January 01, 2018 GPSolo

LAW PRACTICE MANAGEMENT: Using Small Data to Make Big Decisions

When clients ask data questions, lawyers are typically ill-equipped to answer. Clients are insisting that a firm’s experience means more than a limited set of stories dimly recalled from a lawyer’s own experience. Although the experience of a seasoned lawyer is unquestionably valuable, clients would rather have the judgment of a seasoned lawyer informed by the most relevant information to their question. Law firms—even those without information professionals on staff—can use data to provide more complete service to clients and to manage their business better.

The challenge of finding new business. Legal marketing remains one of the most confusing problems that law firms face. Where does new business come from? Social media marketing, call centers, sponsored search, and print advertising can be effective for advertising, but, without data, it’s hard to know what is effective and what isn’t.

Data should help inform legal advertisers what works. Law firms are increasingly taking cues from consumer marketing, using marketing automation tools, customized discount codes, and customer relationship management tools. The challenge of new business is not just about growing revenues—it is also about tracking which clients are most profitable—which requires linking revenues and expenses for different clients, practice areas, and even lawyers at the firm.

Clients rate pressure: More for less. The second major concern of small firms is that clients are expecting more for less money. Especially at a time when in-house counsel is making more efficient use of technology and bringing work back from outside counsel, there is more pressure than ever before to deliver legal services at a more competitive cost.

One of the most important business trends of the 21st century is data-driven decision making. Businesses use sophisticated marketing tools to test the right messages, times, audiences, and even colors in advertising. They use analytics to find the best suppliers and to make purchases at the optimal time of year. Just about the only thing that companies do not purchase using data is legal services—not because they do not want to, but because, until now, they have not been able to.

For the first time, however, clients have begun taking more matters into their own hands. In 2016, 811 Consulting group estimated that companies were bringing $4 billion of legal work back in-house. It’s time for law firms to handle legal matters with the same data-driven rigor that their clients do.

Many lawyers think that data analysis is only for large firms with in-house knowledge management systems, data scientists, price consultants, and marketing managers. They may expect that only the largest clients would want data-enabled decision making from their law firms. But nothing could be further from the truth.

Even individual clients track their fitness down to the step with trackers such as Fitbit or Apple Watch and compare the results on data boards. Indeed, individuals are driving the growth of services such as Mint, which rolls up individual financial factors such as mortgage, savings, investments, and bill payments into a single dashboard that shows net gains or losses in personal finances over time. Small firms and even individuals use data more than ever, and their expectations of their law firms, even small firms, are changing based on this behavior.

And consumer legal services are more accessible than ever, with increasing document automation online and venture-backed consumer legal services investing heavily in consumer advertising. The quality of fixed-price legal advice is increasing, and clients are able to take matters into their own hands now more than ever.

All these pressures—data-savvy clients, more consumer legal services of increasing quality, automation, and commoditization—put pressure on small firms to deliver more value and at a lower cost.

Does commodity pricing mean that the price of legal services must trend to zero? No, but it does mean that lawyers will need to differentiate their services. One way to do this is fixed-fee arrangements. Offering legal services at a fixed fee shifts a greater deal of the risk in legal services transactions from clients to their law firms—but in an increasingly competitive market, clients will increasingly insist on fixed-fee engagements, and lawyers who offer them will be the most competitive in this environment.

The key to pricing fixed-fee engagements lies with data. Firms can aggregate their own data about costs for different types of work. Even with only a few data points, firms will have better information about the services they can provide and at what cost. More experienced lawyers and firms may be able to access some of the most important information from their practice management or billing software.

One promising innovation is the idea of standards to describe legal work, a uniform vocabulary that firms, lawyers, companies, and clients can use to describe legal services performed. Individual firms can compare how long it takes, for example, to draft a research memo using a standard code. This would allow a firm to compare time and billing by different lawyers on different matters to complete the same task. Because the matter names would be open, it would be possible for outside counsel to benchmark the average time and cost of common tasks across firms.

The incredible shrinking billable hour. One of the most publicized findings of the 2016 Legal Trends Report from Clio (http://tinyurl.com/y9geltkq) was the average collection rate for lawyers—not the number of hours worked or billed but, instead, the number of billed hours for which the law firm collected. The report showed that, on average, lawyers logged 2.2 hours of billable time per day, but only billed clients for 1.8 hours per day. Worst of all, lawyers collected on average 1.5 hours’ worth of time per day.

These statistics reinforce why wasting time on administrative tasks was ranked as so important in the Thomson Reuters 2016 State of U.S. Small Law Firms Study (http://tinyurl.com/y78n58vl). And this is why it is recommended that firms look not only at the number of billable hours but also at revenue actually received when measuring the impact of marketing initiatives. The number of hours worked (utilization) is important, but so is the number of hours the firm can actually bill to the client (realization). However, no matter what tasks make it to the client’s bill, it is how much the firm collects from its bills that affects the firm’s success.

Low utilization, realization, and collection rates likely have many different causes. One cause is not enough work. Data-driven marketing and competitive, data-informed pricing may help to create new work.

Another cause for low collection rates may be that small firms cannot allocate enough time to billable tasks. Data can help inform when it is time to outsource tasks to independent contractors or hire new staff, as well as what to pay them.

Law firms can be more competitive by investing in process improvements to make their legal tasks more efficient. And firms that charge fixed fees can create even more value in handling more transactions in the same amount of time but with better processes. This can involve simple data collection, such as collecting information about what legal documents the firm creates in a year.

Efficiency comes in many forms. Well-managed firms can collect data about who and what is most effective in certain circumstances, gathering information about best practices and debriefing on things that did not work or resulted in non-billable overhead. Then, importantly, the firm can use this information to improve and, iteratively, to become more effective. Small data of this sort can drive process improvements and better outcomes for clients at lower cost.

ABA LAW PRACTICE DIVISION

This article is an abridged and edited version of one that originally appeared on page 36 of Law Practice, September/October 2017 (43:5).

For more information or to obtain a copy of the periodical in which the full article appears, please call the ABA Service Center at 800/285-2221.

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