Please enjoy this blog posted on behalf of: Sachin Gupta, Knowledge Management Attorney, Latham & Watkins LLP
You may recall from your elementary math class that a multiplication equation includes factors multiplied together to produce a product. The two factors that determine the cost of legal services are an attorney’s hourly rate and number of hours billed. Clients pay close attention to the former. Anyone who has ever participated in a pitch, or an RFP process can tell you that hourly rates are an important factor for clients deciding whom to select for outside counsel. It is someone perplexing then that the other factor, the number of hours billed, seems to receive less attention.
Clients certainly push back when identifying what they perceive as excessive billing. This is handled by any number of measures, including writing off certain time entries or providing across-the-board discounts. However, all of these measures take place after the fact. Discounts or write-offs result in lower realization rates for firms and, in extreme cases, can even sour client relationships. Alternative fee arrangements are becoming increasingly common as a prophylactic measure to address unpredictable bills but are not always feasible in every situation.
While clients regularly assess the quality of lawyers based on factors such as prestige rankings and schools attended, they could also benefit from assessing the processes and systems a law firm employs to deliver legal services more efficiently. The centralizing of knowledge and leveraging of technology are key components of law firm efficiency that can be assessed, and there are several potential metrics that can be relied on to do so.
Centralizing Knowledge
Knowledge management (“KM”) within law firms has been a staple of many European law firms for some time. In the past decade, KM has gradually begun to gain more prominence in U.S.-based law firms of all sizes. I recall my early days of practice at multiple firms when my inbox was regularly filled with requests such as “Has anyone worked on this type of agreement before? Can you send me what you did?” That was the extent of how many firms managed their institutional knowledge, which you could call the “hope and pray” method. Hoping that: 1) someone sees your email, 2) remembers that they worked on an agreement or clause pertinent to your request, 3) knows exactly where it is, and 4) then responds to you soon enough to meet that you can use it and still meet your deadline. All of this, of course also dependent on that attorney still being employed with your firm.
A centralized knowledge management database resolves this issue. A robust bank of precedents and templates gives an attorney (and the client) the benefit of all the institutional knowledge that the firm has without relying on all the elements of the “hope and pray” method to fall into place. So why are clients not inquiring whether firms have such systems in place? To some extent, they are. Whether law firms are employing knowledge management systems and professionals is a regular component of RFPs. However, this exercise rarely goes beyond a box-ticking question. KM databases can range from a regularly updated, well-managed system that captures the majority of work product a practice group has generated to a dormant database with a handful of documents added by an enterprising associate who has long left the firm. It does not serve clients well to treat both of these the same, yet in both cases, that box will still be ticked.
Simple metrics can provide a more accurate picture of a firm’s utilization of knowledge management. Examples of such metrics are:
• The number and type (templates, precedent, memos, etc.) of documents stored in the database
• Whether the database is built on software to facilitate tagging, searching, and organization versus simply a shared folder of documents
• The frequency of updates
• How often is the database accessed
• Is there a full-time attorney or legal professional managing the database
While such inquiries involve minor additional questions to law firms, any law firm that has a robust knowledge management program will readily have these answers on hand. Advancing the KM inquiry, one step further into a law firm's internal processes can transform the question from a meaningless tick of a box and provide clients with valuable insight into the efficiency of their outside counsel.
Technology
Ask any client right now if they are interested in how law firms are leveraging technology to deliver legal services, and you are likely to get a response along the lines of “Yes, we want to know how they are using AI.” While the recent evolution of generative AI has tremendous potential to change the way numerous businesses operate, the actual value that law firms can leverage from it for clients still remains largely undefined. However, there is a plethora of technology that law firms can deploy and have been deploying to provide legal services more efficiently to clients.
Document collaboration tools can avoid the aggravating situation of being unable to update a document because someone neglected to check it back in. Beyond the aggravation, such situations often create a fork in drafts and result in lawyers needing to bill additional hours to merge changes. Communication tools such as Slack and Teams can provide real-time visibility across teams on cases and deals to avoid duplicating work. Analytical AI, as opposed to generative AI, can help attorneys complete research faster, identify clauses quickly, find that critical precedent in their firm's document management system, and avoid drafting from scratch.
These are just some examples of the numerous legal technology tools that law firms could use to reduce the number of hours billed to deliver the same work product. Evaluating the use of legal tech tools, however, is a more complex exercise than evaluating a firm’s KM database. The legal tech world has seen its own explosion of interest over the past decade.
With so many tools available that legal tech professionals have difficulty keeping track of them, assessing the use of legal technologies by clients is unlikely to be a manageable task. Clients often inquire about a specific tool if they’ve used it in-house and have become familiar with its benefits. However, such an approach does not provide a holistic picture of a firm’s use of technology.
An assessment of how software tools fit into a law firm’s processes could be beneficial to provide a shortcut method of evaluating a firm’s use of technology. However, such a method depends on a defined framework of how law firms practice law, which will often vary drastically by practice area. Defining such a framework is an area the legal sector has lagged in, particularly when compared to the manufacturing and software sectors. While legal tech has tremendous potential to improve the efficient delivery of legal services, a lack of defined processes of legal practice is likely to continue to make the assessment of law firms’ use of technology a challenging task.
Assessing Efficiency
The scrutiny applied to the cost of legal services can vary significantly based on the environment. For large clients, or when in a period of economic growth, cost is often a far lower priority than whether the client trusts the firm it is working with and is satisfied with its work product. However, for small emerging company clients or in periods of economic uncertainty, cost may be a more significant factor. While this often manifests itself in fee pressure, the efficient delivery of legal services is an oft-neglected part of the cost equation.
Discounts and write-offs will continue to address cost concerns after the fact, but clients could also benefit by inquiring into a law firm’s internal processes, including their knowledge management programs and utilization of technology. Clients have traditionally limited their inquiries into this area, which may be an indication that they are simply not interested in a law firm’s internal processes. Alternatively, clients may simply have not yet homed in on metrics to assess a firm’s processes, such as knowledge management systems and the use of legal technology. And insight into the efficiency of their outside counsel may turn out to be something they never knew they needed until they had it.
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