What’s your R&D budget?

What does your law firm spend on research and development? Do you even think about it that way?

In 2010/11, UK businesses spent around £18.6bn on R&D, according to government estimates, part of overall UK R&D spending of about £26bn, or around 2% of GDP.

For many businesses, R&D is the backbone of the company, but for law firms it may seem like a pretty strange way to look at things. After all, law is essentially a reactive discipline, delivering precedent-based legal advice in a trusted, time-honoured way.

And yet, in an increasingly volatile market, where differentiation is becoming and more challenging, law firm growth methodology is all too often based entirely on increasing production capacity and then marketing that capacity, rather than research-backed product and service development.

Let me illustrate.

The classic law firm growth plan goes like this. We need to grow by, ooh, 10% this year, to keep pace with increasing costs, competitive profitability markers and so on. We can do this in two ways; getting more (or more profitable) work from existing clients, or by getting new clients in. Either way, we may need to increase capacity to cope, and it may be that we need to offer new, or stronger, services, in order to do it in the first place.

Enter lateral hiring. Lateral hiring seductively answers all these questions in a nice neat package: new capacity (check), new skills (check), new clients (check), new revenue from existing clients (er…well, let’s leave that political minefield for now).

All too often, lateral hiring is also assumed to answer the strategic questions too. The new person/team will obviously bring some skills or approaches we don’t have, therefore can be said to be innovating, or advancing the service proposition for our clients. The new person will bring business, otherwise we wouldn’t be hiring them, therefore this is a viable market to invest in and, perforce, will grow our market share and therefore brand in this market, and therefore advance the strategy.

What rarely seems to be done is any actual market research, any detailed competitor analysis or any work on the feasibility of certain strategic directions. You’d be right to be sceptical – you know your market, right? – so let’s take a little example and see how many of these questions you can answer for a selected practice area (your own, or another if you are in management).

  • What is your value proposition within this market?
  • What is the overall size of the market?
  • What is the size of the market corresponding to your value proposition?
  • Is that segment of the market expanding or contracting? Do you have figures on this?
  • What is your market share?
  • Who are your key competitors for business?
  • What is the size of their practice, and their market share?
  • In what respects does their value proposition differ from yours?
  • Who are the key clients or client groups within the market segment or segments susceptible to your value proposition?
  • What are their key strategic drivers? Who’s going up and down?
  • Do you have an expressed strategic direction for this practice area?
  • What are the alternatives to this strategic direction? Have you explored the viability of those alternatives?
  • What will need to be true about your practice or about the market for your current chosen strategic direction to succeed?

I could go on. And on. And on (and often do!).

But no, if we want to grow the practice, it’s much, much easier to press the recruitment button, bring a few people in and just get on with it.

To my mind, lateral hiring is simply the end of one strand of thinking, one tool in the box, not the panacea. Yes, it may be necessary to expand your business via lateral hires, to increase capacity or add new skills or even simply some new blood (maybe you have a succession issue). But all too often it is simply about buying turnover, dressed up as something else. And all too often – about a third of the time – it is an abject failure. Of the remaining ‘successful’ hiring, how much of it is really successful or only mildly successful, either in revenue terms or in terms of how the practice has developed as a whole, is only rarely assessed.

Lateral hiring doesn’t usually solve any of the problems about what your clients may actually want, how the practice might be best organised and resourced to better serve their needs and how service might improve, but it is often assumed to have all these magical properties.

It may win market share, in the crudest terms, but this is itself a gamble, and it’s equally likely that parts of your service will degrade, not improve, as someone with a new service style subtly and inevitably modifies your interface with clients or, indeed, forces out existing partners and fee-earners who aren’t happy with the new arrival or are now deemed surplus to requirements. It may improve it, yes, but it may not. Success may only be judged a few years down the track.

Beyond that, lateral hiring may even stunt innovation. If a practice is forced to innovate with its current resources, creativity can be stimulated. However, if lateral hiring is ‘the answer’ in itself, it rarely encourages innovation except in the sense that the new arrival’s experience may bring new thinking to existing fee-earners.

Of course, the best lateral hires can be a strategic solution, but all too often they’re simply not. In fact they’re more like a strategic sticking-plaster.

Understanding the market so that new products and services can be developed, which may in itself require restructuring or repatterning the organisation, training and coaching as well as new marketing approaches, new billing methodologies and new client relationship management protocols, all too often plays second fiddle to the default option of growth by lateral.

So, dedicating time and money specifically to R&D could provide a foundation to sensible lateral hiring, whether you call it R&D or not.

But part of the problem is that firms don’t budget for this. Where do you put product and service design? In your Learning & Development budget? That’s primarily for training or maybe professional support, and this is, surely a business development activity. BD? Well, that’s all very well but that budget has to cover an awful lot, including events, conferences, advertising and marketing, and this has training and resourcing implications. In fact, if we’re talking about lateral hiring, that’s an HR thing, no? Practice restructuring? Surely a departmental issue. Ah, yes, but in terms of an integrated offering, this may be a sector or group issue, covering multiple departments, which could create tussles between different partners, especially if there is, as there is so often, departmental/sectoral overlap in terms of who is in charge.

As such, the holistic approach needed for successful R&D can fall between budgetary stools, and very often it is easier not to do it, and default to a simpler solution.

Meanwhile, actually labelling something ‘Research & Development’ encourages and legitimises both concepts within an organisation. You may instead term it ‘Innovation’, which could have the same effect.

Whatever you call it, good research and continuing service development should be cornerstones of any modern law firm’s way of doing business, and a separate, defined budget for it will pay for itself many times over and support brand-building and differentiation. I believe it goes further than that, with the ability to keep your business surviving and thriving. And in an increasingly complicated and challenging world, that’s surely something to focus on quite carefully.

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