The Intelligence of Business Intelligence

As law firms begin to recover from the last two tumultuous years, more and more are looking for ways to protect themselves from future market downturns. There is no way to completely insulate any business from declines in the demand from customers, but investing in tools, education, and infrastructure during healthy times can greatly increase the ability of a firm to weather the lean times. One way to accomplish this is to place the firm's focus on gaining a greater understanding of the business drivers that create value in a law firm. In many firms, this has meant opening the door to the concept of business intelligence.

Business intelligence is essentially a decision support system in which data are stored, grouped, and analyzed to help provide useful information to the consumer. In other words, it provides a way to turn the billions of pieces of swarming data into organized information and then to turn that information into intelligence to help make good decisions. In the course of doing business, every law firm generates and tracks massive amounts of data, be it in a time and billing system, general ledger accounts, payroll, etc. Structuring those data into a meaningful framework allows a law firm to sift through a large amount of statistics to analyze and answer important business questions.

Law firms have always used some form of financial analysis in their business, whether it be simple reporting of Profit/Loss statements, or, more infrequently, advanced analysis using complex algorithms to tackle specific problems. Until recently, though, the practice of business intelligence was primarily academic. Those firms that had spent the energy and resources to set up the needed technology largely viewed it as a pet project rather than a strategic initiative. The information generated was used when expedient and ignored when inconvenient for firm leaders. Today, as the pendulum of purchasing power swings back in favor of clients, law firms are beginning to understand that the historical twin drivers of increasing rates and hours have limits, and an in-depth understanding of their other business drivers is needed.

Moving Beyond Finance and Accounting

One area in particular that has seen relatively little benefit from the establishment of business intelligence is the arena of business intelligence and marketing. Historically, information requested for business development ventures in firms has largely been reactive. For better or worse, the main functions in the business development groups have not been viewed as analytical in nature. Rather than diving into and analyzing the existing data to gather answers to the pertinent questions of “How?” or “Why?”, law firms are content with simply scratching the surface with “Whom?” and “Where?”. Thus, the act of deriving simple lists of information is one of the main uses of financial data in the business development world.

In and of itself, the idea of generating lists of data to spark action in a law firm is not a bad idea; in fact, it can be extremely helpful. It is the determination of those lists that needs scrutiny and development. As previously stated, the goal of business development is to provide information that can be used to act upon intelligently. In no other area of a law firm is the idea of information that can be acted upon more important than in business development. By its very nature and name, the goal of this group is to develop business, which must require an action. However, in many cases the data that are compiled to generate action items are much too broad in nature and lead to inefficiencies and wasted resources.

Take those firms with management concerned about client attrition. Many firms will simply focus on those clients that have seen a significant decrease in hours over the previous year. This type of reactive analysis will yield a long list of client names and little long-term solutions to the issue at hand. A better approach might be to take this list and apply some concentrated criteria to it. For example, instead of focusing on all clients with a decrease in hours, only look at those clients that have seen a significant hours loss that meet certain realization thresholds, reside in certain practice groups, that have provided the firm significant hours for at least five years prior, and that pay promptly. To take the question one step further, the firm could also look at the historical trend of clients who have left and look for common factors (such as cross-sell percentage, number of partners involved, practice areas, etc.), and then try to counteract these behaviors in the future with existing and new clients. Now, the law firm has a list that is not only more focused, but also will allow the limited resources of a firm to be spent on clients that are of a high value, and provide a proactive course of action in the future that has proven to be successful with other clients.

The Next Steps

At its core, business intelligence allows a law firm to gain powerful insights into itself and encourages the leaders of the firm to drive successful behavior. The next step involves utilizing the information that firm has gained about itself and joining it with data that sit outside the firm's financial arena to reproduce successful engagements. This includes leveraging competitive intelligence, as well as relationship intelligence. Competitive intelligence focuses on information regarding external sources of data, and analyzing them to provide the firm with a greater insight into the marketplace as a whole. Relationship intelligence focuses on the connections between a firm's resources and its clients or potential clients. The interaction of these three data sets is instrumental in providing targeted opportunities that have far greater chances of being successful in the end.

