Analytics can make your firm more profitable and more competitive

By James Careless September 26, 201726 September 2017

Analytics can make your firm more profitable and more competitive

 

Canada’s big law firms have a reputation for being very conservative when it comes to change. “As one top firm said to us early on, ‘We don't like to be first in,’” said Hersh Perlis, Director of the Legal Innovation Zone at Ryerson University. “Heck, we don't like to be second,” Perlis continued: “We like to be third!"

It’s true that not all change is progress, and sometimes the canny bird that doesn’t rush in early gets a good worm.

That said, one change that is developing a proven track record for law firms is analytics. Analytics is about compiling information about how the firm currently does business, then analyzing that data to find ways to change practices to operate more efficiently – and more profitably.

For example, a law firm can figure out how much billable work is currently being done by partners, then run an analysis to see how much of that could be performed by lower-cost non-partner lawyers instead, and reassign the workload accordingly. Such a reassignment can reduce the firm’s expenses , thus improving the bottom line without the need to increase fees.  If the cost reductions are large enough, the firm can even cut client fees while still earning more profit than before.

A second option: “Top Bay Street firms are contacted because of the deep roster of lawyers they have and the decades of precedents and experiences they have accumulated, and those experiences are all very well documented in millions of pages of information/data,” said Perlis. “Every major firm is sitting on millions of such unstructured data. Now, if they find ways to use it to their benefit by mining it using law firm analytics, they could unleash untold new service/product lines.”

Case in point: Stewart McKelvey

Stewart McKelvey, a leading Atlantic Canadian law firm, is using data analytics to respond to increased client requests for alternative fee arrangements and novel pricing structures. “Law firms need to understand their costs and gain deeper insight into the prices they charge clients if they are going to successfully transition away from the traditional billable hour model,” said Paul Saunders, Stewart McKelvey’s first-ever Practice Innovation Partner.

To develop a new approach to pricing without compromising Stewart McKelvey’s financial health, the firm analyzes its historical billing data to determine what it actually costs to deliver specific services to clients, and how this service delivery can be streamlined to reduce costs while maintaining quality and client service.

“Our initial move into law firm analytics has involved adoption of two highly useful metrics tied to profitability, called realization and leverage,” said Saunders. “Realization allows you to measure how much of your billable work is actually being recovered at the full hourly rate regardless of the pricing structure used, so that you can see how cost overruns, rate discounts and fee write-downs are affecting the firm’s bottom line. Leverage is the ratio between partner and non-partner hours. The more we can raise the leverage ratio such that non-partners are doing more billable work relative to partners, the more we can reduce operating costs and improve the firm’s profitability.”

Case in point: McCarthy Tétrault

With law offices in the UK, U.S., and across Canada, McCarthy Tétrault has a history of reviewing “certain matter types of legal cases and related billing data, looking for efficiencies and ways to reduce costs,” said Matt Peters, the firm’s Vancouver-based National Innovation Leader. “Initially, our people did this on a small scale in-house, looking manually at hourly time billed and expenses incurred at various phases of these cases,” he said. “But now we have third-party analysts who use advanced software tools to handle much larger data sets and show us how we can save time and money for our clients.”

McCarthy Tétrault’s use of law firm analytics to re-engineer and improve M&A due diligence procedures, for example, “has allowed us to reduce costs to our clients up to 75 per cent, while charging them using predictable alternative fee arrangements such as fixed-rate billing,” said Peters.

The best part: “Studies show that billing using predictable AFAs is actually more profitable for law firms than billing using traditional open-ended billable hours,” Peters said. “So AFAs are better for both parties: Clients get the savings they want, while law firms get higher profits. This is how using law firm analytics pays off for us.”

Another use for analytics

The power of applied data analytics is not limited to a law firm’s internal operations. Analytics can also be applied to the practise of law in general.

That’s the founding principle of Loom Analytics, a Toronto-based company that provides a subscription-based online service for lawyers. “We monitor the courts on your firm’s behalf, recording and cross-referencing the decisions and actions taken by judges and potential opposing counsel,” said Mona Datt, Loom Analytics’ president and CEO. “Rather than having to dig through law books and cases records yourself, you can use our online search engine to find this data quickly and easily.”

Using Loom Analytics’ database can save lawyers substantial time and money in case preparation. The online system also makes it easier to predict how individual judges and opposing counsel may react in specific kinds of cases.

“Say you’re a personal injury lawyer, and the judge for your case is only chosen a few days before trial,” said Datt. “Using Loom Analytics, you can quickly assess how that judge has reacted to similar personal injury cases in the past; including how they have previously ruled and what kind of judgements they have awarded. This is invaluable information to be armed with before you enter the courtroom, and foreknowledge that might help you achieve a speedy, satisfying settlement instead.”

A very powerful tool

The examples above illustrate what analytics can offer to managing and senior partners in terms of understanding and improving their firm’s operations while enhancing its profitability.

But this is just the tip of the iceberg: Analytics can also be used to better record, understand and satisfy client demands in general; assess how well traditionally-structured law firms are addressing change; and give those firms that have adopted the analytics approach a clear marketing edge over the competition.

James Careless is a frequent contributor.

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