On Bullying

It's a relatively simple mathematical calculation to quantify the negative impact of bullies in the workplace, yet managers in organizations everywhere allow toxic behavior to persist. This week's object lesson comes from the NFL Miami Dolphins, where a professional athlete left the team due to persistent harassment and bullying.

While the full story is not yet known, there are certain unassailable facts: at least one protagonist with a long record of impulsive behavior has acknowledged coercing a teammate into contributing funds to a Vegas vacation, directing ethnic and homophobic slurs at this teammate, and engaging in physical and mental abuse, all in the spirit of hazing -- a long and misguided tradition of veteran players "riding" younger players. The protagonist is not merely a veteran teammate, he's also on the team's leadership council.

There has been a large public outcry leading to the suspension of the protagonist, the victim hiring a lawyer, and the team owner demanding a full investigation. Sadly, but perhaps predictably, the segment of sports punditry comprised of retired athletes has defended the protagonist thusly:  One can't possibly understand what goes on in a locker room unless you're part of the team; the victim walked out on his team during a competitive season, thereby revealing his true character; and the protagonist's actions were merely "boys being boys."

One retired coach called the victim a "baby" and waxed philosophic about "Back in my day when men were men..."  Others accused the victim of gamesmanship, suggesting his failure to report these allegations earlier and his supposed camaraderie with the protagonist demonstrates disingenuousness. In response, the victim acknowledged a fear of retaliation and the loss of his livelihood as reasons for not stepping forward earlier. We'll learn more as this story unfolds, but we know enough to recognize a hostile work environment. Why? Because nearly all of us have witnessed such bullying in our own workplaces.

In the corporate sector, the toxic personality often takes the form of a top-producing salesperson who breaks the rules, fails to properly document activity, over-commits the organization to meeting a client demand, and then bullies colleagues into delivering the impossible because, as the old saying goes, "nothing else matters until we make a sale."

It can also take the form of a long-entrenched manager who has watched leaders come and go, who has watched strategies come and go, who has watched competitors come and go, and all the while she's tending to the company's day to day needs. She truly believes her steady hand on the rudder is the primary driver of organizational success in an ever-changing marketplace, and so when presented with new and uncomfortable ideas her knee-jerk reaction is "We've tried that before and it didn't work. Next!"

In law firm land, the corollary is the toxic partner, that rainmaker bringing in millions in billable hours, or the long-established patron of the corner office whose reputation is unassailable and who can do no wrong. Whether the partner cycles through secretaries like others change their socks, or metes out punitive assignments to associates who fall out of favor, throwing tantrums in the office when the staff fails to read his mind or demanding that others adhere to stringent work requirements out of some vague allegiance to client service, these actions constitute a hostile work environment.

Worse, if the toxic partner is acting under the delusion that such actions will improve team performance, she or he is assuredly provoking the exact opposite outcome. We've all seen the feel-good movies where a tough-as-nails but kind-hearted leader drives his team to victory by forcing everyone to reach deep inside, to unlock that extra courage, to go that extra mile. And there's some truth to that, of course. Any coach knows that even high performers often need external motivation to break through barriers. But how much is too much?

The underlying math in any organization is simple, requiring us to balance the revenue generated with the costs incurred. But too often we fail to complete the equation, focusing solely on the revenue side. So the rainmaker generating millions of billables earns a free pass, or perhaps only an occasional private "talking to" when his conduct falls too out of line. But when we factor in the victims' lost productivity due to distraction or emotional detachment, the cost to continually recruit and train replacements, the sub-optimal work product that results from star performers avoiding collaboration with the toxic partner, the client defections, and more, this "total cost of ownership" will invariably tip the scales in the other direction.

There is NO financial reason to perpetuate a hostile work environment. There is ALWAYS a long-term loss in revenue and profit when such a situation is allowed to persist.  If you've done the math and somehow produce a result that says otherwise, I challenge your approach.

There are protections in place for whistleblowers for a good reason: people often won't speak up for fear of retaliation, because they fear the loss of their income and job security, because they feel they'll be shunned by colleagues for impairing the team's performance. Rather than discourage open talk, we should encourage it. If there's a toxic personality creating a hostile work environment in our workplaces, as managers and leaders we need to step up and address the situation directly and immediately. If you can't summon the courage to do so because it's the right thing to do, then take action because such an environment is unquestionably impairing the team's performance.

