Chartering new territory: diversification, legitimacy ...

Journal of Organizational Behavior J. Organiz. Behav. 29, 1101–1121 (2008) Published online in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/job.557

Chartering new territory: diversification, legitimacy, and practice area creation in professional service firms HEIDI K. GARDNER1*, N. ANAND2 AND TIMOTHY MORRIS3 1 2 3

Summary

Harvard Business School, Boston, Massachusetts, U.S.A. IMD, Lausanne, Switzerland University of Oxford, Oxford, U.K.

Diversification into innovative domains through new practice area creation is a critical imperative for professional services firms. Using theories of organizational territoriality and corporate charters, we conceptualize professional firms as federations of distinct practice areas and argue that the chartering of a new practice is an inherently political act. New practice area founders need to engage in appropriate legitimacy-mobilizing efforts in order to sustain diversification efforts. Our analysis of 46 cases of new practice area creation efforts in consulting and law firms shows that the mix of legitimacy required for new practice areas created through radical diversification is very different from that required for incremental diversification efforts. Our findings have important implications for studying how innovation is structurally accomplished in professional firms. Copyright # 2008 John Wiley & Sons, Ltd.

Introduction Diversification into innovative domains is a critical challenge for professional service firms (PSFs; Suddaby & Greenwood, 2001). Innovative diversification allows a PSF to profit from a wider array of expertise or knowledge and also broadens the market domain of clients that can be served. Innovative diversification further allows PSFs to adapt to changes not only in the external knowledge environment but also in the configuration of their internal knowledge assets (Hitt, Bierman, Shimizu, & Kochhar, 2001). Diversification attempts within PSFs often involve the creation of new subunits within a firm, but such organizational redesign is an inherently political process (Welsh & Slusher, 1986). At the same time, diversifying into an innovative domain entails journeying away from familiar domains and into unchartered territory, so to speak, and could prove to be a cognitive stretch to those managing a firm (Ginsberg, 1990). This paper examines how professional firms can address issues of cognitive and sociopolitical legitimacy to accomplish innovative diversification through structural redesign in the form of new practice area creation attempts.

* Correspondence to: Heidi K. Gardner, London Business School, Regent’s Park, London NW1 4SA, U.K. E-mail: [email protected]

Copyright # 2008 John Wiley & Sons, Ltd.

Received 30 May 2007 Accepted 30 May 2007

Electronic copy available at: http://ssrn.com/abstract=1963378

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Past research on PSFs has largely focused on field-level exogenous forces that provoke structural redesign. This emphasis is wholly understandable given that standards within PSFs originate largely outside their own structure, notably in professional associations and in markets (Mintzberg, 1983). Institutional theorists have highlighted the role of field-level logics in inducing changes in the organizational form of PSFs (Suddaby & Greenwood, 2005) while resource dependency scholars have stressed the importance of external labor markets in influencing the restructuring of internal career paths (Sherer & Lee, 2002). While exogenous forces as field-level drivers of innovation and change are well accounted for, the more endogenous dynamic concerning structural accommodation of innovative diversification within PSFs is less understood. This paper presents an empirical study of attempts at innovative diversification in a sample of management consulting and law firms, specifically as diversification relates to the creation of new subunits, or ‘‘practice areas,’’ within firms (Anand, Gardner, & Morris, 2007). We study the intraorganizational dynamics associated with the creation of new practice areas that are diversified to a greater (i.e., radical) or lesser (i.e., incremental) degree with respect to the dominant practice area within a firm. We find that the mix of institutional legitimacy required for creating viable new practices varies with the degree of diversification. Further, we conceptualize a PSF as a federation of various subunits (i.e., practice areas), each with a distinctive base of expertise and addressing a particular market niche. This intraorganizational level of analysis that we use in studying how firms redesign themselves in pursuing innovative domains nicely complements the exogenous, field-level emphasis extant in theories of innovation in knowledge-based organizations. The key contribution of our paper is in showing how legitimacy requirements underpin the creation of new practices areas that diverge radically or incrementally from a professional firm’s domain of activity.

Innovation and Diversification: A Critical Challenge Professional firms have an inherent imperative for both organic growth and diversification. The ‘‘up-orout’’ tournament system by which juniors are promoted to partner creates an endogenous bias for organic growth (Galanter & Palay, 1991), because newly promoted partners must attract work and then deploy junior professionals to execute this work (Gilson & Mnookin, 1989). The continued profitability of a professional firm rests on partners’ ability to leverage their reputation by deploying increasing numbers of junior staff (Maister, 1993). Beyond this, professional firms have an imperative to diversify, in order to hedge against possible shrinkage in their client markets and exploit underutilized firm resources (Hitt et al., 2001). A diversified structure allows the firm to spread the collective risk of its partners efficiently (Gilson & Mnookin, 1985). Consequently a firm seeks to develop multiple groups of professionals who work within different areas of expertise (Greenwood, Hinings, & Brown, 1990). Such an identifiable professional grouping or structural subunit is conventionally referred to as a practice area, and prior research shows how the development of these knowledge-based structures plays a key role in professional firms’ innovation processes (Anand et al., 2007). The existing literature on PSFs emphasizes expertise development and jurisdictional change as the key mechanisms of growth and diversification in professional firms. Expert knowledge underpins the organization and performance of professional firms (Morris & Empson, 1998) and provides the basis for continuous adaptation to changes in the environment of consulting firms (Werr & Stjernberg, 2003). Suddaby and Greenwood (2001) argue that as management knowledge ‘‘commodifies’’ over time professional firms try to ‘‘colonize’’ new territory, thereby provoking jurisdictional disputes with other professional communities as firms strive to legitimize certain actors and de-legitimize competitors (see Copyright # 2008 John Wiley & Sons, Ltd.

