30 Apr 2018  | 
 |   | 

The edge of chaos

What has complexity theory to do with law firm strategy and business model design?

The behaviours and cultures that are the most difficult to change are those that have proved most successful in the past. Messages telling people that behaviours that worked well before will not in future, usually fall on deaf ears of those who have been well rewarded for those behaviours. Such messages conflict with their personal experience, hence their beliefs. Couple that with other deeply held beliefs that the legal profession deserves special protection from market forces, hence such change should be prevented, and we have the makings of a classic tragedy.

Change without careful thought can also make things unnecessarily complicated. New issues emerge. More lawyers and business units mean changes to the way the firm is governed and how people communicate and collaborate. Systems and processes become misaligned, making it more difficult to get things done. As new clients, new services and service delivery channels and new markets are added to the firm’s strategic portfolio, so greater complexity is unavoidable.

The intuitive response, to over-simplify systems and structures, can destroy value. How does one balance the need for streamlined efficiency with the complexity that delivers the richness that drives premium value? Some of the answers to this conundrum can be best derived from a relatively new, multi-disciplinary branch of science known as complexity theory. Marrying management theory with a branch of science usually associated with quantum mechanics may sound esoteric, but its importance is now well accepted across many areas of life, including modern business theory. Clear links can be traced from complexity theory principles to a number of management approaches regarded as ‘best practice,’ from Peters and Waterman’s eight principles in ‘In Search of Excellence’ in 1982 to Dennings’ ‘Agile Manifesto’ today. What follows therefore is not so much new as a restatement of management practices that are well accepted, this time underpinned with sound science.

Our view of how organisations function is deeply founded in how we view the natural laws that drive our world. Science we learned as children taught us that, as universal laws:

  • Every action has an equal and opposite reaction
  • Left to themselves, systems tend towards chaos (aka “entropy”)
  • Like a clock mechanism, every system can be broken down into discreet parts

These principles are based on the physics of Isaac Newton. A deeply religious man, Newton’s physics were founded in his belief that the world was controlled by a divine being and it was limited that which had been discovered by his time. Newton’s theories work well in closed systems where a small number of forces are involved. They break down in open systems, with multiple forces and elements that have complex and constantly changing relationships.

The most important impact that Newtonian physics has had on management thinking, has been the notion that tight control is necessary in order to prevent chaos. Almost all modern business theory is founded on the premise of control. In the early 20th Century, Henry Ford even forbade his factory workers to speak to each other because it distracted them from work.

While nowhere near as extreme, modern business systems remain fixated with the premise that it is essential to tightly control behaviour. Left to themselves, this thinking holds, people will misbehave and harm the interests of the business. The result is a plethora of complicated rules, performance-incentivised remuneration and reward systems and mistrust between hierarchical levels of the firm.

Such thinking is anathema to intelligent, independent, high-performance professionals. This is probably the main reason why partnerships have proved so popular as a business construct for such people.

In an environment where the underlying drivers of the business are evolving quickly, in ways that are frequently not predictable and the best strategic responses are unclear, control that is too constraining of people’s ability to find solutions and implement them can be especially harmful.

Control has traditionally been reflected in law office design

Today’s most modern approaches to law office design are applying these principles by structuring work spaces to make them conducive to the informal collaboration that sparks innovation and creativity.

Apart from the addition of desktop computers, the disappearance of paper libraries and a sharp reduction in the number of secretary work stations, the layout of most traditional law offices has not changed radically since the mid 20th Century. It still emphasizes boundaries and individuals rather than openness and teamwork.

Open plan offices, a relatively recent phenomenon, have been triggered more by a drive for efficiency and cost reduction than a genuine search for ways to improve collaboration. They bring with them also problems of background disruptions and lack of confidentiality. When properly designed though, they are part of an effective solution.

Digital tools that allow people to work remotely have also impacted the world of work and this seems set to accelerate. Again, determining the “few simple rules” (Lewin 1993) that will best ensure high, predictable performance and then letting groups and individuals regulate their own behaviour is better than being over controlling and, worse, developing new rules and controls on a ‘case by case’ basis.