Why in the world would you take money out of your own pocket to reward some immature buffoon's temper tantrums or locker room behavior, when the alternative is to excise the annoyance and improve both morale and financial performance? Not every workplace has a toxic personality. But if you have one, or more, take action today.

Epilogue: The Miami Dolphins had a .500 record when the above incidents came to light, meaning their next game would literally put them on the path to a winning record or a losing record. The team lost its next game to a previously winless opponent.

Timothy B. Corcoran is principal of Corcoran Consulting Group, with offices in New York, Charlottesville, and Sydney, and a global client base. He’s a Trustee and Fellow of the College of Law Practice Management, an American Lawyer Research Fellow, a Teaching Fellow at the Australia College of Law, and past president and a member of the Hall of Fame of the Legal Marketing Association. A former CEO, Tim guides law firm and law department leaders through the profitable disruption of outdated business models. Tim can be reached at Tim@BringInTim.com and +1.609.557.7311.

Solving for Profitability

At a recent collaborative workshop between two camps -- in-house counsel and corporate procurement professionals on one side and law firm partners, finance and marketing professionals on the other -- we had a lively discussion about law firm profits. Most agreed generally with the view that a law firm has a right to profits, but the challenge arises when a law firm is extraordinarily profitable at the same time the client is extraordinarily unhappy with the value delivered. This scenario, one which resonates with many in-house counsel in recent years, leads to increased price pressure from buyers and over time this will depress law firm profits.

Predictably, in an effort to boost sagging profits some short-sighted law firm partners will make up for price pressure from one set of clients by raising prices for others, eroding the price-value connection for even more buyers, and accelerating this decline of profits. One in-house participant declared that he requires all outside counsel to submit profitability data and he'll decide what profit margin is acceptable! We can all empathize with buyers who are dissatisfied with the value received at the prices they pay for goods and services. But it's a stretch for the buyer to explicitly decide what profit the supplier should earn, in any marketplace.

So how can a law firm both enjoy a healthy profit and satisfy clients? If we adjust our lens a bit, it's not all that difficult - as with many commercial ecosystems, the pursuit of profit can best be maximized by delighting customers, and not as many assume by having one party win while the other loses.

Long Term vs. Short Term Profitability

Most law firm financial systems are structured to measure short-term profits, that is if there is any measurement structure at all. A surprising number of law firms do not explicitly calculate profitability, and many who do refuse to share these calculations with the partnership out of a misguided concern that it's divisive and corrosive to a collaborative culture. What's more divisive is a culture of not knowing -- which naturally leads to most parties making flawed assumptions about their performance relative to their peers. But the root problem is that without a clear understanding of what generates profits and what dilutes profits, no enterprise can sustain itself indefinitely because there will be too many factions working at cross-purposes. When everything supposedly makes money, then nothing makes money. And vice versa.

A focus on short-term profits drives and rewards the wrong behavior. Imagine a partner who sees an opportunity to bill a client $100,000 for a litigation defense matter, when that partner's experience could quite easily lead him to counsel the client that he's better off settling rather than defending, and thereby reducing legal costs by $50,000. Or imagine the partner who pads his own time and allows others to pad their time against the client matter, knowing the client will absorb some or all of these costs without complaint because, after all, "They hired us because we're the best and because we're thorough and they should expect to pay a premium for this."  In reality, clients are rapidly becoming more sophisticated and can incorporate benchmarking data from other matters and other firms to help identify the "right" price for legal services, and increasingly they know when they're being overcharged. This isn't unlike purchasing an automobile before ubiquitous internet research, when price shopping was logistically challenging and buyers expected the dealers to take advantage... and they did. When a buyer discovers he's been overcharged, he doesn't return to that merchant.  And therein lies the mathematical basis for focusing on long-term profitability instead of merely short-term profitability.

A law firm that calculates profitability as a function of maximum hours per engagement will, over time, as sure as the sun rises in the East, eventually experience client defections. Client defections (measured by retention rate) caused by over-emphasizing billable hours lead to three serious financial consequences:

1. The cost to acquire a new client is far higher than the cost to maintain or expand an existing relationship

2. The firm will price itself out of competitive bids

3. The firm will eschew efficiency and alternative fee arrangements and forgo potentially higher profits associated with these models. Success can't hinge on finding an endless supply of clueless clients, a task that gets harder every day.

