When we meet with law firm managing partners and senior partners, we often ask them how well they understand their metrics.
Do you understand your firm's profits per partner?
Do you understand how many hours you and other partners have billed and what billing rates are?
Do you happen to remember your LSAT score and law school GPA?
Why yes, as a matter of fact.
Do you know what the bonus calculation is for the general counsels of your five largest clients?
Every communication or interaction between a modern enterprise and its law firms reflects how the client measures performance, which is expressed in financial statements, and the goals and bonus plans for the CEO and the general counsel. In most companies, the board and human resources play a large role in assessing performance, and GCs are looking for ways to be more in sync with them. To not understand the general counsel's metrics and bonus calculation is to operate with blinders.
In our first and second articles about performance, we discussed how metrics could help lawyers improve their performance and professional satisfaction. In today's world, where most lawyerly conversations touch on areas for improvement like diversity, design thinking, innovation, artificial intelligence or project management, the amazing thing is that we have no agreed-upon way of assessing how these initiatives actually impact performance.
The heart of the problem is that the law school Langdellian method doesn't distinguish much between what judges do and what lawyers do, treating both as practicing legal reasoning, and it understands lawyers to be at the center of things, not needing to seek feedback. So while there are lots of good reasons to resist outcomes-oriented metrics for judges, few of those make sense for lawyers. Yet most lawyers want to be assessed on "lawyer-out" criteria:
- Legal reasoning.
- Thoroughness and effort.
- Ethical intent.
As one friend recently joked: "If you judged lawyers the way they judge themselves, then every action by every lawyer who went to an elite law school would be exactly the same level of quality, since they define the quality of their action on the quality of their credentials."
To understand the implications of getting to a place where you can better measure performance, look at what's happened in the world of advertising. Ninety percent of all growth in ad spending in the last decade has gone to Google and Facebook, because they can demonstrate the performance of ad spending in a way traditional media never could.
Clients measure the impact of any action on:
- Revenues, now or in the future.
- Expenses, now or in the future.
- Balance sheet, i.e., assets minus liabilities (including risk, correctly priced).
- The multiple—the value investors ascribe to earnings, which is usually an amalgam of growth rate and intangible factors such as reputation, predictability, etc.
So the opportunity is for lawyers to embrace modern methods of measuring performance to show how what we do translates into value for the client.
We think this is so important we'll call it the Lippe-MLA Legal Performance Model.
Once we shift the lens from lawyer out to client in, it becomes pretty easy to better understand and improve performance.
What do lawyers do to contribute to revenue, now or in the future?
- Put contracts in place that define and manage revenue.
- Help create intellectual property rights that protect market position and improve margins.
- Help acquire assets that are the source of future revenues.
- Manage regulations or enforcement that impact market access.
- Support business relationships that are viewed positively by customers, thereby improving the client's Net Promoter Score.
What do lawyers do to reduce expenses, now or in the future?
- Help prevent problems or rule violations that ultimately get expressed as expenses.
- Reduce direct legal expenses.
- Help other parts of business, such as procurement, be more commercially effective.
- Avoid creating friction or unnecessary problems that impede efforts at transformation or other strategic changes.
- Avoid litigation, correctly predict the outcome of litigation, or manage litigation to a better outcome.
What do lawyers do to improve the balance sheet?
- The balance sheet is the reflection of historical financial performance. By definition, matters of risk—such as the potential risk that a customer won't pay, or that a derivative will go into default—should be priced into the balance sheet. If risks are priced properly, then everyone in the organization will be on the same page in terms of understanding and taking appropriate risks.
- The balance sheet should be the place for truth-telling, so legal should help create a culture where problems are recognized and addressed, not suppressed to metastasize into bigger problems.
What do lawyers do to improve the multiple?
The value investors ascribe to future earnings is an amalgam of their assessment of corporate competence and market opportunity. While there's not a ton that lawyers can do about market opportunity, all the higher order things lawyers hope to do—improve reputation, be seen as ethical, avoid one-time losses or enforcement problems, improve governance and compliance, anticipate and manage cyber risk—should be reflected in the multiple.
When we see companies like Volkswagen, Wells Fargo or Uber struggle with huge performance, ethical and reputational issues, those problems get expressed as a reduction in their multiple, and it usually takes several years of consistent performance to get past those problems. Often, lawyers' response to reputational problems is to add tons of proceduralism, but there is scant evidence that such proceduralism actually reduces investor uncertainty.
Once we start to measure performance more rigorously, we see what we can do better, and we see how some of the things we're already doing matter more or less than we think.
Diversity can help improve the multiple because it enhances corporate reputation and avoids reputational problems, and it should improve revenue by enhancing market access.
Innovation helps reduce friction and find new market opportunities.
Ethical reputation and consistency of earnings will improve the multiple.
Design Thinking can get rid of superfluous friction that makes clients think we're still living in a Dickens novel.
Given the need to realign lawyers to the way clients measure performance, we can probably suggest five laws for legal metrics:
- LegaI metrics must be outcomes-based, aligned with institutional metrics.
- LegaI metrics must be process-specific, i.e., sales-related metrics should be completely different from litigation-related metrics.
- It's better to imperfectly measure important things than perfectly measure unimportant things.
- Metrics work much better when considered in conjunction with possible innovations like design thinking.
- Lawyers who say they're not good at metrics are just being lazy—they are more than capable of measuring those things they care about.
Like most professions, law makes aggressive claims for its distinctness from the world in which it operates. But perhaps the path forward is more about embracing the metrics culture of the broader world.
* * * * * * *
This article was originally published on American Bar Association Legal Rebels, July 13, 2017.
* * * * * * *
Gregory Richter is Vice President and Global Head of Major, Lindsey & Africa's In-House Practice Group and Solutions Practice Group.
Paul S. Williams is a partner in Major, Lindsey & Africa's In-House Practice Group, based in Chicago. He focuses on conducting in-house searches, particularly general counsel and other senior level positions.
Paul Lippe, the former CEO of Legal OnRamp, is a member of Elevate Services' Advisory Board.