J. Organiz. Behav. 29, 1101–1121 (2008) DOI: 10.1002/job

Electronic copy available at: http://ssrn.com/abstract=1963378

LEGITIMACY REQUIRED FOR NEW PRACTICE AREAS CREATION

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also Greenwood et al., 2002; Greenwood & Suddaby, 2006). Within-firm jurisdictional disputes are also intimately linked to the development of market expertise and related new practice area development (Covaleski, Dirsmith, & Rittenberg, 2003). Although growth and diversification are critical in professional firms, prior research also suggests elements of the particular context that makes these processes highly challenging. First, professional firms are distinctive in their widespread use of the partnership form of ownership, sometimes in addition to formal incorporation (Greenwood et al., 1990). Partners serve as producer-managers, actively participating in the business as key production workers while also responsible for a firm’s overall management. This dual role implies that strategic initiatives are likely to originate at the relatively decentralized practice area level by individual partners since they are most aware of opportunities in their client markets (Hinings, Brown, & Greenwood, 1991). Second, partners’ desire for autonomy and their control of client relationships produces a dispersed distribution of power within the professional firm (Hall, 1968). This diffusion limits the firm’s top management from exercising complete decision-making authority over strategic issues such as diversification and organic growth. A firm’s decision to diversify, therefore, requires negotiation of power relations between a firm’s top management and leaders of existing practice areas. In summary, existing research tells us that innovation and diversification are vital yet difficult processes in professional firms. Prior work on PSFs has proposed that diversification into new services is intertwined with the development of innovative and differentiated forms of expert knowledge (Gardner, Morris, & Anand, 2007). Our present study, which examines the processes critical to the structural creation of new practice areas in PSFs, complements and advances this past research in two notable ways. First, we present a view of practice area as distinctive territory (Brown, Lawrence, & Robinson, 2005) that acknowledges the importance of expertise reorganization and jurisdictional claims but within the level of the firm rather than that of the professional field. This theoretical development allows researchers to appropriately conceptualize a PSF as a federation of practice areas. Second, we show that efforts at creating a new practice area—in effect new territory—need to be chartered with the appropriate forms of legitimacy. We provide an empirical account of PSFs’ attempts to adapt and reconfigure their organizational structure in order to accommodate innovative diversification efforts.

Theory Practice area as distinctive territory An identifiable professional grouping or subunit within a PSF is conventionally referred to as a practice area. PSFs enact structural adaptation in response to external and internal changes at the practice area level. Tracing the history of large law firms in the U.S.A. from the 1880s, Galanter and Palay (1991, p 15) note that as firms grew, lawyers in them became more specialized and identified with a ‘‘special line of practice’’ such as real estate, litigations, wills, and trusts. New and internally differentiated practice areas are also squarely implicated in professional firms’ innovation and diversification efforts (Covaleski et al., 2003; Heusinkveld & Benders, 2005). Practice areas are the basic unit of organizing in the typical PSF. As Kubr (2002, p 769) notes, ‘‘most consulting firms. . .structure their operating core—the professional staff—in more or less permanent ‘home’ units (called ‘practice groups’ in some professions). Consultants are attached to these units according to some common characteristics in their background, clientele served, or areas of intervention.’’ We argue that each practice area can be thought of as distinctive territory, because professionals attached to a practice group are likely to feel a sense of ownership toward it (Brown et al., Copyright # 2008 John Wiley & Sons, Ltd.


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2005). Two aspects of territoriality are especially important in the case of professionals. The first is the knowledge-based products or services that emanate from specialized expertise that comes to be associated with a specific practice area (Heusinkveld & Benders, 2005). The other aspect that a practice group might feel proprietary about is the client comprising its market domain (Gluckler & Armbruster, 2003). Consequently practice groups and practice leaders are likely to engage in behaviors that establish and extend their own product and market territory. With each practice area as a territory, by extension we can think of a PSF as a federation of territories. This idea harks back to Cyert and March’s (1963) notion of the firm as a set of coalitions and an organizational context in which political dynamics between coalitions shape important processes and outcomes. A more recent parallel can be seen in research on the management of divisions within conglomerate firms, which has portrayed the process as allocating ‘‘charters’’ (Galunic & Eisenhardt, 1996; Birkinshaw & Lingblad, 2005). A charter is defined as ‘‘the businesses (i.e., product and market arenas) in which a division actively participates and for which it is responsible within the corporation. In turn, divisional charters represent the building blocks of the corporate domain’’ (Galunic & Eisenhardt, 1996, p 256). From this perspective, one can see the purpose of a multidivisional corporation’s headquarters as granting or withdrawing charters to various division-level subunits and the purpose of divisions as defenders of their approved territory (Galunic & Eisenhardt, 2001). The one important way in which a PSF differs is in the relative decentralization of power and control, which is dispersed among partners responsible for various practice areas. This dispersion limits the ability of the managing committee of a partnership (as opposed to that of a corporation) to exercise absolute control over strategic initiatives concerning diversification and organic growth. All the same, the notion of charter is useful in understanding innovative diversification attempts within PSFs as ‘‘chartering’’ new territory. In the case of PSFs, charters are less likely to be handed top down from the center and more likely to be negotiated bottom-up from the periphery where new expertise constantly emerges through interactions with clients (Føsstenløkken, Løwendahl, & Revang, 2003). In this milieu, attempts to diversify a firm’s activity into innovative domains—efforts to charter new territory, so to speak—are politically loaded. The political model emphasizes the importance of the dominant coalition and sees its interests and beliefs motivating much of a firm’s behavior (Ocasio, 1994). Therefore the degree to which a new practice differs from the dominant practice within the firm is likely to be an important concern. When the innovative diversification attempt is a radical, that is, if a new practice area is very different from the dominant practice in terms of its expertise base and market niche, it might be perceived as esoteric and potentially as territory that cannot be easily chartered. On the other hand if the diversification attempt is incremental, that is, through extension into a thoroughly familiar domain, then there might be a danger of being subsumed by an existing practice that cultivates the related expertise area or serves the market domain that is akin. In terms of trying to earn a charter, both radical and incremental diversification attempts are problematic (cf., Deephouse, 1999). By implication there is a need to underpin new practice creation attempts with appropriate claims to legitimacy that is accepted by the dominant coalition within the firm.

Focus and locus of legitimacy in chartering new practice areas Institutional entrepreneurs engaged in new venture creation are usually required to advance legitimating accounts justifying their intention (DiMaggio, 1988). Aldrich and Fiol (1994) have argued that entrepreneurs need to focus on mobilizing two distinctive types of legitimacy—cognitive and socio-political. They define cognitive legitimacy as the extent to which there is a sufficient amount of shared understanding about a new venture. When cognitive legitimacy is high, what a new venture is attempting to produce and sell is taken for granted, and consumers are knowledgeable users of a Copyright # 2008 John Wiley & Sons, Ltd.