If a law firm embraces a model in which long-term profitability is more balanced with short-term profitability, we will see changes in behavior and reward systems:

• Matters will be priced more competitively, because the objective is not only to win the work, but to also win subsequent work

• Matters will be delivered efficiently to maintain price competitiveness, and profiting from the learning curve is always more sustainable than profiting from high prices

• Satisfied clients not only stay longer (leading to higher retention rates), they buy more services (a.k.a. cross-selling, leading to higher penetration rates at a lower cost of sales)

• Satisfied clients insulate the firm from consequences of lateral partner defections. Even when a key rainmaker or service partner leaves, satisfied clients remain

• Lateral hires and new offerings measured for their contribution to long-term profitability will insulate the firm from making hasty and dilutive decisions, such as recruiting a lateral partner with an alluring book of billable hours but with high service costs, non-competitive pricing, and clients evidently willing to change firms at will

• Contributions from those involved with delivering high-quality legal services and managing valued client relationships will be more readily recognized, and the emphasis will shift from substantially rewarding origination to rewarding all steps along the supply chain. (Yes, it's hard to win new business, and this is why "hunter" salespeople are often highly-paid individuals in a corporate setting too. But those who make, manage and service the product lines are also essential to the sales and retention process. Missing this point is one of several extraordinary gaps in law firm management science.)

Organizational vs. Matter Profitability

To be clear, if we focus on long-term profitability and ignore the many short-term actions we take day in and day out, it's likely that we'll make many wrong and dilutive decisions. So there's nothing wrong with measuring profitability on a shorter time horizon too. Organizational profitability is typically the derived sum of individual matter profitability, often clustered within practices whose profit contributions are measured and compared.

Matter profitability, as we've described above, can be influenced by over-pricing.  Is it acceptable if we achieve a 50% profit margin on a $100,000 matter, but in so doing upset and lose the client?  Or is it better to achieve a 35% profit margin on a $50,000 matter, followed by a 35% profit margin on four subsequent matters, each acquired at no cost to the firm because a happy client simply assigned the work?  Similarly, who should earn the higher reward -- the rainmaker who brings in a $100,000 matter at 50% margin that keeps 5 timekeepers at 60% utilization for 3 months, or the rainmaker and timekeepers who convert a $50,000 matter at a 35% margin that keeps 10 timekeepers at 40% utilization for 2 months into four more $50,000 matters, each at a 35% margin and that also keep 10 timekeepers at 40% utilization for 2 months?

I know, the math is getting hard to follow.  The point is, sometimes the math is hard to follow so reducing everything to a single, simple point statistic like billed hours, and then basing all rewards and pricing on this one factor, is foolish.  Running a business is a bit more complex.  The many variables we've identified already include retention rate, utilization, realization rate, leverage, productivity, penetration rate, cost of sales, cost of goods sold, and more, and this is only a small subset of the variables available to managers who need to make rational decisions about the allocation of resources.

While we're at it, a few quick notes on the mechanics of matter profitability:

• Matter profitability and even practice group profitability ignores cross-pollination. One of my clients recognized that the Trust & Estates practice generated a significantly lower profit margin per matter than other practices and considered shuttering the practice. However, deeper analysis revealed that T&E clients, many high-net worth individuals like CEOs, were feeders to the firm's other practices, like corporate, securities and litigation. On an isolated basis, the numbers suggest the firm's T&E practice should be closed, or at least starved of resources in order to focus on more lucrative practices. On an aggregate view, however, there may be more investment needed in this feeder practice if this can be done at a lower cost than alternative lead generation activities

• Matter profitability often provides a false read because of improper allocations. One of the liveliest discussions in any business setting is how to allocate various costs to the business and to the various product lines. In a law firm, we can argue endlessly over whether to allocate costs based on headcount, or on a square foot basis, or on a consumption of resources basis, or other models. In many cases, the final tally isn't all that sensitive to modest tweaks in allocations, but the overriding imperative is to select a model and then stick with it for all, so it provides a sound and sustainable comparative measure

• Matter profitability shouldn't be diluted by productivity. Matter profitability should balance the revenue generated against the hard costs to deliver the matter, including the compensation associated with the timekeepers billing against the matter. But the compensation should reflect target hours worked by associates, or associate bands. While associates are not truly fungible, in this case we should view their contribution as an interchangeable raw material, so if we replace Mary with Carlton, the underlying cost structure doesn't change. Why? Because if we price our services efficiently based both on our organizational learning curve ("We can complete this task in 5 hours") and the client's perceived value ("This task is worth $3,500 to me"), then an individual contributor's productivity shouldn't have a material impact on our costs of goods sold. Said another way, clients resist first- and second-year associates working on their matters because of the assumption that associates work inefficiently as they learn their craft. By basing the price on a standard cost, we remove the client's objection. Some will complain here that more productive associates are penalized because they're placed in a box along with less productive associates. But productivity is a management issue, not a pricing issue. We don't pay more or less for light bulbs or automobiles or haircuts or vaccinations based on the training level of the person making the product or delivering the service. And legal services shouldn't be priced that way either.