The law as a complex adaptive system

Few really think about law as a ‘system’ although the term ‘legal system’ rolls easily off the tongue. The Oxford English Dictionary defines a system simply as: “a set of things working together as parts of a mechanism or an interconnecting network; a complex whole” and by that definition, it is clear that the term is appropriate. Professor J.B. Ruhl, who is the David Daniels Allen Distinguished Chair in Law at Vanderbilt Law School, provides a good primer on the law as a complex adaptive system and how the principles of complexity theory apply to it, in his paper ‘Law’s Complexity: A Primer’ (Ruhl 2012. ) Building on that, he and Daniel Katz (Associate Professor of Law, Chicago-Kent College of Law; External Affiliated Faculty, CodeX: The Stanford Center for Legal Informatics) examine how complexity might be measured, hence how it might be determined what can be simplified and what not, in their paper ‘Measuring, Monitoring, and Managing Legal Complexity’ (Ruhl and Katz, 2015 .)

Should future law firms be partnerships, or ‘corporate’ entities?

Continuing the point raised in the previous chapter about whether or not the leading law firms of 2025 will continue to be partnerships, or ‘corporate’ entities instead, this question might be an outdated response to systems theory. It seems triggered mostly by the notion that law firm partners have too much discretion and that it is too difficult to gain consensus and to ensure that everybody implements plans that are agreed.

So, they need to be ‘controlled.’

Complexity Theory and its manifestations in business science and in particular, the Theory of the Firm suggest that better results would be obtained by enhancing collaboration and the free flow of resources (especially information) between partners and encouraging entrepreneurial behaviour, rather than imposing ‘corporate’ controls.

One of the key characteristics of self-organising complex systems, whether these are natural, social, economic or business systems, is that their structure and behaviour is governed by a set of very few but rigidly imposed rules.

For law firms and many other businesses, the key is to discover those rules with which people must comply in order for performance to be acceptable and outcomes reasonably predictable. Then, once those rules are agreed and well understood, to enforce ‘zero tolerance’ for their contravention but otherwise to let people free to organise their behaviour within those limits.

The question about what business structure will be best in the future should therefore be governed by strategic considerations, not the kind of behaviour one expects of people in the firm.

Thinking in different ways about law firm strategy, governance and business model transformation

We need to think in different ways about our firms and how to effect change in them. Ways that are derived from how things really work in the world, not the neat but over-simplified models that make for elegant diagrams in business books, denying the real complexities involved.

As a subset of business science, the study of professional service firm (PSF)s is relatively new, starting with the work of Løwendahl, Maister and others in the 1990s. Much of the early work focused on the notion that professional service firms have special characteristics, distinct from other kinds of businesses. Richard and Daniel Susskind, amongst others, have shown how this uniqueness has eroded in the digital age.

With respect to the legal profession is added the notion that it serves the public interest for lawyers to occupy an even more protected position, even for instance than medical doctors, architects and engineers. This notion holds that this special protection from market sources may perhaps even be crucial to protecting the rule of law and the preservation of democratic values, hence even civilization itself. Again, the two Susskinds are foremost amongst many who point out that, excepting narrow practices such as litigation and probate work, this view increasingly is held neither by clients, nor by society.

The Legal Services Act in the United Kingdom

The first globally significant crack in this edifice appeared in the United Kingdom in 2007 with the Legal Services Act, promulgated in response to the Clementi Review. This Review, followed by the Legal Services Act, removed the restriction on lawyers sharing profits with others, opening the door to multi-disciplinary practices (MDPs) and even the restriction on those others from providing legal services to clients in all but a narrowly defined range of legal services.

 

Figure 33

 

In the United States such prohibitions are very firmly in place in most States, despite a succession of commissions of inquiry into their continued desirability. Canada is also in the process of allowing MDPs.

A different models for strategy is needed, to the linear models taught in 20th Century business schools

At the same time, ideas have moved into the mainstream of business science that many theories and models developed during the twentieth century were too linear and mechanistic to adequately guide businesses in how to organise and deliver the best performance.

Concepts of strategy and ‘strategic planning’ have moved from a linear construct of external and internal analysis followed by articulating overarching goals followed by setting objectives (often guided by perceptions of enhancing perceived ‘market position’) to developing action plans to disciplined, even rigid execution of those plans.