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product or service. In contrast when cognitive legitimacy low, entrepreneurs struggle to explain what their venture is about—both in terms of the form of the venture (e.g., Haveman & Rao, 1997) and content of what is being offered—and consumers fail to comprehend why they should use a product or service provided by that new venture. In the context of PSFs high cognitive legitimacy means that potential clients clearly understand the product or service being offered and, equally, that practices founders and members of the dominant coalition readily accept that the creation of a new practice area structure is the appropriate way to deliver that product or service. For example, if a partner in a law firm attempts to start up a mergers and acquisitions (M&A) practice, those in the marketplace will broadly understand what is being offered, given the widespread prevalence and taken-for-granted of M&A activity. If internal stakeholders agree that its business should be conducted from a separate subunit, then cognitive legitimacy for a new practice area is high. In contrast, when the cognitive legitimacy of a new practice area is low, founders may find that the expertise domain that is required to make it work seems so alien to members of their own dominant coalition that it does not quite fit their existing frames of reference; consumers may also struggle to comprehend what is being offered and why it might be relevant to them. Equally it is possible that low cognitive legitimacy refers to an area of expertise proposed by a practice founder that is so familiar to a firm’s dominant coalition that its members fail to understand the subtleties in terms of how the intended new territory is sufficiently differentiated from existing practice areas within the firm and why a new subunit should be set up for the purpose. In both cases the social recognition of claims to differentiated expertise is in question (Alvesson, 2004). Sociopolitical legitimacy is the second area of focus important to entrepreneurs establishing new ventures. Sociopolitical legitimation refers to the process by which key stakeholders and opinion leaders accept a venture as normatively appropriate and right (Aldrich & Fiol, 1994, p 648). In the context of PSFs, the founding entrepreneurs need to mobilize sociopolitical legitimacy for a new practice area by obtaining endorsements internally from members of the dominant coalition and externally from powerful and credible clients. When a practice founder is able to align his or her own interests with those of key members of the firm’s management committee, professionals in the dominant practice area, and partners with influential client relationships, then the new practice area is likely to overcome internal barriers to sociopolitical legitimacy. Getting powerful clients on board may signal commercial viability that is critical to the chartering of a new practice area. A practice founder’s inability to muster sociopolitical legitimacy will be reflected in the lack of internal and external constituents backing his or her claims to new territory. The locus of legitimacy is of equal concern in the context of new practice area creation in professional firms. Legitimacy can flow from sources either internal to the firm or external. Burgelman’s (1983) study shows that entrepreneurs championing corporate ventures need to work hard at cohering sufficient consensus from internal sources in order to get new products to market. Likewise, Heusinkveld and Benders (2005) argue that successful new concept development in management consulting firms rests on innovators’ ability to get around internal obstacles. Beyond the firm boundaries, PSFs mitigate doubts about the quality of their services by relying on external sources of legitimacy grounded in social relationships with clients as Gluckler and Armbruster (2003) have shown in the management consulting sector and Nelson (1988) has in the law sector. It is important to underscore that focus and locus are distinct aspects of legitimacy-evoking efforts. High internal cognitive legitimacy implies that the rationale for offering a product or service through a separate practice area is well understood within a firm, while a low value for external cognitive legitimacy implies that the form and content of a new practice offering is imperfectly or not at all understood in the marketplace. Sociopolitical sources internal to the firm might comprise powerful partners and members of the dominant coalition, while those external to the firm might be longstanding or influential clients. Copyright # 2008 John Wiley & Sons, Ltd.


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Diversification and legitimacy Diversification into innovative domains in PSFs is accomplished by the creation of new practice areas, but these new subunits initially violate the coordination principle of standardization of skills. Therefore, when a new subunit is created, there has to be appropriate claims to legitimacy that sanction its existence (cf., Haveman & Rao, 1997). Given that radical and incremental diversification in PSFs are fundamentally different in nature, we argue that the locus and focus of legitimacy associated with each is likely to be different as well. In our research study we seek to test the proposition that the degree of diversification of a new practice area is related to the mix of locus and focus aspects of legitimacy required for its viability within the firm.

Method Our research design is based on multiple cases of new practice area creation, both successful and failed. We used literal replication logic to build exploratory theoretical insights emerging from each successful case. In literal replication, the same outcome is predicted for each case (Yin, 1994), which is successful new practice area creation. Subsequently we used theoretical replication logic to validate our insights on failed practice area creation attempts. Cases included for theoretical replication produce contrasting results (i.e., failure) but for predictable reasons (Yin, 1994). This two-part multiple case study research design calls for constant iteration between theory and data, which allows us to develop theory that is grounded in the case data (Eisenhardt, 1989). Our unit of analysis is the attempt to create a new practice area within a multi-practice professional firm. These attempts were either successful (i.e., resulted in a discrete organizational subunit with dedicated infrastructure, clearly demarcated offering, and enduring client base) or failed (i.e., efforts that were incomplete or abandoned, or subunits that were shut down).1 We examine the degree of diversification of the new practice in each case and relate it to the focus and locus of legitimacymobilizing efforts. We select cases that are comparable along two primary dimensions. First, there had to be evidence of a clear attempt to create a new practice area that was differentiated to a lesser or greater extent with respect to existing practices within a firm. Second, all attempts studied originated in London, which allows us to control for location-based effects. We improve the generalizabilty of our findings by sampling successful as well as failed attempts at chartering new practice areas in eight firms in two professional sectors: management consulting and law. We chose these two sectors because they represent two very different mix of heterogeneous institutional forces (cf., D’Aunno, Succi, & Alexander, 2000): management consulting firms typically comprise weak normative or professional forces and strong market forces while law firms show the reverse pattern. The consulting sector includes a large international firm (‘‘C1’’), an international firm with mid-sized offices (‘‘C2’’), and two firms (‘‘C3’’ and ‘‘C4’’) that operate in only a few countries focused on specific market niches. The law sector includes one large international firm (‘‘L1’’), two UK-based firms (‘‘L2’’ and ‘‘L3’’) with wide-ranging corporate legal offerings, and a multi-country firm with a specific market focus (‘‘L4’’) (see Table 1 for details).2 We obtained our primary data through semi-structured interviews conducted with initiators of new practice area creation attempts in the eight firms. We compiled a ‘‘write-up’’ for each case after the 1 Practices categorized here as ‘‘successful’’ had met the criteria related to built-up infrastructure, service offering, and client base over an enduring time period prior to our data collection, thereby manifesting clear evidence of subunit creation through organizational redesign. We recognize the risk, however, that some successful practices could yet fail. Practices categorized here as ‘‘failures’’ were those that were acknowledged as such by our informants. 2 We have disguised the names of the firms, their practices, and informants to maintain confidentiality.