• Matter profitability shouldn't be diluted by equity and bonus compensation. Partner time can be billed at actual rates rather than a target, if we choose, under the assumption that their variable billing rates already reflect experience and an experienced partner will bill 3 hours at $650 for a task that an inexperienced associate might bill 10 hours at $275. So a pro rata portion of the partner's compensation based on hours billed is a sensible cost to accrue to the matter. But it would be foolish to add in partner equity compensation, or bonuses for either partners or associates, as these costs have nothing at all to do with the matter! In fact, these costs would force the matter profitability to plummet, requiring the firm to significantly increase prices to make it profitable, which as we've described above serves to provoke the opposite effect, namely that no clients will buy any of what the firm is selling. Consider lawyer bonuses and partner equity compensation as SG&A to be addressed elsewhere.

Managing a law firm or a practice group is challenging enough without adding a lot of financial math to the mix. But the reality is that no law firm manager should be operating without a clear sense, or hopefully a directional sense, or at bare minimum a vague idea, of how resource allocation and pricing can influence the financial health of the business. Long-term profitability vs. short-term profitability, matter profitability vs. organizational profitability, allocations and overhead and leverage, oh my. Yes, it's hard. But I'm willing to bet that you have a resource on staff, or a phone call away, who can help you sort through these issues. The key is to establish a consistent approach across the firm based on the ideals of firm management. And these ideals should be established based on a fully-informed view of the alternatives and consequences. Welcome to management. No one said it would be easy.

For more information about the evolving state of law firm pricing, see Toby Brown's excellent "The State of Legal Pricing 2013."

Timothy B. Corcoran is principal of Corcoran Consulting Group, with offices in New York, Charlottesville, and Sydney, and a global client base. He’s a Trustee and Fellow of the College of Law Practice Management, an American Lawyer Research Fellow, a Teaching Fellow at the Australia College of Law, and past president and a member of the Hall of Fame of the Legal Marketing Association. A former CEO, Tim guides law firm and law department leaders through the profitable disruption of outdated business models. Tim can be reached at Tim@BringInTim.com and +1.609.557.7311.

Predictive Analytics - Gaining a Competitive Edge

Law firm leaders who embrace predictive analytics to manage their businesses and their practices can establish a sustainable competitive advantage over competitors who rely on gut instinct and sheer intellect to leader their enterprises.  There are multiple opportunities to employ predictive analytics in a law firm:  to run the business more efficiently and effectively; to pursue more lucrative clients and engagements; to recruit and train lawyers for success and longevity; and to practice law in such a way as to be a step ahead at all times.

Join me in New York or Boston as I discuss the role of Predictive Analytics in a law firm: Register 

Michael Lewis, in his book Moneyball, later made into a movie, uses baseball as a metaphor for the power of predictive analytics.  Many people assume the book is about baseball.  In fact, baseball is just the setting.  The point of the book is to demonstrate how insightful leaders, using data that may be readily available but ignored by most, can gain a competitive edge. But one doesn't have to know anything about or even like baseball to gain valuable lessons.  During my tenure as a corporate executive, I would purchase this book for all of my senior managers in order to foster a culture of predictive analytics in our business.

In a recent talk delivered at the LSSO Raindance Conference, Boston Celtics president Rich Gotham discussed the role of predictive analytics in managing a major sports franchise.  He acknowledged the heavy use of analytics on the court – the Celtics coaches regularly analyzed opponents’ tendencies and then devised game plans to exploit weaknesses. But Gotham went on to describe the critical importance predictive analytics play off the court as well.  As he explained, team management has to know who to target in order to sell the most tickets.  They need to know which combination of price and amenities will appeal to different target markets.

For example, by rigorously studying patterns in renewals and cancellations of luxury boxes, Celtics management discovered a critical miss in their sales strategy.  The target demographic for luxury box suites is high net worth individuals and corporate executives, but these buyers are also the most likely to have other commitments, including regular out-of-town travel, which limit their availability to attend multiple home games.  The Celtics addressed this problem in part by creating a secondary ticket market for luxury suite owners. If a luxury suite ticket holder can't make a game, the team will help resell that ticket. This approach removed the box holders’ concerns about a wasted investment and significantly improved the luxury box renewal rate.

How does this apply to law firm leadership?  Very simply, there are data available today that leaders ignore, instead relying on instinct and intellect to manage their enterprises.

In Moneyball, the crusty old baseball scouts who eschewed data but could recognize a “baseball body” were, statistically speaking, wrong far more than they were right.  This is not unlike recruiting in the modern law firm, where top grades from top law schools are used as a proxy for quality, when other factors are likely to play a stronger role in the recruit’s chance of success and longevity in the firm.

In countless practice group retreats when we list our client targets for the coming year, inevitably we identify multi-national companies with big legal budgets, or existing clients who have represented large billings in the past.  In fact, deeper analysis may reveal that our most lucrative clients are, for example, companies with less than $0.5 billion in revenues, doing business in a narrow range of SIC codes, with a certain geographic footprint and a management profile that suits our lawyers’ personalities.  Yet we ignore those prospects in lieu of the fruitless pursuit, along with hundreds of competitors, of the same old FTSE 100 or Fortune 500 companies.

And yes, these concepts apply even to the practice of law.  The increase of project management and process improvement has illuminated for lawyers that while every matter may be unique, each is likely comprised of tasks that we’ve tackled countless times previously.  As we learn how to break matters into component tasks, we recognize that reassembling these tasks into new combinations for purposes of budget forecasting gives us a competitive edge – not only can we confidently price a matter based on past performance, but our deeper understanding of how these tasks have interoperated in the past helps us minimize surprise as the matter progresses.  Start layering in knowledge about specific adversaries and even judges and jurisdictions, and our reasoned analysis of what’s likely to happen based on what’s happened previously will look like voodoo to an outsider.

I will discuss the role of predictive analytics in two upcoming sessions. The first is in New York on Wednesday, November 6, and the second is in Boston on Thursday, November 7.  I will lead an interactive discussion for law firm leaders, practice group leaders, law firm c-level executives and those leading business development and strategy. This will be followed by a reception hosted by Thomson Reuters, the event sponsor.  For more details and to register, click here.

Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change.  To inquire about his services, contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.

Crowdsourcing Legal Project Management: How to get started?

I was invited to contribute to Michelle Mahoney's recent ILTA blog series on legal project management.  In this series, numerous experts, pundits and practitioners with experience in project management offer insights and suggestions on how to embed LPM into a legal practice.  Contributors include Ron Friedmann, Liam Brown, Antony Smith, Toby Brown, Sheri Palomaki, Stuart Dodds, and other smart cookies. Here's my comment:

Embedding project management in a law firm is a challenge for many, but not because the subject is difficult or the technology to support it is in its infancy. The greatest obstacle is the average partner's perception that project management applies primarily to repeatable, commodity, low-cost legal practices.  When the lawyers are asked, or even forced, to adopt a new business process that feels inconsistent with how they practice law or earn a living, there is natural resistance.  The best project management programs start, therefore, with partner education.  Once partners recognize two key economic drivers, they often accelerate their adoption of project management principles.

The first driver is that regardless of billing type – hourly or non-hourly – and regardless of price sensitivity, the path to maximum profitability is to lower the cost of delivery, and this is done by finding efficiencies.  Lawyers should have embraced project management long before the economic downturn, but doing so now can quickly improve declining financial performance.  The second driver is client satisfaction and retention.  With clients increasingly demanding matter budgets, those lawyers who can deliver predictability in legal costs with confidence will improve client satisfaction and earn multiple repeat engagements, even as the competition endures RFPs and competitive bidding processes.

Project management is perceived by some to be an approach that primarily benefits clients. While clients indeed benefit, the greatest beneficiaries are the lawyers and the law firms.  Once this is clearly demonstrated to the partners, most firms can't move quickly enough to embed project management into the firm's operations.

The reality is that project management works. Partners raised on "law as art" resist this notion because they often equate LPM as part of the movement toward "law as commodity." Nothing is further from the truth. LPM can actually elevate law, particularly the law needed in commercial business transactions and litigation, from a costly, necessary evil that business leaders avoid at all costs to a strategic initiative.  If a business leader has improved awareness of business risk, has a broad understanding of the costs and impacts of various alternatives for business growth, and can proceed with confidence while competitors proceed timidly due to uncertain costs and risk factors, this provides a compelling strategic advantage.

