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The New Normal

Can ‘Moneyball’ Principles Be Applied to the Valuation of Legal Services?

Posted Sep 29, 2011 2:29 PM CDT
By Paul Lippe

Paul Lippe

I just saw the movie Moneyball, profiling how Billy Beane, general manager of the Oakland A’s, built a competitive team despite a payroll one-fourth that of rich teams like the Yankees, Red Sox or Phillies. Beane’s approach (based on baseball sabermetrician Bill James and chronicled in the Michael Lewis book the movie was based on) was to analyze what created wins (runs and outs), and then assess which ballplayers produced those wins most cost-effectively. In contrast to scouts who focused on a “good baseball body,” or the attractiveness of a player’s girlfriend, Beane sought overlooked sources of value: a relatively overweight player who walked a lot, for instance.

There have been several good articles in the New York Times, New Yorker and Wall Street Journal discussing the limits of Lewis’ thesis—over time, a bigger payroll is a sustainable advantage, and once Beane’s method becomes apparent (exacerbated by publishing a book), it’s easy enough to replicate.

But the fact that the A’s haven’t won every World Series since 2002 doesn’t detract from the fundamental lesson of Moneyball—conventional shortcuts for understanding performance are often limiting, and an astute effort to really understand what drives value is wise.

Can we apply Moneyball-style analysis to law? The answer is a qualified “yes,” informed by three considerations:

First, value of services is inherently more nuanced than value in goods, and law is toward the more nuanced end of the spectrum of services (say more nuanced than a baseball player, a real estate agent or a travel agent, but probably less than a psychotherapist).

Second, value discussions have to be specific—value in sell-side mergers and acquisitions is different from buy-side, and altogether different from counseling to avoid employment discrimination claims.

Third, discussing value is always going to be useful, even though it doesn’t lead to one absolute standard.

A group of us are getting together in Chicago on Oct. 29 at the College of Law Practice Management to pursue this topic, and I hope you can join us at the Futures Conference (PDF) or participate online in a continuing discussion.

Let me suggest a four-part rubric for discussing value:

a. Outcome—goal achieved
b. Risk—harm avoided
c. Process—steps taken and institutional consequences
d. Amount at stake

Let’s discuss this in the context of two common activities (we can discuss value for uncommon activities in a subsequent post): buy-side M&A and revenue contracting.

Outcome. Value is a function of benefit received for the client. If you’re buying a company, then value is related to how beneficial the transaction is, how much was paid, and any unexpected problems, such as write-downs or losses. Lawyers are expected to help get transactions done while identifying possible risks along the way. One of problems, of course, is that an many large corporate acquisitions turn out to be full of risk—think AOL-TimeWarner or Daimler-Chrysler—which presents the difficult question of how to assess lawyers’ performance on an efficient transaction that turns out badly.

Risk. The second component of value is risk or harm avoided. For M&A, that might be identifying reasons not to do a deal that result in the deal not happening, or in negotiating a lower price or identifying potential problems so they can be considered and mitigated. Having done a lot of this, let me respectfully suggest that lawyers are not as good at identifying risk as they think they are and frequently add complexity which is not specific to the real facts (and therefore real risk) of the situation. Clients (who of course are not one person but many people with different and sometimes conflicting roles in a large organization) are not necessarily especially astute or forthright in discussing risk, either. For revenue contracts, obviously issues around the deliverable, indemnification, surety of payment, loss of rights (intellectual property or otherwise) are the risks to address; astute clients also recognize risks in not getting deals done, such as loss of revenue, delay and undermining relationships or implementability through excessive complexity. In all aspects of value, but especially in hard-to-quantify risk avoided, we should also think in terms of what Moneyball calls VORP, or value over replacement player) So the fact that a lawyer filed a motion without which a $1 billion case might have been forfeited doesn’t mean the value of the motion is $1 billion, if an average “replacement lawyer” would have filed the same motion.

Process. As the saying goes, the journey may be as important as the destination, so the process itself is a source of value. In M&A, a well-run process can clarify the clients’ goals, set the stage for effective integration, build relationships, lead to ongoing institutional learning or identify deals that shouldn’t get done. Some lawyers are superb project managers/train conductors; others leave chaos in their wake. In revenue contracts, the process might build understanding in the sales organization, strengthen relationships with customers, or make it easier for other parts of the organization (finance, manufacturing) to follow what the contract says. In every situation, time and timeliness, complexity and cost are important considerations. Traditional legal thinking puts law at the center of every legal matter, but organizational, business and people considerations can be just as important. And because most legal matters are repetitive in some way, doing each subsequent one better—improving the process—becomes an important consideration for most clients.

Amount at stake. While in some sense “unfair,” the amount at stake is a component of value. The exact same work in a $10 billion acquisition is more valuable than a $10 million one, or a $1 million sales contract versus a $10,000 one. That’s true even thought the smaller transaction is often more legally complex and requires more creative lawyering.

We’ve got a ways to go till we can discuss value in a way most lawyers would agree. In one respect, it was a lot easier for Billy Beane, because everybody understood the ultimate measure of value: wins and losses. But if we get started, we can move past what most would recognize as a very incomplete, conventional view of value—reputation times effort—toward one that helps clients and lawyers understand each other better.

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.

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