Instead of simply focusing on work a firm can do, the firm can use internal intelligence to understand what it is doing well and then look outside the firm to target potential new clients that fit those criteria; therefore, doing work it wants to do and should be doing. A simple example of the analysis process follows:

1. Show me all companies we could work with.
2. Show me all pharmaceutical companies we could work with.
3. Show me all pharmaceutical companies we have worked with.
4. Show me all pharmaceutical companies we have worked with that did M&A work with another firm.
5. Show me all pharmaceutical companies we have worked with for which we performed more than $100,000 of work over the last year, had greater than 90% realization from, who attended a M&A seminar recently, and which attorneys they have strong relationships with at our firm.

In the above example, by using a combination of internal business intelligence, external competitive intelligence, and relationship intelligence, the firm was able to take an unmanageable list of low-value opportunities and distill down a small number of high-quality, focused leads. Of course in the example above, the list may be too distilled, but the opportunities exist to determine high-value clients and either find similar clients in the marketplace, engage the existing clients in different types of work, or prospect new laterals who have a book of business that may match our firm's desired practice areas.

While the above may seem too good to be true, the technology does exist and can be maintained. Law firms simply need to start taking advantage of the data that are available to them. The good news is that through technological advances, better education, and new mandates from leadership, this process is being adopted by firms, and finance, accounting, and business development departments are getting better at filtering out the noise of the everyday to isolate that usable information. Law firms are beginning to do more in-depth analysis surrounding profitability, utilization, leverage, cross-selling, etc. in which the goal of the research is quantifiable improvement and direct action, rather than simply information reporting. As downward pressure on margins continues in firms that try to maintain the status quo, more and more will begin to adopt progressive analytical techniques that in the end will not only strengthen their businesses, but also will help insulate them from significant downturns in the future.

Derek Schutz is a member of this newsletter's Board of Editors and is the Director of Programs/Services for the Business of Law Group at Redwood/LexisNexis. Russ Haskin is Director of Consulting at Lexis-Nexis' Redwood Analytics Division.

As law firms begin to recover from the last two tumultuous years, more and more are looking for ways to protect themselves from future market downturns. There is no way to completely insulate any business from declines in the demand from customers, but investing in tools, education, and infrastructure during healthy times can greatly increase the ability of a firm to weather the lean times. One way to accomplish this is to place the firm's focus on gaining a greater understanding of the business drivers that create value in a law firm. In many firms, this has meant opening the door to the concept of business intelligence.

Business intelligence is essentially a decision support system in which data are stored, grouped, and analyzed to help provide useful information to the consumer. In other words, it provides a way to turn the billions of pieces of swarming data into organized information and then to turn that information into intelligence to help make good decisions. In the course of doing business, every law firm generates and tracks massive amounts of data, be it in a time and billing system, general ledger accounts, payroll, etc. Structuring those data into a meaningful framework allows a law firm to sift through a large amount of statistics to analyze and answer important business questions.

Law firms have always used some form of financial analysis in their business, whether it be simple reporting of Profit/Loss statements, or, more infrequently, advanced analysis using complex algorithms to tackle specific problems. Until recently, though, the practice of business intelligence was primarily academic. Those firms that had spent the energy and resources to set up the needed technology largely viewed it as a pet project rather than a strategic initiative. The information generated was used when expedient and ignored when inconvenient for firm leaders. Today, as the pendulum of purchasing power swings back in favor of clients, law firms are beginning to understand that the historical twin drivers of increasing rates and hours have limits, and an in-depth understanding of their other business drivers is needed.

Moving Beyond Finance and Accounting

One area in particular that has seen relatively little benefit from the establishment of business intelligence is the arena of business intelligence and marketing. Historically, information requested for business development ventures in firms has largely been reactive. For better or worse, the main functions in the business development groups have not been viewed as analytical in nature. Rather than diving into and analyzing the existing data to gather answers to the pertinent questions of “How?” or “Why?”, law firms are content with simply scratching the surface with “Whom?” and “Where?”. Thus, the act of deriving simple lists of information is one of the main uses of financial data in the business development world.