Skeptical law partners reading this likely have 20 or more objections to the ideas offered in this ILTA blog series. With all due respect, others have raised these objections previously. Long before you. And yet, many partners have proceeded to vigorously embrace LPM into their practice. Do you really think they're choosing to make less money, that their practices are comprised solely of repeatable commodity tasks, and that their clients are focused solely on cost instead of value? Perhaps it's time to revisit your assumptions. The answers are out there.  What are you waiting for?

Read the other contributions here.

Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change.  To inquire about his services, contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.

Big Data: Big Deal or Big Win?

One of the trending phrases in the legal marketplace is "big data," which refers loosely to the synthesis of massive amounts of data, often from disparate data sets, to provide leaders with predictive analytics and better decision support. While this has been the norm in business and industry for decades, only recently has there been a compelling need for law department and law firm leaders to embrace advanced business practices. The opportunities for a "big data" approach to provide a competitive edge are many, in large part because so few do it well. What is Big Data?

The definition of "big data" varies depending on the audience.  In a sophisticated corporate environment, big data might refer to analyzing and cross-referencing customer purchase trends to predict that a buyer of product A will likely be interested in product B. We see this all the time with Amazon.com's personalized recommendations based on a customer's past purchases or even browsing history: if you purchase a book of baby names, you are likely to see recommendations for books, clothing and sundries related to the care of newborns. This approach can be startling effective. In a law department or law firm environment the analysis might be more rudimentary, but can still provide excellent guidance.  For example, many law departments now employ dashboards to identify the average length and cost of similar legal matters, and this influences how much they budget, and what outside counsel fees they're willing to pay for representation on a matter. As Jobst Elster asks in his "Big Data: Hype, Reality, Myth or Legend" article, "Can businesses -- including law firms -- even compete, let alone exist, without a big data strategy?"

Big Data for Law Departments

Most law practices are by nature reactive. The in-house counsel don't know in advance what products liability suits will be filed or what transactions management will pursue, so the lawyers stand ready to tackle whatever might come their way. But some in-house counsel are looking into the business itself for leading indicators. One in-house lawyer I recently interviewed reviews production quality control data with manufacturing line managers in order to better understand the nature and frequency of product defects that are likely to have shipped. She combines this with customer service call histories, which are coded by product lines and model numbers, to chart the emergence of these potential defective products. This insight allows her team to develop proactive strategies, from product recall to settlement analysis to hiring defense counsel in advance of the first suit. Another General Counsel sits periodically with his colleague, the VP of strategy, to review the list of potential acquisitions, and then his team compiles a very brief dossier on each target indicating the relative legal complexities of the transactions. Not exactly deep analysis, but a step in the right direction.

More advanced legal departments seek to identify patterns related to positive legal dispositions, and then redirect outside counsel in related matters to apply the techniques that have worked elsewhere. Others employ predictive analytics to more quickly identify when a case should be settled rather than litigated, and employ other predictive analytics to accelerate the settlement negotiation process.  Craig Raeburn of TyMetrix, which provides data and analysis to law departments and law firms, confirms that "using benchmark analytics to improve performance and transparency and create competitive intelligence is the next great frontier in the legal industry."

Big Data for Managing the Law Firm Business

One of the more ridiculous tenets of law firm business generation is that "all revenue is good revenue." In a disciplined corporate environment, many top law firm rainmakers might be perceived as marginal contributors because the deals they bring in, while numerous, may incur high costs to service and therefore the contribution margin of the work is dilutive. But law firms typically reward origination, not profitability, so a partner generating $5 million in new fees with a profit contribution of $0.5 million often will be rewarded far more handsomely than a partner delivering $1 million in profits on a $2.5 million book of business.  By adding the cost of delivery and the cost of pursuit (what it takes to win the work) to a matter's hard costs and allocations, and then comparing this against the top line revenue, law firm leaders are better able to identify the matters, and the lawyers, who contribute the most to the bottom line.

Law firms have also begun to employ a big data approach to identifying the "ideal" client. While this definition varies from firm to firm, it generally encompasses clients generating profits from multiple matters over time rather than from one matter, and clients with legal needs spanning multiple practices and requiring numerous partner relationships rather than those with one key rainmaker tied to one key decision maker. A firm that can be more precise with its client and prospect targeting can improve profitability merely by walking away from dilutive work, and avoid raising rates. The analytical rainmaker will identify the characteristics of the ideal client, then identify prospects matching this profile, and then work with the marketing team on successful tactics to pursue these prospects.  Contrast this with the "traditional" approach to rainmaking where we talk about our capabilities to anyone we can, with the knowledge that sooner or later we will find a prospect in need of these capabilities, and you can see how an informed approach can easily surpass the results of a "shotgun" approach to rainmaking.

