The other day we were presenting a webinar (what else?) on “The Lawyer of the Future” to a firm’s summer associate class, now in the midst of their remote (what else?) June and July program, and the quite rational question came up, “What do associates need to know?”
Understand the context: We were talking about the business of law firms, and my most recent book, Tomorrowland, so they were not asking whether they should take Taxation 101 in law school or whether knowing how to run a deal or first-chair a trial would be a handy skill to have. They were asking, “Outside legal knowledge, what do we need to know?”
Here’s where I suspect many of you are anticipating that we would have headed straight to, “Technology” or “IT” or even “How to code.”
Understand: Technology is beyond great. That state of the art smartphone in your hip pocket has over 100,000 times more processing power than the computers that took Apollo 11 to the moon and back, over a million times more memory, and over seven million times more storage.
Technology has been a lifesaver (or at least a job-saver) for many of us in this new WFH world. But increasingly when people say lawyers need to know “how technology works,” I’m reminded of how automobiles were first introduced: Early car owners (they were all wealthy) needed a “chauffeur” not so much to drive the beast but to be on the spot to fix it when it inevitably and frequently broke down. Once cars became more reliable, owning a car did not require “knowing how it works.” You turned the key and off you went.
Now, our answer to the question: (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. (And no, we’re not getting sucked into the debate over whether it isn’t really a “profession” instead. It’s both, OK? And here at Adam Smith, Esq., and in response to these summer associates, we focus on the business of law; we leave the “profession” part to professors at Harvard, Stanford, Columbia, Yale, and so on.)
“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.
The fundamental accounting statements are critical tools in how your clients manage their businesses; if you don’t know how to read them (meaning read them for insight and good news/bad news) or are so haughty as to think them grubby and beneath you, you might want to rethink this whole BigLaw thing and switch course to the government or nonprofit worlds.
What are those “fundamental” statements? Two really, plus a third for extra credit:
- The income statement a/k/a revenue and expense a/k/a P&L: Where the money comes from, where it goes, what’s left as profit or loss.
- The balance sheet a/k/a assets and liabilities.
- (Optional) The statement of cash flows a/k/a 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 summarize 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 exactly how much a company or organization 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 organized 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, say, 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, analyzing, 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 to them that you are comfortable (you don’t need to be fluent, you just need to be comfortable) with descriptions of the world framed in terms of numbers, and that you can derive meaning and perspective from them.
I think of statistics primarily as the indispensable tool for (a) understanding a dataset and (b) putting it in context.
As for “understanding,” we recently discussed how the concept of “averages”—ubiquitous in statistics—was actually a horrible tool to use in trying 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 an AmLaw 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 April 7.) In flagrant disregard of context, those reports never said 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 actually “know?” (We did some research and found that the average month sees about 5,000 people die in New York City so nearly 600 more on one day is, yes, a big deal.)
Now, you might argue that we’ve missed the soft skills: Emotional intelligence, a deep affinity for teamwork and collaboration, curiosity, and the simple social graces.
We completely agree.
The hitch is that “teaching” those skills/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 actually optimistic about building those skills in lawyers.
- Read classic fiction, novels in particular.
- Read 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.
And leave technology to the software engineering geniuses.