How Law Firms Are Using Analytics To Reduce Write-Offs
With the legal client landscape continuing to measure law firms’ success on the value of delivery of services, reducing write-offs is an ongoing initiative for firms. A firm’s efficiency is how write-offs are determined, making operational enhancements a core focus for law firms. Firms are already seeing the consequences from not adjusting to their new client market. Thomson Reuters’ Q1 2016 Peer Monitor Index from May of this year reported on the concerning drop of realization rates, which is at an all-time low of 82 percent.
It’s becoming an absolute necessity that law firms implement strategies to improve efficiency, staffing and value to meet client demands. The short-term, reactive measures firms are taking don’t scale for long-term growth and profitability, and this is becoming a harsh reality for firms taking a back seat to new operations. As realization rates continue to drop, profitability for law firms currently hinges on increased rates, which can’t be sustained for much longer.
“Identifying revenue leaks starts with collecting and analyzing data about write-offs and write-downs. Conduct an internal review to see if your understanding matches the rest of the law firm’s understanding.” — Saltmarsh, Cleaveland & Gund, 2016
Research has shown specific areas of investment and improvement from firms has seen success in boosting profitability and decreasing write-offs. The Thomson Reuters Peer Monitor September 2015 survey polled 34 Peer Monitor firms on what specific operational initiatives they took to align with their clients’ needs as their expectations continued to shift towards increased efficiency and value.
The survey was divided into two categories to observe and compare the results of upper-tier firms that pursued these operational changes to lower-tier firms within the prior three years from when the survey was taken (September 2015). The results clearly concluded that the lower-tier firms that did not prioritize investment and resources into improving operational enhancements through analytical tools did not see the increased financial performance of the upper-tier firms. The areas of investment of the upper-tier firms were heavily centered on project management and e-learning technology, specifically:
- Use of software that allows firm lawyers to monitor the progress of matters, resource commitments and budget status in real time on a matter basis
- Efficient and easily usable knowledge management system that provides lawyers with ready access to the firm’s prior work product
- Document review software using predictive coding based on a “seed sample” of documents provided by firm lawyers
- Client “self-help” tools that allow clients to perform tasks directly that previously required active participation by firm lawyers
Upper-tier firms outperformed lower-tier firms by 15 to 30 percent higher in the implementation of the four areas mentioned above. All of these technology investments provided reporting and analytics that allowed these firms to determine the proper budgets and staffing necessary for their attorneys to perform their job with the highest return.
Corporate law and transaction practices have some of the largest gains to make when thinking about the use of analytics. Not only can firms leverage intelligent data — analysis of deal information — to pinpoint areas of return on investment and revenue, firms can also properly staff deals. Knowing how many resources are required to complete a deal contributes to decreasing write-offs, and it helps set expectations with clients, adding another layer of value and transparency to services provided. In addition, attorneys are able to have a clearer definition of where efficiencies can be improved. Like the firms in the Peer Monitor survey, attorneys that leverage a technology tool that identifies these areas of enhancement are able to take time previously spent on non-value-add tasks and convert it into billable hours. If attorneys are empowered with a tool that manages administrative tasks and analyzes deal data to better budget and staff deals, they free up time to bring on more clients and grow the firm’s business.
Leveraging analytical tools and emerging technology is not a recent revelation, either. Legal analysts have long been predicting the shift in the legal client landscape and observing what has and will make firms successful. In the 2014 Vantage Partners report, “Reducing Write-Offs,” author Danny Ertel walks through the main areas firms must address in order to reduce write-offs, the first being to “improve how partners negotiate fees and scope.” Ertel specifically identifies the benefits:
- “Better scoping conversations prior to giving an estimate
- More structured (and eventually, data-driven) estimates
- Better preparation for fee negotiations, including peer consultation
- Relationship-enhancing scope and fee negotiations focused on value rather than rates (making use of, when appropriate, structures not based on hourly rates)
- Clear expectation setting with the client about the relationship between the fee / estimate and the scope of work.”
This framework can easily be supported by a resource that analyzes a firm’s data to help intelligently structure fees and scope. The second and third points Ertel addresses are “improve how partners manage both internal and external dialogue about [deal work]” and “improve the efficiency of service delivery”. While these are obvious generalizations to reducing write-offs for today’s legal client, Ertel elaborates on how these initiatives implement a sustainable, revenue-driving strategy in firms:
“As clients demand greater certainty and more work is performed under a fixed fee (or under an estimate that effectively becomes a fixed fee or cap), getting the work done with fewer resources will enable the firm either to add to its profit margin or to price even more competitively and win more mandates.”
Where firms have found success with “fewer resources” (as Ertel describes) is not by reducing staff, but by staffing deals more intelligently. Allocate resources where they’re proven to drive value to alleviate write-offs on administrative work. Without reporting and analytics around a firm’s scope of work, attorneys are going in blind on how much of their time is truly spent on improving efficiencies, delivering value and driving profitability. When leveraging an analytical tool, firms must place its value on how it clearly reports areas that drive revenue and breaks down areas where efficiency can be improved to drive more billable hours.