Copyright # 2008 John Wiley & Sons, Ltd. Large, diversified international firm Corporate law and capital markets 1 1 4

Specialty of core/canonical practice Successful cases Failed cases Number of informants

L1

2 2 6

5 1 9

Corporate law

Among the UK’s largest, with a wide range of corporate practice areas Corporate law

Among the UK’s largest, with a wide range of corporate practice areas

L2

L3

3 5 10

5 6 12 Law firms

Operates in only a few countries, with a specific market focus Executive recruitment

Operates in only a few countries, with a specific market focus Organization and human resources 6 2 7

International firm with mid-sized offices, with a wide range of practice areas Corporate strategy

One of the world’s largest professional firms, with a wide range of practice areas Technology enabled change

3 1 6

Intellectual property

Multi-country, with a specific market focus

L4

2 1 5

C4

C3

Management consulting firms C2

C1

Firm characteristics

Firm

Specialty of core/canonical practice Successful cases Failed cases Number of informants

Firm characteristics

Firm

Table 1. Description of case data

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initial interview and then corroborated it with a careful selection of informants within each firm. A senior partner in each firm helped to identify appropriate interviewees with varying seniority levels, tenure within the firm, degrees of involvement with a new practice, and sectoral expertise. This mix of informants provided us not only with personal accounts of individuals who personally experienced the creation process, but also with viewpoints of others who had more objective observations from varying instances in time and through different vantage points. We thus sought to maximize the amount of sensitive information we could obtain for each case from each informant while seeking to minimize bias inherent in retrospective reports (Golden, 1997). Interviews ranged from 1 to 3 hours, with at least two researchers present for each. Most interviews were taped and transcribed. In total we interviewed 49 informants and compiled case studies of 46 new practice area creation attempts, of which 27 were successful and 19 were failures. The write-ups that we compiled served as the data for cross-case comparison. We used a two-step approach to analyze the case data. In the first step we used successful cases to generate exploratory insights into the relationship between (1) the degree of diversification of each new practice attempt and (2) focus and locus of legitimacy-mobilizing efforts. For the 27 successful cases, we coded the interview transcripts to determine the number of instances in which the focus (i.e., cognitive and sociopolitical aspects) and locus (i.e., external and internal) legitimacy was evoked in a new practice area creation attempt. Details of cases are presented in Table 2. We used only successful cases for this step because we expected these to provide the most information about forms of legitimacy required to charter new territory. The coding scheme is described in detail in the following section. One author coded cases in the consulting sector and another author in the legal sector while the third author verified the consistency of the coding scheme. We then created cross-case matrices (Miles & Huberman, 1994) to identify patterns of variance in focus and locus of legitimacy separating radical from incremental diversification attempts. In the second step of the analysis we used the 19 failed cases to add insight to our exploratory findings (see Table 2). We verified whether the failed attempts violated the relationship between degree of diversification and legitimacy mobilization efforts exhibited by successful attempts. Taken together the two steps of the analysis provide a comprehensive account of how new territory is chartered successfully within the federated organizational structure of a PSF and what happens when territory extension efforts fail. We present our findings, analysis, and validation in the three sections that follow. We begin by enumerating the focus of legitimacy mobilizing efforts with respect to external or internal origins observed in successful practice creation cases. We then show the results of our analysis linking the degree of diversification to the focus and locus of legitimacy. We follow up with a set of insights that emerged from our examination of the cases of failed practice creation endeavors.

Findings: focus and locus of legitimacy To understand how sources of legitimacy underpin the successful emergence of new practice areas, we looked at the manner in which practice founders in our sample of consulting and law firms drew on internal and external constituents to mobilize cognitive or sociopolitical legitimacy. We examined the actions of practice founders in the 27 successful cases to enumerate legitimacy-building actions that could be mapped on to four combinations: cognitive-internal, cognitive-external, sociopolitical-internal, and sociopolitical-external. The locus of legitimacy was coded from the interview transcripts. We based our categorization of cognitive and sociopolitical efforts on definitions and descriptions provided by Aldrich and Fiol (1994). We have displayed the various legitimacy-mobilizing efforts schematically in Figure 1 and we provide a brief account of the four focus and locus combinations below. Copyright # 2008 John Wiley & Sons, Ltd.



Totals

Incremental diversification

Radical diversification

-Due diligence -M&A -Operations L2 C2 -Project finance -People and performance -Property -Retail banking L3 C3 -Litigation, sector X -Top teams L4 C4 -IP region 1 -Benchmarking -IP region 2 Total successful 27

L1

-Telecoms -Regional extension -Transport and travel L3 -Corporate debt L4 -Defense and infrastructure

-Marketing C2 -Healthcare -Structured finance -Automotive C3 -Executive remuneration

-Management assessment -Post-merger support -Organization design -Public sector C4 -Leadership training C1

L2

Successful law

C1

Successful consulting

Table 2. Cases by category

-Employment

L3

-N. America focus L2 -Structured finance L3 -Pharma L4 -Intellectual property

L1

Failed law

Total failed 19

-Benchmarking -Capital projects funding -Operations efficiency C2 -Retail sales and marketing -Post-merger support C3 -Utilities

C1

C3 -E-training C4 -Executive coaching

-Retail banking -Assessment and design C2 -Retail Sales and marketing -Media -Corporate banking -Organizational renewal

C1

Failed consulting

Grand total 46

Total incremental 19

Total radical 27

Totals

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Cognitive legitimacy, internal sources Practice founders in consulting and law firms used three main types of actions when drawing on internal sources to develop cognitive legitimacy. First, they sought to extend existing frameworks and expertise that is already widely accepted within the firm. To illustrate, one informant at C1 said, ‘‘Our task [as founders] was to leverage the strength of the past while at the same time building other dimensions onto it.’’ Second, they used internal marketing to showcase the practice area’s new expertise to colleagues and opinion leaders within their firm. An important aspect of this marketing involved revising the language and terminology of the new practice area in order to make it comprehensible, and therefore more acceptable, to others within firm. One practice founder at C2 described how she was able to make others within the firm understand the new practice’s objectives by reframing the language she used in describing the practice: ‘‘the perception of the rest of the organization [of what we do] has changed. . .because we’re better at marketing ourselves in tangible terms that [others within the firm] Theoretical categories

Major themes

Extend existing frameworks / expertise

Cognitive – internal legitimacy Generate internal marketing

Behave ‘‘as if ’’ new practice a reality within firm

Informant concepts and illustrative quotes Use of canonical, firm-specific approach for a client assignment Import frameworks and methodologies from existing practice areas o “We spent a lot thinking about how to bring some of our existing expertise into [the new practice]. I would say it was evolution in terms of the way that we built up our brand. We worked very hard to make sure we didn’t create if you like a distinctive [new practice] brand. Actually we have worked very hard to maintain an integrated brand so [C1] was not C1 strategy group or C1 technology group, it was C1.” Draw on previously codified expertise Showcase new expertise within firm o “Indeed by codifying that know-how, putting that into a series of documents that we’ve developed, like ‘How to manage the training function’ and ‘How to improve the management of sales force’ we developed a whole series of building blocks for the rest of the firm to tap into. They became analytic tool kits for different parts of the [retail] business.’’ Revise language to make it comprehensible to others within firm o “I don’t think it’s been a real fundamental change in what the practice offers, what maybe need to change is the way it’s marketed to the rest of the organization and the level of understanding of what it is that that practice delivers throughout the rest of the organization.” Designate ‘‘leader’’ (even if only one person in practice) Hire juniors to staff new practice

Develop expertise at client site / co-creating with clients o “You tend to find that knowledge works best if it’s sparked by a particular approach that’s already worked for a client and then tends to get tailored to meet the needs of the wider firm.” o “We did a diagnostic with them. Kind of co-create with them, actually, to try and understand the deeper issues and root causes. Once it worked there, it was pretty easy to show that it would work in general.” Do primary research (using facts / data to support) “Borrow” academic research to develop new forms of expertise o “To launch our internal practice website, the team had worked with lots of external people _ you know, ‘gurus’_on a collaborative basis, bringing them in for short periods of time to develop areas of the website.” Show that clients ready to accept knowledge base o “Sometimes we can see the problem coming in the market and we can start flagging early on with some trials and we will in effect look for a leading client who might problem–solve that issue.” o “The whole key to success is finding an area that is hot with clients and then fulfilling that through our internal market.”