In and of itself, the idea of generating lists of data to spark action in a law firm is not a bad idea; in fact, it can be extremely helpful. It is the determination of those lists that needs scrutiny and development. As previously stated, the goal of business development is to provide information that can be used to act upon intelligently. In no other area of a law firm is the idea of information that can be acted upon more important than in business development. By its very nature and name, the goal of this group is to develop business, which must require an action. However, in many cases the data that are compiled to generate action items are much too broad in nature and lead to inefficiencies and wasted resources.

Take those firms with management concerned about client attrition. Many firms will simply focus on those clients that have seen a significant decrease in hours over the previous year. This type of reactive analysis will yield a long list of client names and little long-term solutions to the issue at hand. A better approach might be to take this list and apply some concentrated criteria to it. For example, instead of focusing on all clients with a decrease in hours, only look at those clients that have seen a significant hours loss that meet certain realization thresholds, reside in certain practice groups, that have provided the firm significant hours for at least five years prior, and that pay promptly. To take the question one step further, the firm could also look at the historical trend of clients who have left and look for common factors (such as cross-sell percentage, number of partners involved, practice areas, etc.), and then try to counteract these behaviors in the future with existing and new clients. Now, the law firm has a list that is not only more focused, but also will allow the limited resources of a firm to be spent on clients that are of a high value, and provide a proactive course of action in the future that has proven to be successful with other clients.

The Next Steps

At its core, business intelligence allows a law firm to gain powerful insights into itself and encourages the leaders of the firm to drive successful behavior. The next step involves utilizing the information that firm has gained about itself and joining it with data that sit outside the firm's financial arena to reproduce successful engagements. This includes leveraging competitive intelligence, as well as relationship intelligence. Competitive intelligence focuses on information regarding external sources of data, and analyzing them to provide the firm with a greater insight into the marketplace as a whole. Relationship intelligence focuses on the connections between a firm's resources and its clients or potential clients. The interaction of these three data sets is instrumental in providing targeted opportunities that have far greater chances of being successful in the end.

Instead of simply focusing on work a firm can do, the firm can use internal intelligence to understand what it is doing well and then look outside the firm to target potential new clients that fit those criteria; therefore, doing work it wants to do and should be doing. A simple example of the analysis process follows:

1. Show me all companies we could work with.
2. Show me all pharmaceutical companies we could work with.
3. Show me all pharmaceutical companies we have worked with.
4. Show me all pharmaceutical companies we have worked with that did M&A work with another firm.
5. Show me all pharmaceutical companies we have worked with for which we performed more than $100,000 of work over the last year, had greater than 90% realization from, who attended a M&A seminar recently, and which attorneys they have strong relationships with at our firm.

In the above example, by using a combination of internal business intelligence, external competitive intelligence, and relationship intelligence, the firm was able to take an unmanageable list of low-value opportunities and distill down a small number of high-quality, focused leads. Of course in the example above, the list may be too distilled, but the opportunities exist to determine high-value clients and either find similar clients in the marketplace, engage the existing clients in different types of work, or prospect new laterals who have a book of business that may match our firm's desired practice areas.

While the above may seem too good to be true, the technology does exist and can be maintained. Law firms simply need to start taking advantage of the data that are available to them. The good news is that through technological advances, better education, and new mandates from leadership, this process is being adopted by firms, and finance, accounting, and business development departments are getting better at filtering out the noise of the everyday to isolate that usable information. Law firms are beginning to do more in-depth analysis surrounding profitability, utilization, leverage, cross-selling, etc. in which the goal of the research is quantifiable improvement and direct action, rather than simply information reporting. As downward pressure on margins continues in firms that try to maintain the status quo, more and more will begin to adopt progressive analytical techniques that in the end will not only strengthen their businesses, but also will help insulate them from significant downturns in the future.

Derek Schutz is a member of this newsletter's Board of Editors and is the Director of Programs/Services for the Business of Law Group at Redwood/LexisNexis. Russ Haskin is Director of Consulting at Lexis-Nexis' Redwood Analytics Division.