The Client Revolution

Why lawyers can't win the Cy Young Award

There is an active major-league pitcher with a career win-loss record of 59-68, and he is a mortal lock for the Hall of Fame. Now, if you're a real baseball fan, you immediately realized that I must be talking about a relief pitcher, and probably a closer. And you'd be right. Trevor Hoffman, the closer for the Milwaukee Brewers, has 591 saves to go with that seemingly unimpressive W-L record, more than anyone in major-league history.

You see, wins are a useless statistic for a relief pitcher. Whether a relief pitcher wins or loses the game often depends on what other players (on either team) do. In fact, it's possible for a relief pitcher to win a game without throwing a single pitch. (This has happened 15 times since 1957, according to the hardball geniuses at Baseball-Reference.com. The scenario involves throwing out a baserunner to end an inning, having your team take the lead immediately after, and then getting relieved by someone else.)

The win-loss record for starters is a more-useful statistic, but it is still seriously flawed. For example, on October 2, Adam Wainwright was denied a chance to be the Majors' only 20-game winner in 2009 when the St. Louis bullpen imploded. He pitched six strong innings, striking out eight and allowing just one run. Then the first two batters reached in the seventh. The playoffs were around the corner and Wainwright had already thrown 90 pitches. So manager Tony La Russa (a lawyer, by the way) replaced him with Kyle McClellan, who promptly allowed Wainwright's two runners to score and let in four more of his own. As a result, Wainwright finished with 19 wins, which probably cost him the National League Cy Young Award. It wasn't his fault that he didn't get that twentieth win, still considered a magic number.

What is unusual is that both Cy Young winners announced last week had even fewer wins than Wainwright. Kansas City's Zack Greinke won with just 16 wins, and Wainwright's teammate Tim Lincecum won with 15 wins, the lowest win total ever (for a starter in a nonstrike year). In Sunday's New York Times, Tyler Kepner discusses this novelty in a piece called "A New Generation of Statistics Redefines Baseball." (Actually, the article appears online with a different title: "Not Your Grandfather’s Stats: Baseball Redefined.") Kepner makes the point that the sportswriters who vote for the awards are becoming savvier about which statistics are better indicators of a player's performance. Win totals have long dominated the Cy Young voting, and Kepner and ESPN.com's Rob Neyer point out that Wainwright would have beaten Lincecum if the Cardinals bullpen had held on to get him his twentieth.

Kepner compares the 1990 seasons of Roger Clemens and Bob Welch. Clemens pitched substantially better according to the more-meaningful statistics: many more strikeouts, fewer walks, far fewer home runs, fewer baserunners per inning pitched, much lower OPS against (that's opponents' on-base percentage plus slugging percentage, for you nonseamheads). But Welch won 27 games, six more than Clemens, and thus won the American League Cy Young Award.

The point here is that if you're going to measure performance, measure the things that matter most. (Brace yourself for the segue to law firms.)

So how do law firms measure associates? By the number of hours they bill, of course. Oh, sure, they have evaluations, and 360-degree reviews (whatever that means), and other methods of assessing performance. But the one number that matters — the win totals for associates, if you will — is hours billed for the year. (If this were baseball, we'd call it "HB." Of course the Times would call it "H.B." with the periods, just like they write "E.R.A." and "R.B.I." That bugs me.) This metric is so important that many BigLaw firms have a threshold: if you don't bill 1,850 hours, no bonus for you.

[It's worth noting that unlike baseball teams, law firms usually don't pay their associates based on performance. At least at the larger firms, they pay their associates (in lockstep) based on years of service. Under that system, Alex Rodriguez (who debuted in 1994 — call him a 16th-year associate) should get less than Cliff Floyd (who debuted a year earlier). Of course, the Yankees paid A-Rod $33 million for 2009, while the Padres paid Floyd a mere $750,000.]

And what's the most important measurement for the firms themselves? Profits per partner. This is how they keep score, with the numbers voluntarily reported and shared with The American Lawyer. (Why law firms, which are all privately held, would share their profit numbers is beyond me.)

But how do these "win totals" — HB and PPP — measure real performance? In other words, the performance that the clients care about. I submit to you that like relief wins, they don't.

It's difficult to measure performance when you're talking about professional services. Lawyers aren't playing baseball. But it's not impossible. Value-pricing guru Ron Baker has an entire book devoted to key predictive indicators, or KPIs: Measure What Matters to Customers: Using Key Predictive Indicators. In it, Ron talks about the sort of KPIs that law firms could use, such as turnaround time (which is basically the opposite of billable hours, if you think about it), innovation sales (selling new services), customer loyalty (retention rates), share of customer wallet, and others. You could learn a lot about how to run your law firm better — buy it here.

Lawyers: stop worrying about relief wins, and start measuring what actually matters to your customers.

[Update: Ed Kless, who comments below, has a great sidebar in Ron's book that discusses the topic of using the right stats in baseball. A must read.]

An alternative to "alternative billing"

Words matter. What we call something matters. The name we give something usually provides people with the first opportunity to form an opinion about that something, so it's important that the name fits.

I hate "alternative billing." (If someone quotes me on this, make sure they include the quotation marks.) It's a terrible term; one that does injustice to the concept. As I've said before, it has a seamy connotation to it, like "alternative lifestyle." It seems vaguely Berkeley or Brookline or (gasp) Vermont, which makes tradition-bound lawyers very uncomfortable. We need an alternative for "alternative."

And I don't like the "billing" part any better. First, it makes it seem like the issue is about invoice styles, which makes it more boring than the Tax Code or, say, professional soccer. ("Woo! Another one-nought blowout!") Second, it places the focus on the law firm and its adminstration, rather than on the client and the value it is getting.