Show that ‘‘new ’’ knowledge has already been accepted externally Cognitiveexternal legitimacy Apply new or divergent client needs as a basis for defining new practice

Convince (potential) clients about new offering Hold conferences Publish marketing materials

Develop clientfacing publicity

Figure 1. Coding scheme Copyright # 2008 John Wiley & Sons, Ltd.



Use political means to gain others’ cooperation

Sociopolitical internal legitimacy

Utilize expertise to create boundaries

Show that new practice conforms to rules / norms of firm Emphasize benefits to firm / other partners (beyond just revenues of new practice)

Seek / highlight political sponsorship o “Pulling in the political leaders always works – we’re at an advantage here in the London office because [the global managing partner] is here, and he tends to throw his support behind local initiatives.” Mobilize collective action (get others to join / support / cross-sell practice) o “ Success depends upon the kind of perception of that particular subject in an office or in an area that you could work. In London, because it’s particularly in a hub, i.e., there have been partners interested in it, a lot of work has been done with clients and therefore it has been seen as a legitimate and kind of platform approach.” Hire / appoint leader with strong reputation &/or relevant expertise Build up a competent client-service staff to increase perceptions of reliability o “We created an internal accreditation standard for anyone who wanted to do this kind of work with clients. If you didn’t complete the training, you simply weren’t allowed to charge your time against [this area].” Use (claims of) proprietary expertise to ward off encroachment attempts Sufficiently differentiated: not proliferation for its own sake or pure fiefdom-building Persuade partners that the boundaries of the new practice area do not encroach on their own turf Showcase reputational benefits Potential for cross-selling Expertise useful to develop other new practices / initiatives

Demonstrate economic viability of the new practice area Show “proof of concept” through revenue generated / demand created o “ It was clearly seen to be striking fertile ground in the marketplace and so it’s easy to get funding for additional research and so on. A positive spiral began develop.”

Build economic arguments supporting value of new practice Sociopolitical external legitimacy

1111

Create “stories and narratives” about its usefulness for clients o “It’s the responsibility of the new practice founder to convince people that this is THE approach. That’s done through a variety of organizational means from developing skills and capabilities and tools through showing that it works by bringing in big client success.” o “It’s critical to concentrate on big leverage points with existing clients and show some impact. Where we have an ongoing relationship and where we have brought some of the [new practice] thinking in, it has actually turned things around. The big push is from the practice itself, the partners, and the people within it, to have a stake in the game, to convert others, and to show this is the way forward.”

Use rhetoric of clients to build belief that new practice will work out

Figure 1. (Continued )

can understand.’’ Third, practice founders sought to establish cognitive legitimacy by behaving ‘‘as if’’ the new practice were already a reality within the firm. For example, some practice founders designated themselves as an official ‘‘practice leader’’—even if there was only one other person in the practice— in order to get listed in the firm directory as a chief point of contact for that area. Others went about hiring juniors to staff the new practice or luring them from other parts of the business with invitations to ‘‘get in on the ground floor of a new enterprise.’’

Cognitive legitimacy, external sources To establish cognitive legitimacy, practice founders also drew on external sources, primarily clients but also academics and other accepted outsiders. One option for doing so involved using new or divergent client needs as a basis for defining the new practice area. When, for instance, legislation changed to allow the privatization of parts of the UK telecom sector, one partner in L2 successfully leveraged the opportunity to initiate a new practice devoted exclusively to serving this emerging client base. Similarly, a change in the corporate governance code in the UK provided the impetus for a practice Copyright # 2008 John Wiley & Sons, Ltd.


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founder within C3 to start an Executive Remuneration practice that many clients signed up for. The founder noted: ‘‘Success is about seeing critical moments in market development and responding to them correctly.’’ In addition, both lawyers and consultants often tried to show that the ‘‘new’’ knowledge had already been accepted externally, for instance when a practice founder had co-developed expertise with an existing client. The telecom practice founder recounted how she spent two months immersed in the control rooms of her first telecom client so that she could ‘‘learn the nitty gritty of how to marry law, economics, and engineering.’’ Although this domain was ‘‘way out of the comfort zone of all my [lawyer] counterparts,’’ she was able to demonstrate external cognitive legitimacy by showing that members of the client industry, the merchant bankers, and the accountants accepted her expertise. Finally, the most straightforward means of establishing cognitive legitimacy seemed to be through marketing activities that were aimed at creating impressions of external acceptance. Tactics included holding conferences that attracted the participation of potential clients and publicizing the circulation of newsletters and brochures produced by the new practice area.

Sociopolitical legitimacy, internal sources From our data we could discern several ways in which professionals garnered sociopolitical legitimacy by drawing on sources inside the firm. First, both consultants and lawyers spoke of turning to ‘‘political bigwigs’’ and powerful ‘‘heavy hitters’’ within their firm to increase colleagues’ trust and gain others’ cooperation during the creation of a new practice area. Second, the founders used expertise as a means to enhance cooperation—for example by claiming proprietary expertise to ward off encroachment attempts or by building up a competent client service staff in order to increase perceptions of the new practice’s reliability. Said one lawyer, ‘‘Nobody was going to trample on my toes, because they just knew that they didn’t have my level of knowledge in that area.’’ Third, sociopolitical legitimacy often arose from founders’ actions that showed that the new practice conformed to accepted rules and norms of the firm. Founders were careful to avoid the taint of ‘‘fiefdom building’’ or ‘‘proliferation for its own sake’’—both of which were typically frowned upon in firms in our sample. Finally, founders strove to persuade others that new practice benefited the firm generally, or other partners specifically, beyond just revenues of the new practice. Informants talked of convincing others that the practice held the potential to increase the firm’s reputation by drawing in prestigious new clients, for example. Said one law partner, ‘‘Once I started bringing in the bulge bracket [elite banks], any opposition just sort of melted away.’’

