Why Your Law Firms’ Business Model Matters and How to Track Your Legal Spend

//Why Your Law Firms’ Business Model Matters and How to Track Your Legal Spend

As law firms continue to face pressure to keep profits high in the face of decreased demand for legal services, the business model of law firms is changing rapidly.

As the Wall Street Journal  pointed out, lawyers who “who don’t bill enough hours or bring in enough business are quietly asked to leave or demoted.”  As a result of this increased pressure to increase profitability, law partners are increasingly moving between law firms. In fact, Law360 reports that 2016 is expected to be the busiest year ever in terms of lateral law partner hiring. 

While this acceleration of change in law firm business models is well-reported, many clients overlook that business model pressures — including the variation in pressures faced across the client’s law firms and lawyers — is the biggest driver of the efficiency of legal spend today.  Consequently, it is essential to isolate, measure, and track the key metrics which correspond to the business pressures that firms, partners and associates face in order to run an optimized legal department. 

This increasing mobility and pressure to increase profits has created tremendous variation in how legal services are performed across their legal spend, both across and within law firms. Bodhala has found that this new dynamic is true across the range of firms that serve corporate clients – from white-shoe American Lawyer 50 firms to regional firms and insurance firms with traditionally lower hourly rates.

For example, as law firm partners face pressure to raise profitability, clients frequently observe increased staffing on matters. Also, as law firm partner mobility increases, corporate clients find that the performance of partners at the same law firm is no longer as homogenous as it used to be, and the performance of partners can be affected as they change firms and business models as pressures change.

At Bodhala, we have analyzed billions of dollars in legal billing data and seen systematic differences in the cost-effectiveness of law firms, law firm partners, and individual timekeepers within similar firms and similar practice areas.

Recognizing that there are million of potential variables that one could track and only limited time, our machine learning algorithms have searched for (and continually refine) the most impactful indicators for business-savvy legal managers to monitor and use to ensure their legal dollar is optimally spent given the variation in the market.

As a result, in order to ensure that their spending is as efficient as possible given the realities of today’s business, we advise our clients on certain key principles related to legal spend, the corresponding key metrics, and systems to make those metrics actionable given competing pressures inside legal departments. We will discuss four key ones in a series of upcoming posts.

  1. Tracking and benchmarking the magnitude of the billing increment of your firms and timekeepers drives more billing precision from your law firms as compared to traditional bill auditing programs;
  2. Implementing an actionable plan on monitoring and controlling staffing is more critical than ever due to the pressure to staff timekeepers on matters given continuing business model pressures on firms;
  3. Implementing a system to measure and act on the variation between partners is a powerful optimization tool to drive partners to adopt more efficient practices or to re-allocate work to more efficient partners; and
  4. Implementing a system to measure and act on the variation between law firms is critical due to the increasing variation in business models of firms.
2017-02-08T05:11:25+00:00

About the Author: