It’s the business, stupid: bringing strategy tools into the practice of law

    “A lawyer who has not studied economics… is very apt to become a public enemy” Brandeis J.

Law schools do not generally teach anything about business, as opposed to business law. As a result, lawyers learn about business legal forms and contracts, but nothing about the non-legal imperatives of running a business like corporate finance, marketing, or corporate strategy. Furthermore, as members of an inherently conservative profession many lawyers resist engaging in any topic that goes beyond the four corners of their legal brief (“I only give legal advice”).

This is highly problematic for business, because every legal problem comes within a business context, and lawyers who are not willing or able to understand that context cannot give good advice; Brandeis J.’s dictum is as applicable with respect to business knowledge as it is with respect to economics, and there remains a significant knowledge gap between the practice of law and the practice of business.

In some cases lawyers address this knowledge gap by specializing not only in a particular field of law but also in a particular industry, and in this way they develop industry expertise in substitution of more general business knowledge. At the same time the scale of the knowledge gap can be masked by the natural hubris of the legal profession—lawyers who are at the pinnacle of every information and decision making-tree they are associated with can suffer from the illusion of knowing more, not less, than their clients.

A great deal has been written about alternatives to lawyers billing by the hour, or lawyers working from home instead of at a desk in a big law firm, but in my view these topics are relatively trivial. A much more significant topic is bringing business financial and strategy tools into the practice of law in order to develop a multi-disciplinary approach to the delivery of legal services.

In a litigation context for example the focus of lawyers should not be on winning their client’s case but on solving the underlying business problems—the disputes which were the reason clients came to them in the first place. One very simple example of this would be to compare the cost of litigation with the cost of buying the other side’s company—if the two numbers bear some similarity then a rare opportunity for a litigator to participate in value creation instead of value destruction may exist.

Business clients want to know how much their case will cost, how long it will take, what the risks are, and the probable result. These four basis elements—cost, risk, time, and reward, are the foundation of the financial analysis of any business proposal, and there is no reason why lawyers cannot make reasoned and reasonably reliable assessments of these elements in any given legal context—the law is no more uncertain than many projects undertaken by business, and in many cases is substantially more certain.

Once we have attached numbers, or a range of numbers, to the four elements then we can financially model them the same way we can model any other business proposal. We can start with a simple spreadsheet comparing cost to risk-discounted reward, or add time to give a net present value calculation (which will show how high the reward would have to be to justify the risk over time, all other things being equal). Nor does it stop there—we can go on to decision tree modeling to assess the value of certain choices and options, and use sensitivity analysis or tornado diagrams to identify the assumptions in the model around which most of the risk in the model revolves; this in turn allows us to go back and further assess the assumptions.

I am aware of no lawyers anywhere in the world who consistently adopt this multi-disciplinary approach in their practices. Discovering such lawyers, and developing a framework with readers to put some flesh on the bones of this theoretical multi-disciplinary approach, is a key objective of this Journal.