Sociopolitical legitimacy, external sources Lawyers and consultants both used similar strategies to create sociopolitical legitimacy by drawing on external sources. They built economic arguments supporting the value of their new practice. Founders talked about demonstrating ‘‘proof of concept’’ by showing how much demand they had created for their new service. For example, one consulting partner at C2 said, ‘‘It was clearly seen to be striking fertile ground in the marketplace and so it was easy to get funding for additional research and so on. A positive spiral began to develop.’’ A number of indicators signaled the potential viability or worth of the new practice area: booked revenues, number of clients served, and even the numbers of meetings held with client senior executives. Somewhat less tangibly, but equally important, was the creation of compelling stories and narratives about the new practice’s usefulness for clients. As a consulting partner at C3 remarked, ‘‘It’s the responsibility of the new practice founder to convince people that this is THE approach. That’s done. . .by showing [what] works in bringing big client success.’’ Copyright # 2008 John Wiley & Sons, Ltd.



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To summarize, we were guided by our theory to identify legitimacy-building efforts that were either cognitive or sociopolitical in focus and with an internal or external locus. The list displayed in Figure 1 was nearly identical across management consulting and law firms, leading us to believe that professional firms in general might share the tactics that we have identified. In the next step of our analysis, we relate degree of diversification of successful new practice areas to the focus and locus of legitimacy-mobilizing tactics.

Analysis: diversification and legitimacy To analyze the relationship between the degree of diversification of a successful new practice and focus and locus of legitimacy-mobilizing attempts by practice founders we used the following steps. First we coded whether the new practice was incremental or radical in terms of its degree of differentiation, as explained below. Next we determined frequency counts of legitimacy-seeking attempts for each new practice in each cell of the 2 2 combination of focus (cognitive or sociopolitical) and locus (internal or external). We then examined the nature of the relationship between diversification degree and cognitive legitimacy on the one hand and sociopolitical on the other. Our findings suggest that the combination of legitimating tactics required for radically diversified practices is different from that required for incrementally diversified practices. The results held for both consulting firms as well as law firms. Diversification: radical or incremental? We triangulated three sources of information to determine whether a successful new practice in our sample could be classified as a radical diversification attempt or merely incremental. First and foremost we relied on the interview transcripts of practice founders and terms that they themselves used. For example, informants’ use of the descriptors ‘‘a radical departure’’ or ‘‘a whole new way of thinking for us’’ cued radical diversification. In contrast, incremental diversification was signaled by use of descriptors such as ‘‘a fairly incremental step away,’’ ‘‘adjacent to what we already did,’’ or ‘‘nearly more of the same, but targeted in a different way.’’ Second, we compared the way things were organized within the core or dominant practice vis-a`-vis the new practice area with respect to standard operating producers, products or service offered and market domain addressed. For example, if the dominant and most other practice areas within a firm used 3-month client assignment as the norm whereas the new practice employed a 3-week assignment, the difference was an indicator of radical diversification. Third, we used expert informants within each firm not directly connected to, but familiar with, the new practice attempt to verify our coding based of the primary informant’s data. As a final check we used the help of senior partners in the firms to validate and adjudicate the incremental versus radical categorization that we had attached to practice creation attempt. Table 2 incorporates the result of our coding effort. Of the 27 successful new practice areas, 15 were cases of radical diversification and 18 were in the sample of consulting firms. To illustrate, we coded the Marketing practice at C1 as a case of radical diversification because the type of expertise, staffing ratios of experienced to junior personnel, the level of client contact, and length of assignment associated with that practice area were all quite different from the firm’s canonical technology-led transformation practice. Of the 19 failed cases, we coded 12 as incremental diversification, and seven were in the lawfirm sample. To illustrate, we coded the Sector X Litigation practice in L3 as incremental because it shared many features in common with the dominant corporate litigation practice within the firm. As one partner at that firm described it, the new practice ‘‘was just a sub-specialty of what we were already doing, a sort of natural hiving off from the [core].’’ Copyright # 2008 John Wiley & Sons, Ltd.


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Legitimacy-seeking efforts: relative count measure In the next stage of our analysis we determined a comparable measure of legitimacy-seeking effort for each case. Coming up with measures that could be compared across cases required two steps. First, for each case write-up we used the category counting procedure outlined in Weber (1990, p 56), which ‘‘assumes that higher relative counts (proportions, percentages, or ranks) reflects higher concern with the category.’’ This logic implies that we can infer the importance of a topic to an interviewee according to the portion of time he or she spends talking about it. We used the categories in Figure 1 to decide whether a legitimacy-seeking effort should be coded as cognitive-internal, cognitive-external, sociopolitical-internal, or sociopolitical-external. Two authors independently analyzed each case writeup to tally legitimacy-seeking efforts, and we then arrived at raw counts for the four legitimacy cells per case through mutual agreement. In the next step of the analysis, we followed Dougherty (1992) to correct for distortions that might be introduced due to the relative differences in transcript length for the different case write-ups. We divided the raw tally by the total number of words comprising each writeup and multiplied by the average transcript size (423 words) to arrive at a clearly comparable ‘‘relative count’’ measure. To illustrate, in L2’s Telecoms practice (a case of radical diversification) the raw tally for the cognitive-external cell is 3 and the transcript length is 552 words, resulting in a relative count measure of 2.3 (this number was rounded off to 2). For each set of radical or incremental diversification cases, we summed the resulting relative counts in terms of four categories: cognitive-internal, cognitive-external, sociopolitical-internal, and sociopolitical-external. Patterns of legitimacy-seeking efforts Figure 2 presents the relative counts of internal versus external legitimacy-seeking efforts for radical versus incremental cases in two sets of matrices (one for cognitive diversification, another for

Relative frequency of legitimacy-seeking actions A Radical Degree of differentiation Incremental

7

14

19

5

Internal

External

B Degree of Radical differentiation Incremental

28

12

15

24

Internal

External

Locus of legitimacy Figure 2. Legitimacy mix by degree of differentiation. (A) Cognitive legitimacy and (B) Sociopolitical legitimacy Copyright # 2008 John Wiley & Sons, Ltd.



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sociopolitical legitimacy). There is a clear cross-over pattern that is visible when comparing across the cognitive and sociopolitical matrices.

Cognitive legitimacy When the new practice is a radical diversification attempt, then the locus of cognitive legitimacy is predominantly external. As Figure 2A shows, cases of radical diversification relied twice as much on external versus internal cognitive legitimacy (14 vs. 7 actions). What this means is that when a practice founder attempts to charter a territory that is very alien to the firm (i.e., radical diversification), then he or she must point to models that are verified or referred to by external constituents. When there are external constituents willing to endorse the potential taken-for-granted of the service offering then the new practice is more likely to be successful. On the other hand when the diversification is incremental, the locus of cognitive legitimacy is predominantly internal (19 vs. 5 actions). That is, when practice founders propose something that is in the nature of extension of existing territory, then they need to justify vehemently to internal constituents that what they are proposing is, in fact, different from what already exists within the firm. Endorsement from internal constituents that the basis for the new practice is indeed cognitively distinctive seems to be very important in making a success of it.

