The rareness of law firms offering analytic value to their law department clients

The 2016 Chief Legal Officer Survey, conducted by Altman Weil, has been discussed here.  That survey included a question about the CLOs primary law firms and what those law firms have shared with them of data analytics.  Specifically, the question asked “Considering the ten law firms that receive the largest portion of your outside counsel spend, in the last 12 months how many of those firms have provided you with an analysis of spending data that was useful to your law department?   Select a number between 0 and 10.”  Page 19 of the report gives the overall results overall and then breaks them down by the number of lawyers in the department.

The chart hereafter shows a breakdown by revenue of the company.  Revenue and number of lawyers are correlated, certainly, but many readers are more familiar with categorizing companies by their revenue.

aw-clo-2016-law-firm-data-analysis-pg-19

The situation is dramatic and regrettable.  Almost no chief legal officer in this large sample of 331 (median lawyers nine and median revenue $3.5 billion) has been impressed by what their key law firms have recently shown them on spending data-analysis.  More than half the respondents stated “zero” while 32 did not provide an answer.  One bright spot, however, was the department that claimed that all ten of its key firms had provided valuable data analytics!  For the others, irrespective of the size of the department mostly, on average less than one firm offered analytic value regarding the one area they could do so most easily: their fees and expenses.  Even the largest companies, who are likely to spend millions on law firms and to have large, sophisticated firms representing them, averaged less than 1.5 firms on average.

Law firms that appreciate the value of data-based decision making, that can trawl at least their own figures to draw conclusions about management, and that can help their clients benefit from those insights, will leap ahead of their innumerate competitors.

All sizes of law departments value data analytics approximately the same

We introduced The 2016 Chief Legal Officer Survey, conducted by Altman Weil, Inc. , above.

The survey report asked responding chief legal officers to select from eight efficiency initiatives any they had done recently.  One was “Collection and analysis of management metrics.”   That choice came in fourth as 39% of the respondents who answered the question selected it.

On the downside, however, the next page of the report (pg. 7) reveals that of the eight techniques, data analysis came in last as determined by the percentage of respondents who ranked it as a 9 or 10 on a scale of 10, where 10 meant “enormous value”.

aw-clo-2016-data-analysis-pg-7

Another view is to look at the relative perceived value of the data analysis efforts by size of company, which is tantamount to size of law department.  The graph above indicates that all sizes of law departments viewed data analytics as roughly offering the same value, albeit not as much value as the other measures.  So, even though as pointed out in previously larger departments exhibit a much higher incidence of using data analytics, all sizes of departments rank the return on that investment as about the same.

 

A benefit of sharing data analyses: thoughtful questions and interpretations

Any time a law department distributes an analysis of data to executives it may get questions or interpretations that the department’s legal managers had not thought about.  Likewise, when a managing partner of practice group head in a law firm circulates a data analysis, they should expect (indeed hope for) someone to ask about methodology or accuracy or the takeaways from the findings.

Not only is data transparency useful for marketing attorney effort and worth, it also stimulates thinking by the recipients – crowd-sourcing regarding legal management data.  General counsel should shine light into the black box of outside counsel costs – expose the numbers, explain variability, explicate the methodology.  Publish amounts spent by firm, by practice area, by business or staff unit – and where possible show trend data on all of them.  Present blended billing rates for key firms, and show the discounts negotiated from standard rates.   When executives understand more about costs they are probably less likely to carp; put negatively, ignorance coupled with suspicion breeds mistrust and criticism.

Or as Louis Brandeis memorably put it, “Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”  He might have added, “Candles promote thinking.”

Data increases someone’s power and reduces someone else’s power

Ponder the double-edged sword of data.  Yes, knowledge is power, as Francis Bacon and many others have asserted.  If you know the base salaries of your cohort, you are can argue more forcefully for a raise.  “Everyone else like me makes more.”  If your total legal spending as a percentage of revenue is less than the median in your industry, your Office of the General Counsel can preen.  Given facts, someone gains power.

Yet, inevitably knowledge weakens someone else if the facts show that their view is misguided or their assertion unfounded.   If it turns out from compensation surveys that you are paid at the top of your cohort range, you have one less leg to stand on and might not want the comparative salary data to be known.   If you have higher internal spending per legal staff as compared to your industry peers, but not lower external spend, you might want the benchmark report to gather dust on the shelf.  Presented facts, someone’s position weakens.

Put differently, accurate facts wielded by lawyer managers always cut two ways politically:  someone gains power and someone loses power.  Facts and data are not neutral and value-free.

ROI challenges in connection with data analytics

Law firms and law departments inevitably want to assess the return on investment (ROI) of their data initiatives. Ideally, they would understand the time and effort put into producing data analyses and be able to compare that to plausible increases in profit or decreases in costs, respectively.

However, an ROI calculation inevitably challenges people. In what time frame do you look for the return to show up? If it’s as short as months, you miss longer-term beneficial effects.  On the other hand, the farther out you look the harder it is to reliably estimate returns and the more likely you can claim that the returns dwarf the investments (not to mention present-value calculations).

Second, while less difficult, it is sometimes hard to measure how much time and money people invested in an activity, especially if the activity is intertwined with other purposes and results.   By that I mean if someone can gather metrics for a proposal, for instance, but that data turns out to have an analytical use, how do you allocate their time?  Moreover, do you use a calculated hourly rate, which is based on what? How can you include in your summary calculation the opportunity costs of what was forgone?

A third challenge is that confounding events inevitably occur. Your data analysis initiative on market capitalization of clients may have begun just before a stock market crash, to pick a dramatic example. Or perhaps your General Counsel resigned or the firm merged with a 100-lawyer firm on the West Coast. Exogenous events such as these throw a monkey-wrench into ROI calculations.

Finally, not all outcomes of an initiative are translatable to dollars. If savvy data analysis of settlement costs help a law firm guide its client to a non-monetary settlement or resolution, how do you factor that into your return?

These challenges should not deter legal managers from doing their best to determine whether the game is worth the candle, whether the effort to marshal data that informs a decision has a positive payoff.  The challenges, however, deserve consideration and thought so that they can be minimized or taken into account.