April 2017 • Volume 105 • Number 4 • Page 26
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Moneyball for Lawyers
When it comes to optimizing your practice, do you trust your gut? Don't. If you aren't using data to measure what works and what doesn't, you can't be sure you're winning the game. The good news: your practice generates the data you need to gauge success and adjust as needed.
The movie Moneyball features a scene during which a group of scouts for the Oakland Athletics sit around a table babbling about which players they think have the most potential for their team, citing characteristics like "he's got a strong jaw" and "he's got an ugly girlfriend, which means he lacks confidence."
The team's general manager, Billy Beane (played by Brad Pitt), admonishes the grizzled assemblage about the inherent imprecision of their old-school metrics and turns instead to a young whiz-kid well versed in computers, who can tell him statistics like which players get on base the most, and thus score the most runs and help the team win. The team ends up riding a late-season 20-game winning streak to a playoff berth, despite having a lost three star players during the offseason.
Jeffrey S. Krause, a partner at Affinity Consulting, believes that attorneys can make similar use of metrics to score the most clients and overall work and help their firms win. He has created a presentation built on these principles called "Moneyball for Lawyers: Using Data to Build a Major-League Practice."
"When you're looking at a baseball player, saying that somebody has potential, well have they realized that potential?" Krause says. "He seems to have speed; well, if that speed isn't translating into an extra base here or there, what good is that speed? Are they able to run out a few more infield singles? Are they able to turn a few more singles into doubles? That's what matters, not that they're fast. And if you're not looking at a number that actually measures what you're trying to get to, all the gut feeling in the world isn't going to get you there."
Numbers tell a story
Krause begins his presentation by stressing that numbers tell a story, but you need to produce and then examine that data to know the story at a granular level. "It's not about saying, 'I sure would like a few more clients.' It's about, 'How many am I getting, where are they coming from, how many am I losing, and why?' You have to dig deeper," he says.
Tracking numbers of clients over time will uncover patterns and help attorneys and firms come up with reasons (or excuses) why they're going up or down, Krause says. "It's usually reasons for going up and excuses for going down," he says wryly. "This isn't one of those things where at the end of the year, you run a report and compare it to next year. That's valuable, but the real story is how it's growing month to month, or week to week. Year to year, it's too late to do anything about it."
Keeping score inspires improvement, and small improvements add up to larger ones over time, so you need to reduce your goals into bite-sized chunks to make them manageable, Krause says. If you want to add 50 clients to your firm this year, "You don't say, 'Where are those 50 clients?'" he says. "That's four a month, and at the end [of the year] you will have added 50."
To track a firm's profitability, attorneys should be measuring not just their productivity - the percentage of time that's billable, which they do typically track - but also collection realization, Krause says. "That's the percentage of those who pay on time," he says. "If you bill six hours in a day, and you get paid for all of them, that's more profitable than billing for eight and not getting paid for three of them."
Obtaining the number of clients you want in the first place derives from a deeper formula that attorneys and firms need to think through and leverage, Krause says. "The number of clients you add is the product of the number of leads you get times the [percentage] you turn into an actual client," he says. "To get 50 new clients, how many additional people do you need to get interested in your firm? Do you need to increase the percentage of them who turn into clients? It's not just, 'I need 50 new clients.'"
Many attorneys tend to overestimate that conversion percentage, Krause says. "People will give you an outrageously higher number on that, like 90 percent," he says. "Most businesses, in the end, have a conversion rate somewhere between 20 percent and 30 percent. They're not tracking it. They're remembering the wins.…That [conversion] number is a huge eye-opener when a firm really sits down and tracks that. Otherwise, it's that cold gut feeling."
Once they have brought additional clients in the door, attorneys and firms need to think about how to increase the revenue gained from each one due to repeat business, Krause says. "If your practice is probate, you're not likely to get that client again," he says. "On the other hand, the administrator of that probate may come back and do something else with you. It's about great service, and telling your clients all the things you do, to encourage them to come back for another matter.…What types of services can you add on, and bill a little extra for?"