Sociopolitical legitimacy The finding for sociopolitical legitimacy exhibits an interesting cross-over pattern when compared to cognitive legitimacy. When practice founders propose radical diversification they direct their sociopolitical legitimacy-seeking attempts at internal constituents. Figure 2B shows that successful cases of radical diversification relied on internal sources of legitimacy 28 times, compared to 12 for external. This could happen because their proposal carries a lot of risk and uncertainty, and hence internal political backing might be extremely crucial. On the other hand, when the proposed practice is only incrementally diversified, then validation from external constituents is important: practice founders need the support of important clients to vouch for the need to carve out a distinctive practice area. To summarize, radically diversified practices need external sources to provide cognitive legitimacy and internal sources to supply sociopolitical legitimacy. Incrementally diversified practice attempts need internal sources to vouch for cognitive legitimacy but external ones to buttress sociopolitical legitimacy. We found no difference in the pattern between consulting and law firms. To animate our qualitative insights better we provide illustrations from our case studies: one each of radical and incremental new practice areas in a consulting firm and a law firm, respectively. Illustrative cases Radical diversification. Our analysis suggests that for radically diversified practice efforts to succeed, founders should mobilize cognitive legitimacy from external sources and sociopolitical from internal ones. The structured finance consulting practice at C2 provides an apt illustration. The dominant practice area within C2 is strategy, and it exemplifies how the firm does business: each assignment is scheduled well in advance, typically lasts three months, involves a large number of junior and generalist staff, requires a lot of analytic research work, and results in a set of recommendations to the top management team of the client without much ‘‘hands on’’ or implementation work to follow. The structured finance practice sought to help clients that were contemplating a leveraged buy-out (LBO) of publicly traded companies that were taken into private hands. In this domain, the standard template of the hallmark strategy practice did not really apply to the structured finance practice area: the request for Copyright # 2008 John Wiley & Sons, Ltd.


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advice could not be predicted well in advance and was entirely contingent on whether an LBO deal was imminent; assignments lasted 3 weeks at most; the nature of work required a small staff of highly specialized individuals with requisite sector level or financial engineering expertise; and occasionally, there was some ‘‘hands on’’ work in helping a client on site after a deal was consummated. To many partners within C2 the very lack of isomorphism in the way the structured finance practice proposed to carry out its business smacked of illegitimacy. To make the new practice area viable, the founder worked on two fronts. The founder mobilized cognitive legitimacy through external sources by pointing to a close competitor that had a similar practice and by demonstrating that prestigious firms that were not previously C2’s clients were convinced that the firm could provide such a service. The founder also enlisted internal sociopolitical support in the form of powerful partners that were willing to ‘‘lend’’ staff members to work on projects and who endorsed claims that the new set of clients would provide ‘‘follow on’’ work in the form of assignments for the dominant strategy practice once an LBO deal was completed successfully. Interestingly—and in line with our findings—the founder did not use any of the tactics we have identified as cognitive-internal nor sociopolitical-external. Incremental diversification. We find that for incrementally diversified new practice area attempts, founders should mobilize cognitive legitimacy from internal sources and sociopolitical from external ones. Take for example the public sector financing practice at L2. When legislation in the UK changed to introduce private sector funding for public works projects through what was termed the Private Financing Initiative, the practice founder, who was attached to the construction industry practice in L2 got together with a colleague in the banking practice to propose the new practice area. Specialized expertise for the new practice area was a pure recombination of existing knowledge in these practices, which is the most frequently used tactic for gaining internal cognitive legitimacy. The founder and her banking cofounder had each been involved previously in two large transactions outside the UK where private financing for major public projects was prevalent; they were therefore able to convince domestic clients with whom they had already built their reputation for this sort of work to provide them with the required external sociopolitical legitimacy. As a result, the firm was able to launch a Project Financing practice that sat outside the existing core practices and was staffed separately to them. The clients for this practice included lenders (banks) who were now sourcing law firms to aid the documentation of new transactions and borrowers who also needed legal services to structure the financial arrangements. Because the former were familiar with the reputation of the banking practice and the latter with the construction practice, the new practice could build on the existing reputations of core practices to capture its market domain.

Insights from failed practices: territory forgone and territory subsumed In general the failed cases in our sample exhibited lower levels of legitimacy-seeking actions by practice founders. Of the 19 in total, 12 were radical diversification attempts while the remainder were incremental (refer to Table 2 for the list of failed practice attempts). In order to obtain further insight into the process by which new territory is chartered we asked why the failed practices were discontinued. We found a surprising difference in fates of radical versus incremental new practice attempts. When radically diversified practice attempts failed, firms generally treated these as ‘‘forgone’’ territory: they shut down the practice area completely and withdrew from that area of expertise and market domain. For example, the founder of the Organizational Renewal attempt at C2 tried to base the new practice on a fairly esoteric framework of organizational learning developed as part of his graduate dissertation thesis. An informant within the firm noted that the attempt lacked cognitive legitimacy because the expertise base was unfamiliar within the firm, and no external constituents were willing to vouch for the robustness of the expertise base. He said that the practice founder was ‘‘unable convince Copyright # 2008 John Wiley & Sons, Ltd.



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our. . .colleagues that this was anything other than German sociology and it might work in one or two very odd German clients, but it was completely irrelevant elsewhere.’’ The firm did not pursue any further attempts to establish a practice in the domain. The law firm L1’s North America-focused finance practice attempt provides another example. It was a case of radical diversification in terms of knowledge and market networks needed to make it work even though it was building on the core practices of the firm. This new practice was initiated by the firm’s top management committee, which allocated substantial start-up funds to acquire office space, hire a marketing team, and make lateral hires. The firm had some local clients among banks and corporations from its London operations that it planned to use to enter the North American market. However, the firm was not able to make enough leading hires to break into the local market against powerful competition nor could it develop sufficiently strong network connections into local clients without these hires. Its technical knowledge base was also insufficient to be able to convince clients it had the expertise to compete against the incumbents on large, complex transactions. Influential partners became concerned at the huge cost of the effort and began to withdraw support. It therefore lacked both external cognitive legitimacy and internal sociopolitical legitimacy. The practice was shut down and the firm had to forgo its ambition to establish a North American beachhead. When incrementally diversified practices failed, firms treated these as territory to be ‘‘subsumed.’’ Existing infrastructure in the form of frameworks, tools, methodologies, personnel, and client lists were transferred to an ongoing practice area and what was previously a claim to a separate area was simply treated as a subsidiary service line. To illustrate, the founder of the Operations Efficiency practice at C1 claimed that, despite the presence of similar practice in North America, the firm needed a separate European area because the local context was different. While the founder was able to muster some external sociopolitical support in the form of clients requesting work from the new practice area, he was unable to convince internal stakeholders that the new practice area’s offering was fundamentally different. Powerful partners within the firm failed to recognize it as in any way distinct, thus denying necessary internal cognitive legitimacy. The founder’s supervisor agreed to merge the practice with the North American operation stating that ‘‘Our global clients expect us to have a global view on which way we’re going, so ultimately [we] made the call to say we’re not going to support this [claim to a distinctive practice area].’’ Another illustration of territory subsumed is provided by law firm L3’s Employment practice in Germany that was opened to take advantage of a new set of European regulations. The founder had been hired laterally into the firm and was thought to have good contacts to regulators and to other local firms. While he therefore had good support from clients to generate work, he ran up against internal competition for this client work and opposition to his requests for resources. Partners in the UK were unconvinced the firm should spend money to develop the German practice as fast as he wished and that work should be fed back to the UK practice from Germany in order to sustain the core practice. Disagreements occurred over which practice had the better expertise to carry out more complex transactions obtained from the regulatory body. In the event the German practice was re-organized to operate within the UK practice and its separate budget was removed.