While neat and lending itself well to strategy consulting engagements, this construct is flawed in that it is based on an assumption that conclusions of the analysis and hence goals and objectives will remain constant through the execution phase, until the time comes to review and reset strategy.

Why differentiation is important

In ecology, the competitive exclusion principle (sometimes referred to as Gause’s Law of competitive exclusion or just Gause’s Law) states that two species that compete for the exact same resources cannot stably coexist.

One of the two competitors will always have an ever so slight advantage over the other that leads to extinction of the second competitor in the long run (in a hypothetical non-evolving system) or (in the real world) to an evolutionary shift of the inferior competitor towards a different ecological niche.

Gause’s law can frequently be seen between businesses in a market. Multiple businesses with exactly the same value proposition will not be able to co-exist because clients and others upon whom the business depends for its success will tend to value one of the businesses over the others.

With due regard to differing perceptions of value across clients and to legal conflict and other commercial considerations that modify the degree to which the exclusions are truly exclusive, Gause’s Law is as applicable to law firms, as to any other business.

In other words: it is very difficult for law firms offering the same services and strategies as each other to present different value propositions to clients. Although law firms may perceive themselves to be very different, clients frequently disagree. In a hypercompetitive market, this is a very serious matter. Differentiation is widely recognised to be important, but very seldom convincing to clients.

We believe that applying the principles described in this paper are an excellent basis on which to achieve clear differentiation, in ways that clients find valuable and real.

Sources of competitive advantage  

Michael Porter (1980) teaches in his theory of competitive advantage that there are three and only three ways of achieving sustainable competitive advantage – and that these are largely mutually exclusive, because the business models required in order to exploit each do not co-exist well with each other.

Porter’s sources of competitive advantage are to find unique ways, that clients and other stakeholders value, to:

  • be cheapest in the market
  • be differentiated – ie. better (in the eyes of clients) than competitors
  • exploit a market niche where demand exceeds the supply capacity of competitors in that space.

At its core, law firm strategy involves making choices about the above and then about the mix of clients, services and markets in which the firm chooses to compete as a result.

It is as much about what a law firm decides not to do, as what it decides to do.

Defining strategy

How best to approach strategy is well informed by returning to the basic concept as it was first conceived.

As early as the 1970s, Kenneth Andrews of the Harvard Business School published one of the first definitions that acknowledged that what businesses do is as legitimate as strategy as what their strategic plan states they should do. He also broadened the range of stakeholders that should be entitled to have an interest in strategy.

“Corporate strategy is the pattern of decisions in a company that determines and reveals its objectives, purposes, or goals, produces the principal policies and plans for achieving those goals, and defines the range of businesses the company is to pursue, the kind of economic and human organization it is or intends to be, and the nature of the economic and non-economic contribution it intends to make to its shareholders, employees, customers, and communities.”

Even in the 1970s, Andrews recognised that strategy is reflected in what the firm does rather than in the plan that is agreed, and that strategy emerges over time.

Andrews also however held the strong belief that strategy was something that had to be designed and driven by management, a precept that is difficult to reconcile with the realities of a partnership.

Fourteen years later another founding father of modern strategic thinking, Henry Mintzberg (1994) wrote his landmark book ‘The rise and fall of strategic planning’ in which he defined realized strategy (i.e. what is actually executed) to be a combination of deliberate strategy (that is planned) and emergent strategy (the stream of actions that are taken in response to day-to-day drivers that were not included in the deliberate strategy.)

Mintzberg’s model is probably closer to how strategy really emerges, especially in knowledge-intensive organisations like law firms. He teaches that strategy emerges more frequently from actions and behaviours at various organizational levels, and furthermore that this is desirable. Conflating the two views suggests that two major types of process exist through which strategy may be formed: deliberate, and emergent.

Today, few would argue against the premise that while a clear overall sense of strategic direction is important, equally so are the resilience and agility to change course quickly when new opportunities and threats emerge. In our view, this tends to mitigate in a favour of strategy development processes that favour emergent strategy, with the proviso that in either case, the soundness of the information upon which strategic decisions are based, is crucial.

A careful balance is needed. Err too much towards strong direction and opportunities go unexploited or threats overwhelm. Too much towards agility, and the firm wastes resources pursuing dead ends, invests too little in real needs and can end up rudderless, without any direction at all.