When it comes to business development tactics, partners tend to hold the marketing team more accountable than they hold themselves for achieving some elusive return on investment, or ROI.  However, a big data approach to measuring ROI can level the playing field. One firm deduced that prospects or past clients who subscribe to 2 or more practice newsletters and attend 3 or more events are 75% more likely to retain the firm than an average prospect. So when the marketing team identifies a prospect with the "right" newsletter subscriptions but who hasn't attended the "right" number of events, the prospect is flagged and a partner will personally call to recruit the prospect to an upcoming event. With such an approach, the firm has significantly improved its financial performance. Alina Gorokhovsky, who advises government departments and agencies on the use of data analytics to transform government and who previously served as a law firm Chief Strategy Officer, is a strong believer in data-driven decisions: "No law firm should operate in a fragmented fashion, with every practice group and office pursuing any client for any matter simply to grow revenue. A more rigorous approach based on analyzing internal and external data will reveal clear benefits in pursuing the right clients, with the right tactics, for the right matters."

In case it's not self evident, many law firms struggle with adoption of alternative fee arrangements, believing many to be dilutive to a profit stream that has long prized hourly billing.  Kris Satkunas in a recent Inside Counsel article offers some excellent insights into the benefit of big data to inform alternative fee analysis. Chris Emerson of Bryan Cave offers additional insights into big data and law firm profitability in this Information Week article. At the recent P3 conference hosted by the Legal Marketing Association, numerous experts offered commentary on the natural connection between analytics and profitable decisions.  And the list goes on.

Big Data for Managing Talent

Many law firms employ a growth strategy best described as "recruit lateral partners with portable books of business."  With such an indiscriminate mindset, it's no wonder that many law firms recruit laterals who don't fit the firm's culture or don't actually bring in as much business as promised.  And they often find that those who do deliver a robust book of business require a high cost to service, which is dilutive to profits, or whose new clients create conflicts with existing clients, so the net positive financial impact is minimal.  It may seem unrelated, but recruiting associates often follows a similar pattern:  recruit top students from top schools, often without regard to practice interest or personality, and rotate them through various departments until they find a home where they can toil away until making partner... although an overwhelming number depart long before making partner.  This approach isn't unique to law firms, as law departments often hire skilled technicians in certain areas of law under the assumption that, say, if we're an investment bank then an in-house lawyer well-versed in securities law is a good fit.

The reality is that law firms and law departments, like any other organization, have a certain personality, and succeeding in any environment has as much -- if not more -- to do with matching behavioral characteristics than with technical considerations.  Savvy law firm leaders are increasing the importance of cultural fit when recruiting laterals -- after all, if the ideal client is one with matters spanning multiple practices, then a lateral with a $5 million book of business who refuses to collaborate or provide access to her client is not as good a fit as one with a $1 million book of business that can grow substantially by cross-selling other firm services. Similarly, studies have indicated little to no correlation between Law Review participation (a proxy for academic excellence) and successful rainmaking (a proxy for understanding a client's business). One is not intrinsically a more desirable trait than the other, but at times a firm may place higher value or have a specific need to fill in one area more than the other.  Predictive analytics based on factors other than law school and class rank can dramatically improve the probability that a recruit will endure longer than the average. In Bloomberg Law's "Everything You Think You Know About Lawyer Recruiting is Wrong," article co-author Caren Ulrich Stacy declares that "armed with the knowledge of the particular success traits or competencies that exemplify a high performing lawyer, the firm has the ability to employ evidence-based and data-driven tools for lawyer selection."

And the same holds true in a law department.  Businesspeople value a counselor who looks to find ways to advance the business and who can quantify degrees of risk, not one whose risk aversion leads to the recurring advice to "make no deals because we can't eliminate all risk." Hiring to criteria other than technical excellence in the company's product specialty may lead to a better business advisor, one who can better instruct outside counsel because they can speak both the language of business and the language of law.

