluded before, with any capability-building exercise, the real challenge is building the muscle and managing change.
First, it is essential that projects aimed at executing an innovation goal have clear objectives and measurable key results (OKRs). These will help maintain accountability and defined milestones with corresponding exit or scaling options.
Second, I’ll resort to a cliché: innovation is a team sport. Orchestrating change requires a great amount of salesmanship and influence. Robert Cialdini’s Principles of Persuasion are timeless tactics to bring people along. There are others, especially related to co-creation and shared ownership.
Third, as I mentioned at the beginning of this essay, flexibility by design is key. An innovation strategy should assume that not everything will work and that there will be significant learning and change along the way. Flexible tactical levers such as discretionary budget (Opex), access to a varied talent pool, and permission to make quick decisions in response to signals are key.
Flexing in the face of the coronavirus
To conclude, I’ll share a personal story on innovation that illustrates the importance of having clear objectives and target results but also flexible tactical levers to pull on during execution.
Part of my work at Thomson Reuters involves leading special projects that require innovative approaches to their design and execution. Late last year, I was tapped to lead an initiative to strengthen our business in Spain, including the acceleration of sustainable growth.
With the local business leaders, we created a vision for success and set quantitative and qualitative objectives that we considered would be indicative of a positive trend. We then broke down goals into stretch objectives for the quarter. This was the part where we set Objectives and Key Results (OKRs).
In a workshop with people who would be responsible for going after those results, the team defined six key initiatives that we assumed could deliver the desired outcomes. From there, we set up an agile program, squads, and kicked off a lot of virtual collaboration and a common cadence.
Things were rolling fast and effectively. I was also scheduled to be on site with the teams throughout the full month of March. In this month, in addition to keeping momentum and the operating rhythm, the plan was to run sprints and workshops, help launch a sales meeting and employee trainings, speak at a couple of conferences, meet with clients and partners in pursuit of milestones, and generally do those things that are harder to achieve while working remotely from New York. My family was also scheduled to join me for the last two weeks, which coincided with our children’s Spring Break.
We developed great cadence, teams were genuinely experiencing a positive cultural impact from the new way of working, and most milestones were on track. On the personal side, I was living in Madrid for a couple of weeks, visiting friends, enjoying the food, attending my first Clásico (soccer), visiting museums, and traveling to Andalucía over the weekend, while waiting for my family to join. Everything was great until we started seeing signs (e.g., school closures, working from home suggested, cancelled client meetings and conferences, etc.) that things were not going to continue as planned. Over the course of two days, we responded to signals, adjusted plans and I returned to New York to work remotely and in self-quarantine.
The fact that squads were set up to work remotely and under an agile cadence allowed us to stay connected and keep working through objectives. Some of these changed but we were set up to adjust at any moment. We had also planned a 2-day working session where we would do a retrospective on the first quarter and set up initiatives and new teams for Q2.
As a result of working from home restrictions, we split the session into four 90-minute virtual sessions which we are running through online collaboration tools (MS Teams, Mural). So far, no hiccups. In fact, doing this virtually and spread out through multiple days has allowed us to involve key people we wouldn’t have included if we had planned an in-person workshop. The quarterly cadence and weekly sprints also allowed us to pivot a few focus areas and set new milestones. Our objectives (and strategy) haven’t changed. The process and cadence were designed to test new things and adapt. The team has responded incredibly well to operating in an uncertain environment, in part because of how we were already working.
I mentioned before that innovation is not a strategy, but firms need an innovation strategy. I’ll add that an innovation strategy should not be decoupled from the capability to programmatically deliver new outcomes. Ultimately, this capability depends on resource allocation and culture. “Being innovative” is not a strategy but building an adaptable capability that can generate innovation is the backbone of an innovation strategy.