Doc Automation + Fixed Fees Can Drive Law Firm Profits

One of the key barriers to the adoption of productive legal technology* is the fear that if it changes how lawyers work it will reduce their profits. But, a new survey on the use of fixed price legal services suggests that when combined with document automation, lawyers can make more money, not less, especially with matters perceived to be ‘complex’.

The survey by Australia-based NewLawCLE has a focus mostly on SME-sector firms, but its central finding is relevant to larger legal businesses. The finding is that complex matters, priced with a fixed fee, and utilising doc automation, will generate a higher ‘yield’ relative to the amount of work put into the matter.

I.e. if you go down the route of fixed fees, then doc automation clearly speeds up the work process, and that can provide a boost to your profit margin if work flows are managed well. But, in addition, clients have their own perception of what is a complex matter and will pay more in terms of fixed fees depending on the type of document. So, lawyers can gain an even greater yield on work inputs when using doc automation for such matters.

As seen below, the implied hourly rate gained from what lawyers can charge clients for different types of documents shows a wide variance, from Aus$180 to Aus$400+.

Ben Rosswick, COO of the Smarter Drafter doc automation company which backed the report, said: ‘More transparent pricing means that the old model of billing by the hour has effectively reached its use-by date. Clients really only care about the finished product, and for the law firm, clearly charging $1,000 for a service that took two hours to complete is better than charging the same amount for a service that took 10 hours to complete.’

‘One of our most important findings was that, when charging fixed prices, the return per unit time spent on ‘complex’ documents is higher than ‘simple’ documents,’ the company added.

Moreover the survey of 418 firms, mostly working in the SME sector, also found that over 130 of them gained half or more of their revenues from fixed fee matters, i.e. around 30% of these smaller law firms (see below).

The steady movement toward fixed fees (at least from this survey sample) is encouraging, but it also creates challenges for lawyers who have been able to use a time-based system for the bulk of their work.

Understandably some lawyers fear a wholesale move toward fixed fees will mean giving work away for lower profit margins, and in turn result in reduced partner incomes. However, the research suggests that for matters clients perceive as complex, profits can be very healthy.

As to matters that clients now perceive as simple and ‘easy to do’ there is indeed increased pressure. A response to that, Artificial Lawyer would suggest, is to increase volumes of such work in order to maintain or increase overall net profits on that stream of work. To do small amounts of low margin work with trained lawyers that could charge way more for more complex matters is clearly uneconomical and a poor allocation of staff resources.

Smarter Drafter in addition suggests developing scenarios where clients are able to fill in as much of the document themselves, which further reduces lawyer input and protects firm margins in turn.

On that point, and it would certainly work for the documents perceived as low complexity/low value, the following comment by the company makes sense: ‘The only thing more efficient than you using document automation software to speed up the drafting process is getting clients to create their own documents through a self-service e-commerce portal.’

Conclusion: technology has been seen as a threat to the inefficiency-based model of law firm profit generation that is centred on selling time. That in turn hurts technology adoption as some firms fear impacting their ability to bill for time as efficiency increases.

However, the survey suggests, where clients perceive a document to be ‘complex’ a combination of fixed prices and doc automation can drive up profitability.

And this raises a key question: how does client perception of what is complex and what is simple evolve? You could argue that the entire business model of the legal profession is based on the perception of complexity, and/or real complexity created by arcane legal processes.

Do fixed fees and doc automation in turn accelerate the perception of ‘less value’? We don’t have the data yet, but it’s possible. Even so, law firms, like all parts of the economy have to move with the times, and client perceptions of value are always changing. In which case, it’s perhaps better to embrace the above approach, rather than wait for it to leave you behind.

[ Productive legal technology – i.e. software that generates, or helps to generate, a chargeable work product, e.g. a contract. ]

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