AI technology, pricing demands and increased competition are driving law firm leaders to focus on efficiency and profitability

April 28, 2023

Artificial intelligence (AI) technology, digitization, client collaboration and profitability led the discussions at the 8^th Annual Sandpiper Partners’ Managing Law Firm Profitability, Pricing and Data Analytics London Conference. Clare Hart, CEO, Williams Lea, joined top law firm leaders, general counsels and pricing experts to discuss the evolving legal sector, and what new factors are helping law firm leaders take a more business-minded approach to running their law firms.

Here are the top three takeaways from the event:

Clients want law firms to go beyond the billable hour and be more creative when pricing their services

The legal sector is not only becoming increasingly competitive, multiple other factors are being incorporated into legal fees and affecting how and what firms price/bill. Clients are looking for services that deliver value and want pricing that is flexible and transparent and reflects the specific legal work involved. This pricing should be compartmentalized: technology, innovation, and stronger environmental, social, and governance (ESG) initiatives, including diversity should stand apart from billable hours. A law firm client representing a top tier global investment bank said, “I believe the dangers we face in discussions are: we are just intermingling conversations on pricing and profitability with the relationship-based conversations. As a client I deeply value working with law firms excelling in diversity and inclusion and that are really innovating… but that does not necessarily translate into us paying a 10%-20% surcharge on very commoditized work… Pricing really needs to be rethought by focusing on the different service deliveries, not just the billable hours, and focusing on the role of tech as part of the outcome of legal advice as a product.”

Another client on the panel, also from a leading global bank, agreed on the billable hour issue, “I don’t like to talk hourly rates. We’ve got a fee structure that actually allows us to collaborate well together (with law firms), and it’s outcome-based, success fee-based, and contingency fee-based. I still struggle because I think that in most law firms there are some hourly rates that sit behind that, and those really shouldn’t if we’re building a partnership.”

For law firms to increase profitability, the non-lawyer elements of a law firm should be just as important as the lawyers

Profitability is increasingly under scrutiny at the firm level rather than at the practice group level, allowing a more holistic perspective on minimizing costs and driving efficiencies. “When you look at profitability, it gives you a different lens to look at because what you do is you uncouple your revenue and your costs, and it allows you to look at them independently and separately,” said a global pricing executive at an international law firm. “We can then think about how can we then minimize costs from driving efficiencies, but also how can we maximize revenue, and it doesn’t have to be linked to the billable hour.”

Clients want their lawyers to be more commercially minded, and the panelists agreed that in the last few years law firms have professionalized further with “non-lawyers” starting to become integral to running the firm. “Law firms are big business,” said a leader representing a multinational white shoe law firm, “and you can’t run big businesses just with loads of lawyers because they’re actually not particularly good at the non-legal aspects. If you’re going to run (a law firm) properly, those (non-lawyer) positions have great significance.”

A managing partner from a UK-based law firm, took the point of professionalizing law firms a step further by highlighting the importance of the service side of the law firms as a business, “It has really blossomed over the past five years…what you want are people coming in on the business support side who are idea generative. They will improve the performance of the firm and you want them to challenge you, the law firm, to say you can do this better.”

AI is already helping drive efficiency gains and has the potential to transform the legal industry

The third and final panel of the day focused on technology, and the rapid and unprecedented rise of AI models such as Chat GPT and Bard. Even though we are still in the early stages of understanding AI’s capabilities, law firm leaders know that they cannot overlook its future potential. The panelists debated new ways law firms can take advantage of such technology to improve forecasting and increase efficiency. “Clients are asking us about AI and what are we doing with it?”, stated a managing partner from a leading UK law firm, “it’s a huge question, but someone’s got to be briefing people about it and explaining it to them. And then you’re coming back to the use cases, really delving down into how and where it can be used.”

Williams Lea’s Clare Hart emphasized that when it comes to work that needs to be managed carefully, particularly within support services, it’s important to look at AI from a productivity standpoint, “When we first looked at AI a couple of years ago, we focused on how we can improve productivity and reporting associated with the work we’re doing for our clients. So, we launched a digital platform called ENGAGE, which is a workflow tool, a data warehouse and a reporting dashboard. Every task we’re doing for our client is captured, whether it’s proofreading, booking a taxi, or creating a pitchbook. And our workflow tool records that information.” While this workflow technology helps with proper management of resources, the AI element helps drive efficiency, “At one point, it used to be a human doing it, but now email requests automatically get passed onto ENGAGE. That information automatically flows through the process and gets us proper management of the request, and then provides data and reporting to our clients.”

With AI technology rapidly evolving, using it to drive efficiency is only the beginning, the panelists agreed that it has the potential to expand into the legal spectrum. One law firm leader predicted big potential advancements for AI in the world of law, “We’re seeing some immediate efficiency gains as more and more of those types of tools become available… and then you’re going to get into the next level, which is how can you use AI for big chunks of matters, such as, discrete tasks or particular phases of matters. (AI) has the potential to supercharge that, and then there’s going to be completely new areas of legal work.”

Find out more on the factors that help maximize productivity in a hybrid work environment with our latest future of work brief, The eight Cs of hybrid working.