The intellectual godfather and guru of this ill-named field, the Verasage Institute's Ron Baker, has long advocated "value pricing" as the preferred term. [Update: Ron points out in the comments that he prefers "fixed price" when talking to the customers themselves; "value pricing" is more of a behind-the-scenes term.] It's definitely an improvement, and it is far more descriptive and accurate. The main idea, of course, is that lawyers should price their services based on their value to the client. (Gee, it sounds so obvious when you say it like that.) But my quibble is that the word "value" has Walmart-y connotations. People often connect "value" with "discounted," and that's missing the point entirely.

I propose a different approach:

Open-price lawyering.

What we're talking about here is legal services where the price is known to the customer ahead of time, so that the customer can make an informed decision about the worth of those services to him or her before actually agreeing to buy them. In other words, the price is out in the open. There is a fair exchange between lawyer and client with the client having as much knowledge about the price as the lawyer.

And what's the opposite of open-price lawyering?

Hidden-price lawyering.

The price is hidden from the client (and, often, even from the lawyer). I'm not saying that in a judgmental sort of way, like the lawyer is intentionally hiding the price from the customer. Well, maybe I am. But even if it is unintentional, that's no excuse for doing it.

Clients of the world: which would you rather have — open-price lawyering or hidden-price lawyering? Sound off in the comments, or reply to me on Twitter at @jayshep.

Try out the term, and let me know what you think.

Or offer an alternative.

Boston Business Journal reports on killing billable hours

The Boston Business Journal ran a nice profile on our firm, Shepherd, and how we got rid of the billable hour three years ago. Lisa van der Pool, the BBJ's top-notch legal-beat reporter, did the interview and wrote the story. The piece is called "Rebel with a clause: Lawyer is fixed on reforming the billable hour."

Lisa describes how we changed our business model:

For the first eight years of running ... Shepherd Law Group, Shepherd billed clients by the hour. But soon after starting the firm he began to research everything about the billable hour, including how long it had been in use and whether a fixed-pricing model could even work.

...

His next step was to analyze eight years worth of bills from his firm, to figure out what was driving costs. Did his clients feel like they got their money’s worth and did his firm feel like they got paid fairly? He had read that you can’t do litigation on a fixed-fee basis, and 80 percent of his firm’s work is litigation.

“Now, after doing it for three years, I’m here to tell you, you can do litigation on fixed fees. It all comes down to, what is the service ... worth to the client?”

If there's a money quote in the article, it's probably this one, talking about how lawyers see themselves as being something more than other businesspeople:

“We’re so resistant as a group to thinking of ourselves as a business. But we are a business. We’re not a priesthood. It’s not a guild.”

Read the entire piece here. (Note: the article continues onto a second page. The next-page link is tucked in after some sponsored links.)

Are cellphones companies smarter than law firms?

Could be.

Now, it's true: I've been known to criticize law firms and their business models on this page and elsewhere. But I'm also no kind of fan of cellphone companies. I've been an iPhone user since the day the phone dropped, and my biggest complaint has always been AT&T's coverage. Before that, I (like many iPhone users) had Verizon, which had better coverage but questionable customer service. Also, like most people, I can't stand being locked into a two-year contract for anything. I have a mortgage, an office lease, and a marriage: that's plenty of long-term commitment for me.

Cellphone pricing has caused many to scratch their heads, or even bang them on their desks. Saul Hansell's finely reported and written article in Sunday's New York Times goes a long way to making some sense out of them. Saul's piece is called "Is There a Method in Cellphone Madness?" and the answer, he finds, is yes.

If you want to understand how the cellphone companies come up with their pricing and how they make their profits, you should read the article. But my main interest is in law-firm pricing, and there was one section that jumped out at me.

As you know, lawyers are obsessed with how much their services cost. (See "Hourly billing: the end of the beginning.") They claim that their inability to figure out what a particular case or matter costs makes it impossible to offer fixed prices. This notwithstanding the fact that law firms' costs are generally fixed: associates' salaries, other payroll, leases, insurance, and so on. Just because a case takes more work does not mean that it costs more to the law firm.

But it turns out that cellphone carriers also have no idea what their services cost. Saul explains:

In many ways, however, the least important factor in setting prices is the actual cost of providing cellular service. Cellphone companies resemble airlines, that other industry whose oblique prices exasperate consumers. Think of a cellphone network as one giant airplane that costs tens of billions of dollars to build. The cellphone companies don’t really know how much it costs to handle a call to Aunt Suzy in Syracuse, any more than an airline can calculate a specific cost for Seat 12B.

“Service providers don’t have a good measure of their costs,” said Philip Marshall, an analyst for the Yankee Group. “They don’t have the ability to say if they are going to make money” on any particular plan.

Huh. I hear lawyers say this to me all the time: "If you don't track hours, you idiot [OK, that part is inferred], how do you know if you're making money on a particular case." I tell them I don't. [That's often when they say "idiot" in their out-loud voice.] But I don't need to know that. I only need to know if I'm making a profit on my law firm, not on a particular case or client. Profit equals revenue minus expenses, and there's no earthly way to determine the real expenses for a particular case or client. Even if you bill by the hour.

The phone guys don't seem to have a problem with this. Saul writes:

Put simply, all a phone company wants is to get as much money as possible each month from its customers. Then it hopes that this total is more than its costs.

That sums up the cellphone business, and every other business in the world. For some reason, though, lawyers have trouble understanding that.

Maybe cellphone companies really are smarter than law firms.