The New Normal
Allen Iverson and the Value of Legal Services
Posted Mar 14, 2011 8:22 AM CST
By Paul Lippe
Google today is worth more than $100 billion. Does that mean that the lawyers (Wilson Sonsini Goodrich & Rosati, I imagine) who incorporated Google should have gotten a $90 billion fee on a “value” basis?
Skadden, Arps, Slate, Meagher & Flom generated $2 billion in revenues in 2010. Does that mean their electricity providers, without whom they couldn’t operate, deserve $1.8 billion in revenues on a value basis?
Drug companies sell immunizations, and car component companies sell airbags, all of which save lives. Should they charge the full value of the lives (millions upon millions)?
Presumably, in all cases the answer is no. The measure of value is not simply the complete value of the loss avoided or the gain realized, minus $1. But talking about value (which is quality minus cost) in a rigorous way in law in not so easy.
Many lawyers’ view of their value can be summed up thusly:
In this light, I was very impressed by a presentation (PDF) that Lisa Damon from Seyfarth Shaw gave at Georgetown University Law Center (read tweets about it). She described her team’s serious effort to begin applying Lean Six Sigma to the practice of law, reflecting the broader conversation about quality and value from outside law.This approach began first in manufacturing (think Deming, TQM, Six Sigma and Lean), and is migrating to harder-to-quantify services. In this time of economic exegesis, it has begun to be seriously applied to medicine and education, two other fields where professionals have held to the same view of their quality as lawyers.
Most of us have read Malcolm Gladwell’s New Yorker critique (sub. req.) of the U.S. News ranking of universities. One of Gladwell’s key points is that using Harvard’s graduation rate as an indicator of quality makes no sense, because the kind of kids who get into Harvard are the kind of kids who would graduate anywhere—Harvard doesn’t influence that outcome. (Personally, I accept the general view that the U.S. News rankings are mostly a disaster and haven’t helped, in large part because, as Gladwell points out, they are largely a recursive exercise in which reputation drives reputation, and there has been almost no movement in the rankings in 20-plus years. But where does the fault lie, dear reader? Have universities acted in any way to be more transparent or comparable?) According to Gladwell, a better indication of value might be to compare different state schools who take kids with a lower probability of graduating and see which ones succeed.
One way to begin to have a serious conversation about quality/value is to recognize that one size doesn’t fit all, that you can’t leap to a universal definition. So rather than start with the broadest possible definition, one can start with the narrowest possible definition.
What is quality/value in the context of doing a 10-K and proxy statement?
Everyone does more or less the same 10-K/proxy, varying perhaps with size and complexity of business, under the same Securities and Exchange Commission rules, which change over time, so it’s as close to an apples-apples comparison as we can reasonably get.
How would we assess value for annual reporting? Maybe 6-8 questions:
• Did it achieve the desired business outcome, i.e., a successful vote? This is kind of easy, because they more or less always do.
• Did it result in any loss? Did we get sued, investigated, etc.?
• Did it result in any business disruption?
• What was the total hard dollar cost, i.e., fees and expenses paid to all professionals and salaries?
• What was the soft dollar cost in terms of time spent and/or uncertainty?
• To what degree did it result in hard-to-quantify benefits, like improving overall transparency in the business?
• Did the lawyers persuade responsible folks in the company to make decisions that were “long-term greedy,” i.e. favor the long-term over the short-term?
• Did it have positive spillover to adjacent parts of the business, i.e., anything as trivial as increasing/reducing printing and mailing costs to as important as making the company more attractive to investors?
My impression is that some companies spend $30,000 on their 10-K/proxy, others spend $300,000 or $3 million. Is there any evidence that those who spend more have better quality? I doubt it.
Might they? Perhaps.
Can this approach be applied to other kinds of work? Absolutely. Try it with commercial contracts, “bet the company” litigation or deals. We will probably all refine the questions as we apply them in different instances and we’ll have minor disagreements about what precisely is an apples-apples comparison, but that’s fine.
Note that none of these questions were how hard the lawyers tried, how much they cared, how many hours were billed, how great was their technical expertise, how few were their typos, or how good is their reputation. Those are both assumed and irrelevant, inputs worthy of measuring only when you’re unable to measure quality/value.
The best way to start thinking about quality/value in law is to see how it is being discussed in other fields like basketball, which has always been somewhat tougher to analyze and compare apples-apples from a statistical standpoint than other sports like baseball. The most interesting model, called APBRMetrics looks at two key statistics—how much did you contribute to points per possession (shots made, shots taken, assists), and how much did you contribute to having a possession (rebounds, steals, turnovers). Teams on average score 1.6 points/possession, and everyone gets a possession after the other team scores. So if you’re a player who scores a lot of points, but it takes you a lot of shots to do that, it is not all that helpful.
Applying this to law, the questions is not so much did you get the proxy (or the deal, or the case) done, but how much better (or worse) was your performance relative to an average lawyer, and how much of a premium are you worth for being better than average? It turns out that Allen Iverson scores a lot of points, but he also takes a lot of shots. Another player who can score points in fewer shots, and free up more salary cap space for a strong rebounder may well be a better Value.
More on this in future posts.
Paul Lippe is the founder and CEO of the Legal OnRamp, a Silicon Valley-based initiative founded in cooperation with Cisco Systems to improve legal quality and efficiency through collaboration, automation and process re-engineering. Lippe formerly was an executive at the electronic design automation company Synopsys and later was CEO of Stanford SKOLAR, a medical digital library and e-learning company sponsored by Stanford Medical School.
Editor's note: The New Normal is an ongoing discussion between Paul Lippe, the CEO of Legal OnRamp, and Patrick Lamb, founding member of Valorem Law Group. Paul and Pat spend a lot of time thinking, writing and speaking about the changes occurring in the delivery of legal services. We hope you will join their discussions.