Conclusion Diversification into innovative domains is a key mechanism by which firms adapt to changes in their environment and to shifts in their resource base. Diversification in professional firms requires structural adjustment—the creation of new subunits through which new domains can be pursued. We find that new practice area creation is largely an endogenous process that is highly political and one in which Copyright # 2008 John Wiley & Sons, Ltd.


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legitimacy is critical. The grounding of our research study in two professional sectors is a major boost to the generalizability of our findings, even though a surprising element of our study was the lack of difference in patterns between the consulting and law sectors. We make three important contributions to research and theory: (1) we use territoriality theory in a novel way to conceptualize a PSF as a federation of distinctive territory; (2) we extend corporate charter theory to the domain of professional firms; (3) we show how legitimacy-seeking efforts are implicated in the structural accomplishment of innovative diversification efforts within PSFs. We contribute to the theory of organizational territoriality (Brown et al., 2005) by conceptualizing practice areas as distinctive territory within a PSF. We have developed a theory of how distinctive new territory is created through two quite different mechanisms of radical and incremental diversification. We also explain how failed diversification attempts can be categorized as territory forgone when radical or territory subsumed when incremental. Radical diversification implies the contemplation of a domain that is esoteric and unknown territory so far as the firm is concerned. Practice founders that seek to charter such strange territory must obtain endorsement from outsiders that their idea is not as farfetched as it seems and must also seek political support from insiders. When the products and clients underpinning the new practice attempt is merely alien to the firm but found in competing firms and well-accepted within the marketplace, then practice founders can muster external cognitive legitimacy relatively easily. Founders could argue for the need to match competitors’ offerings or invoke the visibility or salience of the practice in the marketplace. However, if the practice area is radically new and without precedent at all, that is, not found elsewhere, then one clear implication of our study is that practice founders should mobilize external cognitive legitimacy and seek political backing from insiders in order to succeed. Incremental diversification implies extension of existing territory but seems to be no less problematic. Founders that seek claim to distinctiveness of known territory need a different mix of legitimacy-mobilizing attempts: they must be able to convince insiders that their domain needs to be separated from ongoing operations and must show that influential outsiders would favor such separation. A parallel can be seen in the case of small nation-states that are formed by seceding from a larger existing colony (Anderson, 1983): patriots championing the cause of a nation-state must convince the outside world of the cognitive legitimacy of their claim and also recruit powerful players in the larger colony who see the rationale to cede territory. In this paper we also extend the notion of organizational charter to the context of professional firms. The charter concept has been mainly used in previous research in describing high technology conglomerates (e.g., Galunic & Eisenhardt, 2001) and multinational firms (e.g., Birkinshaw & Hood, 1998) in which top-down directives from corporate headquarters play a controlling role in defining charter evolution. We show that charters can be negotiated from the bottom-up in professional firms. We argue that chartering efforts are intimately intertwined with legitimacy mobilizing processes, as practice founders do when they seek license to operate a separate subunit. Further, in this paper we unpack the concept of legitimacy that has been critical to explaining how new structures are created and sustained (Haveman & Rao, 1997). We have built on Aldrich and Fiol’s (1994) ideas of sociopolitical and cognitive forms of legitimacy to argue that the focus of legitimacyseeking action within firms should be analyzed with reference to their locus as well. We show that external and internal loci serve very different purposes in embodying innovative diversification efforts through the chartering of new subunits. There are clearly managerial implications stemming from our research study as well. Professionals that seek to champion innovative new practice areas need to be mindful of the degree of deviation entailed from business-as-usual and also should heed interaction between the focus and locus aspects of legitimacy. Internal and external constituents play different roles in the chartering of unfamiliar and familiar territory. Copyright # 2008 John Wiley & Sons, Ltd.



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There are, of course, limitations to the present study. Although we have shown that founders must mobilize locus-specific cognitive and sociopolitical legitimacy, our data are not detailed enough for us to make normative rules about the order or sequence in which such attempts should unfold. Ideally one would want to study a few new practice attempts as they unfold in addition to relying on retrospective (albeit well corroborated) accounts. Our research points to the practice area level as one in which important structural adaptation takes place. Clearly future studies of professional firms need to examine how intraorganizational political struggles play out to resolve the imperatives for innovation and adaptation within PSFs. Taking heed of the practice area level can also help us better understand how endogenous forces interact with exogenous field-level forces to shape change in the sector of professional firms. Studying innovation in PSFs is important because their characteristics as knowledge-intensive organizations with flatter structures and a focus on strong employee involvement make them representative of a broader category that is of increasing contemporary relevance (Greenwood, Suddaby, & McDougald, 2006). Understanding how PSFs innovate successfully or fail to do so therefore has wider ramifications for organizations in the future. Finally, because organizations generally face the problem of learning how to innovate successfully in order to sustain their competitiveness, conceptual and empirical studies of the innovation process have important practical as well as theoretical implications.

Acknowledgements This study was supported by funds from the London Business School and from the Clifford Chance Centre for Professional Services Firms at the Saı¨d Business School, Oxford University.

Author biographies Heidi K. Gardner is an Assistant Professor of Organizational Behavior at Harvard Business School. Her research on professional firms examines how to organize for innovation and effective client service. Her other research focuses on group-level issues of status and conflict, knowledge creation and sharing, and multi-national teams. N. Anand is a Professor of Organizational Behavior at IMD, Lausanne. His research focuses on innovative organizational structures in professional firms, organizational field formation, and the use of social networks in managing emotions. Timothy Morris is Professor of Management Studies at Saı¨d Business School, Oxford University and the Director of the Clifford Chance Centre for the Management of Professional Service Firms. His research interests in professional service firms concern the ways in which they organize to innovate, as well as their decision making and promotion systems.

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