recently spoke to law firms, lawyers, and clients about the challenges of pricing matters when using alternative billing structures. Clients are pushing towards value-based billing. To live up to client expectations, law firm leaders must evaluate how they can maximise billings from their lawyers to meet client expectations and remain profitable.
According to a recent , to run a successful law firm, law firm leaders need to understand their firm's utilisation rates. Calculating your firm's utilisation rate gives you insight into your firm's billing efficiency. It measures your firm's workload and productivity.
You calculate the utilisation rate by dividing billable hours worked by the number of hours worked in a day. For example,
• If a lawyer billed 2.5 hours in an eight-hour workday, your utilisation rate is 31%.
• If one of your lawyers worked 60 hours per week, with only 20 hours billable, your utilisation rate is 33.33%
• If a lawyer worked 12 hours a day and billed 5 of those hours, the utilisation rate is 47%.
Law firm leaders know that billable hours do not necessarily reflect your lawyer's value, efficiency, or productivity.
A lawyer's working day consists of juggling their time doing admin work, attending internal meetings, and keeping up to date with training and development. That is without considering the time lost each day to commuting, work breaks and lunch. So how much time is left for billable hours?
According to PwC's Annual Law Firms' Survey 2022, the average recorded hours per lawyer at the top 10 firms currently sits at 1,373. This number drops down to 1,272 chargeable hours for the top 11 to 25 firms, and to 1,167 hours for the top 26 to 50 firms. Although these numbers are thought to have risen in response to recent economic events. A found 98% of UK law firms surveyed said they had increased target hours for lawyers, with nearly half (47%) doing so by over 10%.
It is not sustainable to keep increasing billable targets and fees per billable hour. The next-generation lawyers are reluctant to target increases, and the billable hours model is also facing increased criticism for creating negative incentives and working against client interests. Law firms must find alternative ways to increase profitability to meet clients' demands.
Clients want value for money and cost certainty. They don't want to pay for activities that are not adding value, but they are happy to pay for solutions. They are demanding pricing transparency and alternative fee structures.
Many firms are still determining how they feel about investing in legal technology that increases productivity. There's concern that it will reduce the number of hours billed and reduce profits.
However, legal technology could be an excellent tool to move away from billable hours to alternative billing models successfully and simultaneously maximise billings.
Effective use of data and legal tech can address many of the barriers in the way of alternative fee structures.
"Better use of data will be really, really critical for disrupting this billable hour model," said Isabel Parker, executive director of the Digital Legal Exchange, an independent forum for general counsel designed to accelerate digital transformation in the legal industry. "Law firms bill their time in six-minute increments, so they're sitting on a lot of time recording data, so if that data can be mined and used for insight about what's really involved in delivering a matter, law firms would have much more confidence in the way they price."
In a recent ½Û×ÓÊÓƵ report, 63% of law firms cited determining accurate pricing as a barrier to switching to alternative fee structures, whilst 60% cited estimating how much time and effort the work will require as a barrier.
Technology can help law firms provide more accurate estimates of how much a matter will cost, reducing some risks of moving away from billable hours to alternative fees. Firms can analyse the time spent on similar types of work and how much profit they made. That information makes it much easier to decide on a flat or alternative rate.
Firms wanting to implement alternative fee structures could charge the same or a similar rate but reduce the time spent by their lawyers. For example, access to legal research tools could save the lawyer a significant amount of time. Thus, freeing up the lawyer to focus on getting the best possible result for their client, spending time on another important matter or bringing in new business.
86% of respondents in Bloomberg Law's cited improved productivity as a reason for using legal tech. Other reasons include improved workflows, improved quality of work and reduced costs - all outcomes that appeal to clients (and law firm leaders).
88% agreed that legal tech is important to their firm's ability to meet client demands. Whilst 86% agreed that legal tech improves the legal services they provide.
In some cases, incorporating new technology could allow firms to charge more by improving the value of their offering.
Data and legal tech help firms align their services with clients' needs. Some firms offer clients access to specific legal tools and products that deliver legal services faster and more efficiently.
"One of the basic aims of law tech is to speed up tasks, which doesn't really help your profitability if you're still sticking to billable hours, so firms are still coming to terms with how to feed in the law tech element," said Stephen Denyer, director of strategic relationships at The Law Society of England and Wales. "That is probably going to depend on how special or unique the law tech component is—if you've got something that is really unusual or unique, then obviously you can potentially pitch that to a client as something that will cost more."
Denyer added, "Technology can also give you real insight into the client's issues, which gives you a chance to pitch for more work".
So instead of thinking that legal tech will reduce billable hours and profits, law firm leaders should consider the benefits of legal tech to move away from billable hours to alternative fee structures. Legal tech can improve productivity, maximise accurate billing and bring in more work.
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