According to recent comprehensive surveys, COVID-19 did not destroy the legal industry for the most part in 2020, at least not to the same extent as industries such as restaurants and hospitality. The studies show that most of the larger companies saw average sales growth in the mid-single-digit range in 2020. Smaller companies recorded only single-digit decreases on average over the same period.
Yet controlling costs has become a priority for individuals and institutions alike. This trend started with the 2008 financial crisis, but even after the economy recovered, the cost-saving mindset was slow to wane. The legal department was particularly sensitive to these preferences and was forced to find ways to reassure more cost-conscious customers without sacrificing too much revenue.
This trend was documented in a report from the Georgetown University Law Center and the Peer Monitor. It was found that the implementation rates have dropped to 84%. Alternatively, law firms are left unpaid for up to 16% of their work. This is well below the normal realization range of 90 and 95%. If this payment rate were carried over to most other professions, it would be widely viewed as irresponsible.
In addition, according to a recent Altman Weil Flash survey, companies have begun strengthening their in-house legal departments to reduce overall reliance on law firms. The survey showed that “[m]or more than 85% of law firms find that their strongest competition comes from their clients. “
Similarly, among smaller businesses, Clio found that 31% of consumers felt the legal fee fees were too high, while 35% disagreed that the potential outcomes are worth the money it takes to run one Case would be required trend report.
What should law firms do? You lose money with lower realization rates and risk losing customers with price increases – too often to make up for lost realization rates. The answer is to leverage existing technology to optimize business performance whenever possible, especially in administrative and management areas like billing.
With these technological solutions comes useful and organized data that can be analyzed to create data-driven approaches to streamline and maximize resource allocation in future affairs.
There are two main reasons why simply increasing fee rates is not a viable way to recoup revenue from fluctuating realization rates.
The first reason is that it doesn’t work. The costs for legal action primarily lower the implementation rates. In turn, if you try to keep raising prices to make up for those losses, you are just creating a vicious circle that further removes customers. It’s an unsustainable model.
According to the Georgetown report, although many of the law firms that responded to the survey had increased their hourly rates, “clients continued to push back on rate increases and maintain pressure on the realization rates companies could achieve”. As this ongoing trend shows, simply increasing interest rates will not help profit if the customer pays fewer of the hours billed.
The second reason is that customers are looking for “reasonable” fees. Rule 1.5 of the ABA Model Rules for Professional Conduct gives specific guidelines in the form of eight factors to determine the form of a “reasonable” fee, otherwise it could be a somewhat nebulous concept.
These factors include:
- The time and work required to complete the matter, the novelty and difficulty of the issues involved, and the skills required to handle the matter properly.
- The obvious likelihood for the client that this matter will be taken over precludes any other employment of the lawyer.
- The fee typically charged locally for similar legal services.
- The amount and the results obtained.
- Time restrictions imposed by the customer or the circumstances of the individual case.
- Type and duration of the professional relationship with the customer.
- The lawyer’s experience, reputation and skill.
- Whether the fee is fixed or conditional.
The effective and accurate record of time
Documenting time spent on legal tasks is the blood of a company’s revenue. If it is not captured and recorded accurately and efficiently, money is lost.
An internal LexisNexis survey found that over 450 companies with 20 attorneys or fewer are losing 40% of their billable time due to inefficiencies in billing and time tracking. To put this in perspective, according to the Clio Legal Trends Report “[d]Despite working 50 hours a week, the average lawyer devotes only 2.4 hours of billable work per day. “
This problem can be greatly mitigated by the existing legal accounting software, which is designed to streamline and automate the legal accounting process using artificial intelligence (AI) and machine learning.
Since these applications work digitally, most of them have mobile options. In this way, lawyers can record time or even bill customers directly from anywhere where the lawyers have internet access.
Just buying legal technology like billing applications is not enough to improve profitability on its own. The implementation of this technology is essential. This implementation must be company-wide in order to achieve the desired effect.
The American Bar Association has recommended the following tips to help maximize your timing efforts without going beyond what is reasonable:
- Be descriptive
- Avoid block billing
- Proofreading of time entries
- Track and enter your time daily
- Record all your time
Improved optimization through data analysis
Data is a valuable asset to modern law firms. It can inform everything from hiring decisions to the general allocation of resources as a whole. However, there is less talk about how the acquisition and implementation rates can be improved.
In their latest Industry Outlook report, Major, Lindsey & Africa acknowledge this phenomenon, claiming that “more companies are using analytics to predict trends and measure practice developments by applying advanced analytical tools to their own billing and financial information”. Larger law firms even have the option to create their own software tailored to their billing and cost control needs.
It would be difficult for smaller companies to compete where there are no existing applications with which smaller or even sole proprietorships can collect, organize and precisely analyze their billing data – and at the same time automate and streamline the billing process as a whole.
In contrast to the costly endeavor of designing personalized software, most of these options are not prohibitive and often integrate seamlessly with the existing accounting system. This is made possible by the proliferation of cloud computing, which enables platforms and applications to exchange information effectively in real time.
The ability to accurately predict billing expectations for a given matter based on the data of similar matters in the past would allow companies to give customers an idea of what is expected of them long before the first invoice is sent out. It also helps highlight aberrations for how long this task took. Such an advance warning enables course correction long before the problem sets a red flag for the customer.
Increasing the billing rates cannot fix the falling profitability by itself.
The problem needs to be solved by increasing efficiency in stressful areas like billing. Artificial intelligence (AI) and machine learning-controlled applications enable such tasks to be automated. As a bonus, they offer an organized cache of useful data that can further improve profitability through data-driven decision making.
However, technology will only get you so far. You need to create a plan to increase efficiency and then act accordingly. The tools are only useful when used correctly.