Krause provides an example from the non-legal world: When you buy paint at Home Depot, they put a sticker on the paint can with a checklist asking whether you need any brushes, stirrers, or masking tape. "That's how you get a client to spend more money on an engagement," he says, not implying that lawyers actually use stickers. "That's not something you can do in every area of law - it typically works better in transactional law."
Prospects lead to conversion, which leads to additional services, which leads to revenue. Then firms and attorneys need to measure their margin, Krause says. "Now that you have that revenue, what do you get to keep?" he says. That stems from answers to questions like: "What am I spending on phone services and utilities? Can I raise my rate a little bit to make sure total revenue goes up?"
But too often firms focus just on reducing costs when they want to goose their profits, Krause says, rather than looking at leads, conversion, additional services, and rates. "Four of those five things are essentially all sales and marketing," he says. "It's a big picture view that too many firms don't take. They say, 'I want more revenue.' That doesn't just magically happen. They say, 'I want more profit at the end of the year.' There's a series of things that go into that. If you grow each of those things by 10 percent, that will increase your firm profit by 60 percent."
On the issue of fees, Krause encourages attorneys and firms to think hard about gaining more revenue from raising them - and what happens when you offer discounts to get clients in the door in the first place. "The thing I stress here is that if you discount, you basically have to work harder to get the same amount of money," he says. "To get $250,000 [in revenue] you might need 28 clients instead of 25. You would need to pick up 11 percent more clients to make up for the discount. If I'm already having trouble finding clients, where am I going to pick up the three I need [to pay for] the discount? It's critical that you track that."
On the flip side, if you raise your rates by 10 percent, you can afford to lose 10 percent of your clients, Krause says. "Attorneys are very conscious about not losing clients," he says. But with higher rates, "You wouldn't have to work as hard to get ahead of where you are."
He adds that he understands that's become more difficult in the current legal economic climate. "There's a lot of pressure against raising rates these days. I get that. But it's another piece people have to think about: What value am I providing to clients to prompt them to spend more money?"
Client report cards
Attorneys and firms should move from numbers to letters, as in letter grades, to evaluate the quality of their clients from a bottom-line standpoint, Krause says. Most recognize the fact that some clients are better for business overall than others but few actually go through the exercise of ranking them, which they should do at least once or twice a year, he says.
F and D clients are those you definitely or probably want to "fire" as soon as you can, Krause says. "They're the clients that take up a lot of extra time, make unreasonable demands, complain about their bill, demand discounts, and don't pay on time, anyway," he says. "That discount number, they're the ones adding to that by a lot. They are making you work harder for other clients because you're discounting them. They are also costing you the time and effort to acquire other clients to pay for the discounts you're giving them."
C clients are somewhat better than D clients, making some extra demands or paying a little late but to a lesser degree. B clients are those who almost never cause trouble and are generally a pleasure to work with, Krause says. "'A' clients are basically 'B' clients who refer other work to you," he says. "They're great to work with, they pay on time, when the phone rings you're happy to take their call, and they send other people your way."
Krause doesn't mean to sound fatalistic about the D clients and says all but the absolute worst clients potentially have room for improvement as business propositions if you work with them. "The idea isn't to fire all of the 'D' clients," he says. "Can I move them up the ladder to a 'C?' Can you at least get them to the level where you don't have those problems [to the same degree]? Can you get a 'C' to a 'B,' and can you get a 'B' to an 'A?' There's a ladder. Can you improve your relationship to move them up? It consciously makes you think about the people you're working with and how you deliver services."
The client grading system also comes full circle to lead conversion going into the future, Krause says, in the sense that attorneys and firms can start to correlate lead sources with quality of clients they produce. "When you look at the 'D' clients, where did they come from?" he says. "Is there something they have in common when you go back to marketing and sales efforts? …What did I do to get those 'A' and 'B' clients? Where did they come from? That's where I should spend my marketing money, to get those clients I love working with."
