Law Firms Learning from Industry

Mainstream media articles often hold lessons for large law firms — if management can look beyond the industry and story-line specifics. And some days, articles coincidentally group to offer a lesson book. The Friday, 2 November 2018 print edition of the Wall Street Journal published three articles that made me think about a range of Big Law issues.

Assessing the Life Time Value of a Client

A front-page story, Secret Scores Shape Customer Service, explains that many companies calculate a “customer lifetime value” (CLV) per customer. The CLV “can determine the prices you pay, the products and ads you see and the perks you receive”. Banks, cell service providers, and retailers use these scores to segment customers and differentiate service by their assessment of that customer’s value over time. Approaches to computing CLV vary but the goal does not — treat different customers differently.

Large law firms would benefit by taking a similar approach. For this discussion, I focus on service delivery, which I define to include all aspects of the relationship except the substantive advice. As a thought experiment, suppose Client A had the potential to become a long term, large, profitable, and easy-to-deal-with client that also offered interesting legal work. And Client Z, in contrast, would always offer only transactional work, would shop for price, create relationship challenges no matter what, and provide margins well below average.

If firms could predict which clients over time were closer to A and which to Z and if management were rational, more service delivery resources should flow to A than to Z. For example, A would receive offers of seconded lawyers, free CLE, regular visits (not billed), and other perks. In contrast, B would get good legal advice delivered on terms promised but no more.

Sadly, many firms today cannot even segment their clients by current profitability, much less by projected future profitability. Nonetheless, this Journal article offers inspiration for forward thinking firms: an approach to managing clients that maximizes long term favorable attributes. I say “favorable attributes” because I hope firms would maximize for more than just profit. They might also consider, for example, the amount of interesting work and client willingness to help mentor younger lawyers.

Improving Client Value by Boosting Productivity

Outside the legal bubble, the standard definition of productivity is output per hour. It tells us much about large law firms that they say “productivity” to refer to hours billed per year.

It’s distressing to read a headline Worker-Productivity Gains Lag Behind (top of page 2). The article reports that though the US economy continues to expand, worker productivity remains well below the desirable 2% level, achieved in the long post-war boom and in the late 1990s. Productivity is the only engine of growth beyond population expansion.

Clients, if not their law firms, should hope that lawyer productivity improves. Another thought experiment: if lawyer productivity suddenly increased 10%, clients could save 5% and firms could boost margins 5%. OK, a bit simplistic but it illustrates the point. Productivity growth is one path to more client value. (Others can cover how, if productivity goes up, the gains are shared.)

With the hype today around legal tech, innovation, and AI, we can hope that lawyer productivity indeed increases. But just magically invoking those words does not suffice. We must use the tools of the modern era to change how lawyers work. Done right, that will boost productivity.

Tying It All Up: Data Analytics

Understanding CLV and lawyer productivity requires a foundation of good data and good data analytics. I was pleased to read a page 3 headline, At Berkeley, Big Data on Campus. This article reports that at the University of California at Berkeley, “the fastest-growing class on campus is introduction to data-science”.

This month-old major combines computer science and statistics to teach students how to mine the growing troves of data almost everywhere. We need these skills to analyze the 2.5 quintillion bytes of data created daily (25 followed by 17 zeroes). This involves computer science, stats, and subject matter expertise about the source of the data. Hence, this new major is inherently cross disciplinary.

I take two lessons from this article. First, law firms need data science, both to compute CLV and to measure productivity. And second, it drives home the point that the future of law requires multi-disciplinary teams that include data scientists.

Conclusions

For too long, the legal market has operated as if it were a universe separate from the rest of business. If there was ever any truth to that view, holding onto it becomes harder as clients grow more sophisticated.

Smart firms will learn from industry. They will analyze their clients and pursue those that offer the best long term value to the firm. They will assess lawyer productivity and find ways to boost it. And they will break down the caste system that makes true multi-disciplinary teams difficult to form today.

[Note: WSJ headlines are from print edition; online headlines differ.]