"Tacit Interactions" & Sustainable Competitive Advantage

Forgive me for an extensive quote, but it sets the stage for all that's to follow here.  From the redoubtable McKinsey:

"In today's developed economies, the significant nuances in employment concern interactions: the searching, monitoring, and coordinating required to manage the exchange of goods and services. Since 1997, extensive McKinsey research on jobs in many industries has revealed that globalization, specialization, and new technologies are making interactions far more pervasive in developed economies. Currently, jobs that involve participating in interactions rather than extracting raw materials or making finished goods account for more than 80 percent of all employment in the United States. And jobs involving the most complex type of interactions—those requiring employees to analyze information, grapple with ambiguity, and solve problems—make up the fastest-growing segment."

Before you say, "I already knew that!," consider the implications.  The Holy Grail of any firm seeking growth and supra-normal profitability is a sustainable competitive advantage. 

Transitory competitive advantages don't count. What is an example of a "transitory" advantage? Say, installing bar-code scanners at the checkout counter; this quickly becomes merely the price of entry.  But what if you could raise the productivity not of your checkout clerks but of your marketing manager?  Now do I have your attention?

As McKinsey characterizes it, lawyers and similar people who deal with ambiguity and exercise judgment are engaging in "tacit, complex interactions" (as opposed to explicit transactional interactions, which can be and are being automated, outsourced, or just plain eliminated [as when the bar-code scanner is integrated with the supply chain so that inventory and reordering can be removed from human hands]).   As the economy focuses more and more on "knowledge workers," then, "as Adam Smith predicted, specialization tends to atomize work and to increase the need to interact."

So the question for sophisticated law firms becomes, can we increase the productivity of our interactions?  Can we, in other words, do for the tacit workers what we've already done for the transactional workers?

The first thing we can say is that it's clear that "This shift toward tacit interactions upends everything we've known about organizations since the days of Alfred Sloan."  Gone is the pyramidal structure with tacit work only at the top; in are tools to help people collaborate more effectively both inside and outside their firms.  Decision support tools can take care of checklists and deadlines, and automatically point the way towards best practices.  Here's a concrete example:

"Kaiser Permanente is one of the organizations now pioneering the use of such technologies to improve the quality of complex interactions. The health care provider has developed not only unified digital records on its patients but also innovative decision-support tools, such as programs that track the schedules of caregivers for patients with diabetes and heart disease. Although it is hard to determine quantitatively whether physicians are making better judgments about medical care, data suggest that Kaiser has cut its patients' mortality rate for heart disease to levels well below the US national average."

One can only imagine the fear and loathing experienced by doctors who were asked to abandon their notebooks and manila file folders and to "trust" the digital records. 

Similarly, cutting-edge law firms will need to step back from the (false?) comfort of hierarchical staffing and move towards "environments that encourage tacit employees to explore new ideas, to operate in a [...] more team-oriented and unstructured way."

Feeling trepidation?  Here's the good news:  "Such capabilities will be difficult for competitors to duplicate.  Best practices will be hard to transplant from one company to another if they are based on talented people supported by unique organizational and leadership models and armed with a panoply of complementary technologies."

In other words:  Sustainable Competitive Advantage.

Support this effort with serious and ongoing professional development efforts, starting with recruiting for tacit skills, and then expose lawyers to diverse matters so they can become more seasoned and knowledgeable faster.  The best, if not the only, way to develop "good instincts" is through broad and sustained exposure to complexity, so one can intellectually progress from awkward and highly self-conscious analytic labors to fast and accurate perceptual insight.  Micro-management won't get you there.

Worth it?  Here is McKinsey's representation of the "disperson of average EBITDA per employee for companies by industry type, ratio of standard deviation to mean:"

What does this mean?  Simply that in "tacit" industries such as ours, the pre-tax cash earnings generated per employee are extremely "dispersed," meaning that the spread from the best-performers to the worst-performers is unusually wide.  Without knowing the numbers that went into McKinsey's calculation, not to mention the fact that McKinsey isn't focusing on law-firm-land in particular, all I can offer as a refresher course in statistics is what "standard deviation" means. 

Basically, it's a statistical measure of spread around the mean, and for present purposes all you need to know is that the higher the ratio of SD:Mean, the greater the disperson.  (68% of all members of a population fall within one standard deviation of the mean and 95% fall within two standard deviations.  Above 3 SD's and you're talking true outliers.)

For our purposes, this "wide dispersion" means excelling on tacit interactions truly distinguishes you from the competition—and doesn't hurt at year-end bonus time, either.

Still scared?