Most practice management software could be used to run such a report, Krause adds. "That's a number, again, that most firms don't think to track," he says. "A lot of them track referrals, but are they using that in a useful way?"
Time is money
Another set of metrics that attorneys and firms should track revolves around how individual lawyers spend their time. An equivalent to how many runs a given baseball player scores might be how many leads joining a particular civic organization would bring, Krause says.
"If I joined this one civic organization, there are a lot of potential clients there," he says. "What you need to do is join two and figure out which one is delivering the results you want. In the end, it's the results that matter - you joined one and picked up four clients, and another you picked up eight. Most people do these things on gut feeling."
Back at the office, attorneys should track how they spend time in a given day because too many of them lose hours to tasks they either can't bill for, or they're the wrong person to bill for, creating situations in which the client doesn't want to pay, Krause says.
"I talk about, for example, cleaning up your desk, opening the mail, things like that are a complete waste of time for an attorney to be doing," he says. "They should be pushing that task down to somebody else. But if you don't track your time, you don't know much of a time sink that is. [Not knowing] also makes it harder to justify hiring staff to help. But if it takes up to six hours a week, you could hire somebody part time."
Instead, attorneys should be spending their time on higher level tasks like building long-term client relationships and strategic management of the firm - but they can't know for sure how much time they're spending on those crucial functions unless they keep track, Krause says.
"See where your time sinks are, and how little time you are spending on the things that really matter," he says. "You're not spending time doing those things because you're spending time at the bottom of the [task] scale."
Lastly, Krause encourages attorneys and firms to take all of these numbers and put them into a scoreboard that shows leads, clients, billable hours, revenue, and all the rest. "Without tracking those numbers, you'll just never know," he says. "And you can make smart investments. There are always patterns to be uncovered."
In the movie "Moneyball," general manager Billy Beane tracks investments by noting that a certain pitcher cost $5 million and won 18 games, so if the team wanted to win 90 games, how much would he have to spend on pitching?
"Our budget for wins is this," Krause says. "We have to go for pitchers that can get us those 90 wins. We need 200 home runs, and this player costs us $20,000 per home run. Someone who hits 30 home runs but costs $30 million, that's different from somebody who costs $8 million."
Life gets in the way
In any case, there's no actual way to know how many wins or home runs a player will produce based on what he - or his girlfriend - looks like. "There's a level of gut feeling that you want to avoid entirely if you can," he says. "There's concrete numbers, but there's a level of analysis that you also have to do with those numbers."
Krause says he always hopes attorneys and firms will put "Moneyball" in action, but when he gives his webinars, "I don't know how many people actually put these things into practice. They love the presentation, but every day office management stuff intervenes, and they never get it off the ground."
Ed Finkel is an Evanston-based freelance writer.
ISBA RESOURCES >>
Ed Finkel, Seeing - and Shaping - the Future, 105 Ill. B.J. 24 (Jan. 2017), https://www.isba.org/ibj/2017/01/seeingandshapingthefuture.
Ed Finkel, Mapping the Relentlessly Efficient Law Firm, 104 Ill. B.J. 22 (Aug. 2016), https://www.isba.org/ibj/2016/08/mappingtherelentlesslyefficientlawf.
ISBA Free CLE, Keeping Your Clients Happy and Coming Back for More: Defining Value in Your Firm (recorded Dec. 1, 2015), http://onlinecle.isba.org/store/seminar/seminar.php?seminar=49062.
LEARN MORE MONEYBALL TIPS, EARN CLE CREDIT >>
Jeffrey Krause of Affinity Consulting is bringing his 90-minute program about the game-changing power of analytics to the ISBA Annual Meeting this June. He will present Moneyball for Lawyers: Using Data to Build a Major-League Practice on Friday, June 16, at The Abbey Resort in Fontana, Wisconsin. Watch the ISBA website for more about the program and other Annual Meeting CLE offerings.