The ‘Edge of Chaos’ is a thing, in strategy too

The ‘Edge of Chaos’ is a principle of Complexity Science positing that some systems are too ordered and rigid so would benefit from loosening and becoming ‘more chaotic’ and others are too chaotic so would benefit from more order. The ‘Edge of Chaos’ is the space between, where the right balance exists between order and chaos, where self-organisation, innovation and creativity are most possible.

Figure 34

 

Figure 35

 

The set of guidelines presented in this section provide firms with a practical template for action, to deal with the very real challenges involved in balancing the need for a strong sense of strategic direction, premised on clear sources of differentiation that clients find valuable and real, and the inherent need for self-organisation in a complex, dynamic business.

Like all people, members of a law firm whether lawyers or not act individually, making choices about how to act based on information in their immediate environment. They operate with decentralised authority, involving disparate stakeholders creating systems with functions and purposes unto themselves, brought together for mutual benefit. All make choices simultaneously, both influencing and limiting each other’s actions. All parts of the system (including both people and inanimate parts such as work spaces, processes, knowledge, equipment) are connected in some way to all other parts, and the sum is in some tangible way greater than the individual parts.

People don’t act randomly. They share common rules about how to decide what to do next. These rules, whether formally defined or not (e.g. forming part of the corporate culture) connect people together and allow a global coherence to emerge without any central source of direction. The rules used by people to guide their behaviour evolve based on the degree of success that they deliver in changing their environment to their own advantage. The connections between people (i.e. the degree to which they respond to each other’s influence) are neither so tight that the system freezes up through inaction nor so loose that it degenerates into chaos.

Within these limits, systems are full of novelty and experimentation. People constantly try new ways to improve their own local environment and those actions trigger reactions amongst others. The result is a kind of dynamic stability that is characterised by occasional rapid shifts in shape and direction. Actions and reactions are not linear. Sometimes tiny actions give rise to large reactions and sometimes the opposite is true. The system tends to self-correct when unsustainable disequilibrium occurs, with people experimenting with many possible responses when roadblocks are encountered and rapidly exploiting solution when these are found. They have memory, behavioural diversity, are sensitive to small disturbances.

In summary, our hypothesis is that law firms are very much complex, adaptive systems as defined in Complexity Theory. We therefore need to apply their principles to how we govern our firms, how we develop strategy and how we transform our business models to align with those principles and, in so doing, the demands of this complex, adaptive 21st Century.

To leverage these principles is far more likely to yield an agile, resilient, high-performance law firm, than to attempt to suppress them with (ultimately doomed) efforts of command and control.

 

Sources and references

Andrews, K.R., 1971. The concept of corporate strategy, Richard D. Irwin, Homewood

Denning, S. 2018. The Age of Agile: How Smart Companies Are Transforming the Way Work Gets Done. AMACOM

Katz, D., 2011. Perspectives on Law and Legal Institutions and Complex Adaptive Systems. PhD Thesis, University of Chicago

Lewin, R.L., 1993. Complexity: Life at the edge of chaos. Dent.

Mintzberg, H., 1994. The Rise and Fall of Strategic Planning. Simon & Schuster.

Peters T. and Waterman R.H., 1982. In Search Of Excellence: Lessons from America’s Best-Run Companies. HarperCollins.

Porter, M.E., 1980. Competitive Strategy, Free Press, New York, 1980.

Richardson, K., Cilliers P., and Lissack, M., 2001. Complexity science: A “Gray” Science for the “Stuff in Between”. Emergence, 3(2), 6–18.

Sheard, S., and Mostashari, A., 2009. Principles of Complex Systems for Systems Engineering. Syst. Eng., 12(4), 295–311.

Sprauer, W., Blackburn, T., Blessner, P. and Olson, B., 2015. Self-organization and sense-making in architect–engineer design teams: Leveraging health care’s approach to managing complex adaptive systems. Journal of Management in Engineering, 2016, 32(2): 04015042

Sterman J., 1994. Learning In and About Complex Systems. Syst. Dyn. Rev., 10(2–3), 291–330.

Waldrop, M., 1993. Complexity: The Emerging Science at the Edge of Order and Chaos. Simon & Schuster, New York