With a shaky economy and continued pressure on legal fees, law firms seek levers to improve profitability

May 12, 2023

If we want to see just how quickly things change, all we have to do is look at the legal sector. Emerging from the pandemic in 2021-2022, law firms were experiencing unprecedented growth. Less than two years later, firm leaders are dealing with demand slowdown, soaring expenses, client pushback on fees, talent retention issues, and cybersecurity threats, amid a backdrop of global economic uncertainty.

What can law firms do to make it through this period of continued economic instability?

That’s what the panelists at Sandpiper Partners’ 11^th Annual Managing Law Firm Profitability, Pricing, and Data Analytics Conference aimed to answer. Our CEO, Clare Hart, joined a stellar panel of top law firm leaders, general counsels, and pricing experts to address these challenges.

Here are the takeaways from the event:

To drive profit, firms must focus on delivering value

When the market slows, the logical thing to do is to look for areas that can help shore up profitability. As one panelist asked, “What can we do about profitability in a low-demand environment? Where can we find an extra one to three percent [of profit] more?”

We start with the data. Law firms should have a thorough review of firmwide data – at the individual level, practice level, industry group level, etc. – and analyze performance, focusing on the bottom quartile. With this analysis, a law firm can ask whether an individual, practice group, or process, fits into the firm’s core strategy and whether it’s an investment they would like to keep.

However, while cost-cutting is a quick way to drive bottom-line profits and fix operational inefficiencies, it can also be a short-term strategy. A panelist from a legal consulting firm was quick to point out that any performance metrics-driven exercise should go hand-in-hand with an exploration of value. “We often think about value in terms of cost of services provided, but there’s a conversation expanding beyond that,” the panelist said. “How are you strengthening client relationships? Are you able to harness new technologies, like ChatGPT, and provide not just a more efficient delivery of legal services, but increased value and information back to your clients? These are the kinds of law firms that will separate themselves from the others.”

Clients’ Legal Operations roles are gaining more recognition as strategic functions

“Legal Ops is sort of a mixed bag, in terms of what it really means,” said one operations leader from a client organization. In spite of its vague and varied definition, legal operations as a function has grown in influence and value in the last few years, taking over important responsibilities, such as financial management, procurement, process support, even digital transformation.

“If we think about the relationship, it’s always been (law firm) partner to client, and in that relationship, they’re talking about the transaction. We’re talking about the litigation, the strategy,” said one client panelist. “Now take it down a notch: there are tasks that need to be done, tasks that should be in the budget, or the pricing. In some ways, we are like procurement people, because we have to think about what the cost of that matter is going to be.”

The panelist continued, “The key part is, the Legal Ops teams are willing to say, we should work with this vendor or law firm, we think you should outsource that, we think you should send that to someone else, or we can do it efficiently by doing this or by applying this technology.”

“What Legal Ops is meant to be, is the advancement of the business and practice of law,” said another panelist. How that is defined is up to the firms; what we know for sure is the bigger role it now plays in increasing operational efficiency.

Law firms that capitalize on technology, especially AI, will lead the curve

In 2022, Wolters Kluwer came out with the “Future Ready Lawyer: Leading Change” survey, where they gathered insights from 751 legal professionals across US and Europe. According to the survey, 91% of corporate legal departments said that it’s important to have a law firm that fully leverages technology.

We’ve come to a point where technology has become a requirement, not a “nice to have.” One law firm leader said, “This is no longer something where law firms can say, ‘Let’s take a look at technology. Should we do that? Should we not do that?’ This [technology] is something all of our clients are looking for.”

Law firms can capitalize on technologies, such as the potential of generative AI, to enhance their operations and provide better service to their clients. “When we asked ChatGPT where it’s most likely to be used, the answer was the automation of tasks,” said one panelist. “If you’re a law firm and you have not been looking at routine, high volume, low rate, and low complexity tasks, and how to come up with a top technology-based solution for doing this more effectively, more efficiently, and at a salvageable profitability model, then you’re in that camp that’s behind the curve.”

Williams Lea CEO Clare Hart agreed. “Because our business is very heavily concentrated around information, we have to be looking at technology that enables us to capture the information that complements the work we do for our clients,” she said. “One example is transcription: using the same OpenAI technology, we’re able to do transcription work in much less time, and that speed is going to enable us to better support our clients.”

The ongoing economic uncertainty will post significant challenges for law firms. To survive, and thrive, firm leaders should focus on delivering value to their clients, whether it’s delivering legal services more efficiently or offering new tech-enabled solutions.

Learn more about new technologies that your law firm can harness to increase efficiency and productivity. Download our future of work brief, Is the metaverse the ultimate hybrid working solution?