The other day we were presenting a webinar on ‘The Lawyer of the Future’ to a firm’s summer associate class, now in the midst of their remote June and July programme, and the question came up, ‘What do associates need to know?’
Here’s where I suspect many were anticipating we would have headed straight to, ‘Technology’ or ‘IT’ or even ‘How to code.’
Our answer was two core skills: (1) How to read accounting statements and (2) becoming at least minimally conversant with basic statistics.
We start from the premise that law is a client service business. Client service, in turn, has to be founded on understanding your client. One outcome from the pandemic is that client service will be more important than ever. Thus Accounting 101.
Fundamental accounting statements are critical tools in how your clients manage their businesses; if you don’t know how to read them (meaning for insight and good news/bad news) or are so haughty as to think them beneath you, you might want to rethink this whole BigLaw thing and switch to the government or non-profit worlds.
What are those ‘fundamental’ statements? Two really, plus a third for extra credit:
1. The income statement, revenue and expense, AKA P&L: Where the money comes from, where it goes, what’s left as profit or loss.
2. The balance sheet, AKA assets and liabilities.
3. (Optional) The statement of cash flows, AKA sources and uses of funds, about which we’ll say no more.
Here are the two bedrock accounting statements 101 courtesy of Harvard Business Review:
The income statement
Also known as profit and loss (P&L) statements, income statements summarise all income and expenses over a given period, including the cumulative impact of revenue, gain, expense, and loss transactions. Income statements are often shared as quarterly and annual reports, showing financial trends and comparisons over time.
The purpose of an income statement is to show a company’s financial performance over a period. It tells the financial story of a business’s activities.
The balance sheet
A balance sheet is designed to communicate how much a company or organisation is worth – its so-called ‘book value’. The balance sheet achieves this by listing out and tallying up all of a company’s assets, liabilities, and owners’ equity as of a particular date.
The information found in a balance sheet will most often be organised according to the following equation:
Assets = Liabilities + Owners’ Equity
A balance sheet should always balance. Assets must always equal liabilities plus owners’ equity.
If a balance sheet doesn’t balance, it’s likely the document was prepared incorrectly.
Your goal is not to become a forensic sleuth capable of pulling the covers off Enron or Wirecard. It’s to be able to hold a conversation with your client that refers to financial results with some degree of confidence.
That’s all we’re going to say about Accounting 101. What about Statistics 101?
According to the University of California:
Statistics is the science concerned with developing and studying methods for collecting, analysing, interpreting and presenting empirical data.
Two fundamental ideas in the field of statistics are uncertainty and variation. There are many situations that we encounter in life in which the outcome is uncertain.
Probability is the mathematical language used to discuss uncertain events and probability plays a key role in statistics.
Why does this matter to clients? It demonstrates you are comfortable with descriptions of the world framed in numbers, and you can derive meaning and perspective from them.
Think of statistics primarily as the indispensable tool for understanding a dataset and then putting it in context.
As for ‘understanding,’ we recently discussed how the concept of averages – ubiquitous in statistics – was a horrible tool to use to grasp what the listing of AmLaw 200 firms might reveal.
And as for ‘context,’ a statistic in isolation – which can be impeccably calculated, based on entirely credible information, and the apt tool to use for the data at issue – can provide little or no real information absent context. If a leading law firm’s revenue increased X% from one year to the next but their lawyer headcount increased 3X%, that revenue growth suddenly looks a lot less impressive.
And for a more real-world, if tragic, example: some weeks ago daily reports were all over the news that New York City was nearing its peak of daily deaths from Covid-19. (The officially reported peak was 598 dead on 7 April.) In flagrant disregard of context, those reports did not state how many people die in New York City on a ‘typical’ day. If Covid-19 were increasing the death rate by a factor of 5, 10, 20, or more, that’s informative; and if it’s increasing it 2%, that’s also informative. But without context, what do you know? (We did some research and found the average month sees about 5,000 people die in New York City so nearly 600 deaths in one day is, yes, a big deal against a long-term average hovering in the 160/170-a-day region.)
Now, you might argue that we’ve missed the soft skills: emotional intelligence, affinity for teamwork and collaboration, curiosity, and the simple social graces.
The hitch is that teaching those skills and personality traits to lawyers is laborious and time-consuming. It also strikes us as just plain odd to classify that as something associates – or partners or business professionals – need to know. It’s a way they need to behave, feel, relate, interact, and a set of inbuilt intuitive reflexes that operate at the subconscious level.
Still, we’re optimistic about building those skills in lawyers. Some effective tools that can help include:
• Reading classic fiction, novels in particular.
• A generous helping of enduring management classics (for theory – Michael Porter’s On Strategy, Clayton Christensen’s The Innovator’s Dilemma, Jim Collins’ Good to Great, Roger Altman’s and A.J. Lafley’s Playing to Win.
• And read some business history as well; so you’ll learn from the lessons of the past that the choices your clients are facing can be existential in the moment and the ‘right’ decisions obvious only through the lens of years of hindsight.
Just leave technology to the software engineering geniuses.
Bruce MacEwen is the president of Adam Smith, Esq, a strategic consulting business focused on the legal industry. You can read his articles here.