Big Data for Managing a Matter

Many lawyers perusing the above anecdotes will nod their heads, recognizing the inherent logic in employing predictive analytics on the business side of a law practice.  But far fewer will acknowledge the ready opportunity to employ such techniques to their own practices.  But it's already happening.  Venue shopping is merely a tactic employed by litigants to remove a matter to a jurisdiction deemed more friendly to one's side, based on past performance. Jury selection has evolved from art to science, with high stakes cases incorporating psychological profiles and mock juries to identify the optimal approach before even entering the courtroom. The recent increase in legal project management and process improvement tackle these same themes on a more basic level, helping lawyers to understand the repeatability of tasks in even high stakes transactions and litigation.  When a client demands a matter budget, essentially what he's asking is for the lawyer to draw on his experience to produce a set of decision trees, informed with probable timelines and costs. Predictability and "lowest cost" are not the same, though many in-house counsel and outside counsel confuse the two. Anyone can lower a rate or demand a lower rate. Only an experienced practitioner can provide informed insights into how a matter may or may not proceed.

In my recent column in Marketing the Law Firm, an ALM publication, I describe several clever new technology tools in use by law departments and law firms:  "New tools are available that collect and synthesize trends across multiple jurisdictions, providing lawyers with insights that may provide an advantage. Case Outcomes, offered by Thomson Reuters, is one such example of big data applied to a legal practice. Says Amy Hrehovcik, New York-based business development manager, 'It’s like breaking down film of an opponent in basketball. If you know your opponent prefers to drive left, you overplay that side and push him right. Lawyers can adjust litigation strategy based on studying the tendencies of opposing counsel and even judges, and offer more informed advice to clients.'" While it takes years to accumulate the sort of jurisdictional knowledge that makes local counsel invaluable in developing trial strategy, new tools are closing the gap.

The Technology Red Herring

It may be helpful to discuss big data from the perspective of those who are often on the front line in these discussions, namely the technologists.  Consider a use case:  a law firm wants to identify its "ideal" client, and this requires looking across multiple databases such as time & billing, CRM, conflicts, event registration, mailing list, website clients, Chambers and directories submissions, to first capture all of the clients.  Then it's necessary to go through a laborious process of matching and de-duplicating this raw client in order to ensure that, for example, "Eastman Kodak" in one system is the same as "Kodak" in another, and to ensure that "FPC Italia" is properly identified as a subsidiary but not Xerox, which is in a related line of business, with plants and offices in close proximity and some movement of executives between the two, but which is a distinctly separate company.

This "data cleansing" takes time and is never really done, because at any time a legal secretary might open up a new matter by entering EK (the suspended NYSE symbol for Eastman Kodak) and introduce yet another variation of the client name.  At some point we may want to introduce SIC or NAICS codes to the dataset, add in a more robust corporate tree, combine publicly available data with notes captured from our CRM system, add in a common "key" so future matching processes take less time and then put the resulting data set into a new "data warehouse" where we can run queries against it, though that's a task often restricted to a select few with both access rights and training on database reporting.  This is a real challenge for any business, but moreso for law firms which have long eschewed rigorous data management policies in favor of making life easier on partners who want to quickly open up new matters to begin billing. Because of these complexities, many law firm leaders are convinced big data is at heart a technology challenge. They're wrong.

Just Do It

The reality is that while the above technology tasks are often necessary to provide the greatest "big data" payback, there are plenty of techniques and queries that can be run against databases as they exist today, and there are plenty of insights to be drawn from simple manual analysis. The most common objection I hear when proposing predictive analytics projects to law firms or law departments is that they lack resources or tools to do it right.  That's not entirely true.  While a team of quantitative analysts poring over a robust, structured and fully-indexed data warehouse would be nice, the reality is few businesses have that luxury.  And while others hesitate to proceed, those who start with what they have and begin to better inform their business decisions will obtain a competitive edge.

Big data is here.  It's entered our lives in the recommendations we see when we shop online, when Facebook or LinkedIn suggests "friends you may know" and when our weekly issue of  Sports Illustrated has customized its advertising to appeal to our specific tastes and interests.  Law departments are increasingly using big data tactics to identify the "right" fees to pay for different legal matters, and which outside counsel are appropriate for different matters based on non-financial metrics.  Legal Process Outsourcing (LPO) companies have deconstructed complex legal tasks into bite-sized and measurable chunks, at once increasing throughput and quality and decreasing costs. And there are numerous law firms beginning to arm themselves with precise data about which clients to keep and which to pursue, which laterals to recruit, which partners to retain based on factors other than origination and what steps are necessary to improve the probability of obtaining a certain legal outcome.

Big data.  Those failing to understand it, and those avoiding it, may be making a big mistake.

 Note: The mention of a product or service in this article does not constitute an endorsement by the author. 

Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change.  To inquire about his services, contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.