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The Decision Advantage

Making Small Data Work for Your Firm

By Ed Walters and Morgan Morrisette Wright

Recently The Economist published an article proclaiming “The world’s most valuable resource is no longer oil, but data.” The author declares that data is “the oil of the digital era,” raising antitrust concerns in an age where long-established tech companies like Google, Facebook and Amazon amass more and more information to spin into profit, while other players lag hopelessly behind. Big data is undoubtedly powerful stuff, but it’s not just for giants to take advantage of. In reality, data has changed the way we think about information and decisions as a culture, from the largest corporation down to the individual level, there is no going back.

Lawyers make countless decisions every day, whether they work in a large or small firm context, which can benefit from tapping into data. Should we accept this settlement offer? Who at the firm can handle this matter most profitably? Is this contract clause standard? The trouble is too many times the answers attorneys arrive at are not based on data, but can best be characterized as hunches. When decision makers do not approach issues in an appropriately analytical way, clients suffer. Many lawyers are simply not framing the decisions they face in a data-driven way. For instance, the answer to “How much is my case worth?” is not a number; it’s a distribution of outcomes in similar cases. “Should we accept this settlement offer?” is a probabilistic answer based on a likely range of outcomes, not a simple yes or no.

It may be surprising to some practitioners that clients are often more skilled at using data to their advantage than the lawyers they employ. This leads to understandable frustration when attorneys do not possess comparable prowess in high-risk situations that deeply impact client interests. In the business world, using data is a necessity, not an innovative idea. It no longer suffices for lawyers to answer with “it depends.” Clients are insisting that a firm’s experience means more than a limited set of stories dimly recalled from a lawyer’s own experience. Although the experience of a seasoned lawyer is certainly valuable, clients will always prefer the judgment of a seasoned lawyer informed by relevant information.

BigLaw is beginning to embrace data, but small firms that handle major problems such as incarceration, custody, housing, employment or bet-the-company litigation still have work to do. The changing of tides is especially significant considering the market share of smaller firms. According to the Thomson Reuters Legal Executive Institute, small law firms represent more revenue than BigLaw. Firms with fewer than 29 lawyers represent $108 billion in annual revenue, while firms with more than 175 lawyers bring in $95 billion per year. Small firms don’t mean small stakes, and data is as important for solo and small firms as it is for the world’s biggest firms.

HARNESSING SMALL DATA IN THE SMALL FIRM
Given the benefits of using data in the office, where should firms that are willing to innovate begin? It may be best to start at the ground level. Ask the manager of a small firm – from a solo practitioner to the managing partner of a boutique firm – what keeps him or her awake at night. The answer will not be legal tech or artificial intelligence, although both topics garner a lot of attention. The responses are more likely to be focused on day-to-day management. According to the 2016 State of U.S. Small Law Firms Study from Thomson Reuters, the top three concerns of small firms are 1) acquiring new client business, 2) clients wanting more service for less money and 3) wasting too much time on administrative tasks.

Marketing Matters

Advertising methods have changed rapidly over the past 15 years. Previously attorneys may have relied on advertising in the Yellow Pages or networking in the community, but these methods alone no longer cut it. Social media marketing, call centers, sponsored search, print advertising and even television can be effective for advertising, but, without data, it’s hard to know what is effective and what isn’t. Any one of these new prospecting methods is pricey on its own – without efficient targeting and tracking, it can be easy to spend a lot of money pursuing marketing strategies without knowing whether they are effective. The data is ready to help small and solo firms if they are willing to collect it, but the key is careful and consistent tracking. This can be as simple as asking new clients how they heard about the firm, or something more in depth and automated.

Seth Price, the managing partner of Washington, D.C. firm Price Benowitz LLP, says his firm uses Salesforce to manage potential clients, especially intake. “We can run all sorts of reports which help us determine how to allocate resources.” Customer relationship management systems can help determine which clients came from which campaigns, measure return on investment for marketing expenses and even help determine which practices and clients are most profitable for the firm.

The challenge of new business is not just about growing revenues – it is also about tracking which clients are most profitable – which requires linking revenues and expenses for different clients, practice areas and even lawyers at the firm. Adding revenues is great unless it cuts the firm’s overall profitability. While it takes some discipline, it is relatively simple to track metrics around phone calls and consultations to learn the origin of consultations and the percentage of those consultations that result in an engagement letter. Lawyers can track profits and revenues all the way back to lead sources without resorting to specialty practice management software, although it may make the task significantly simpler.

Satisfying Client Expectations

Another major concern for small firms is that clients expect more work for less money. Especially at a time when in-house counsel are making more efficient use of technology and taking work back from outside counsel, there is more pressure than ever to deliver legal services at a more competitive cost.

Corporate clients have already begun taking matters into their own hands at a rapid clip. In 2016, BTI Consulting estimated that companies were bringing $4 billion of legal work back in-house. Empowered with tools that automate legal workflow and troves of their own data, corporate lawyers are choosing to do more work themselves. But that does not mean that data analysis is only for large firms that have in-house knowledge management systems, data scientists, price consultants and marketing managers.

Lawyers may be under the mistaken impression that only the largest clients would want data-enabled decision making from their law firms. Nothing could be further from the truth. Firms must handle legal matters with the same data-driven rigor that their data-tracking clients do. Even individual clients track their fitness down to the step with trackers like Fitbit or Apple Watch and compare the results on dashboards. Indeed, individuals – not companies – are driving the growth of services such as Mint, which rolls up individual financial factors like mortgages, savings, investments, credit cards and bill payments into a single dashboard that shows net gains or losses in personal finances over time. Consumer legal services and do-it-yourself platforms in general have changed the game. Small businesses and now individuals use data more than ever, and their expectations of their law firms, even small firms, are changing based on this behavior.

For certain types of highly customized legal work, only certain firms will do. But for others, clients may care little about which firm provides the service. As Jordan Furlong has pointed out in his new book of the same name, law is a buyer’s market. Certain types of legal services are becoming more commoditized. Does commodity pricing mean that the price of legal services has to trend to zero? No, but it does mean that lawyers will have to differentiate their services. One key way to do this is fixed-fee arrangements. Offering legal services at a fixed fee shifts a greater deal of the risk in legal services transactions from clients to their law firms. In a competitive market, clients will insist on fixed-fee engagements, and lawyers who offer them (and who price them correctly) will be the most competitive in this environment.

The key to pricing fixed-fee engagements lies with data. Firms can aggregate their own data about costs (in time and expenses) for different types of work. Even with only a few data points, firms will have better information about the services they can provide and at what cost. (Of course, more data paints an even clearer picture.) More experienced lawyers and firms may be able to access some of the most important information from their practice management or billing software. Lawyers without practice management software, or new lawyers, may have to work harder to find this information from paper files or more general industry information.

These pricing pressures are greater in some practice areas than others and greater in some regions than others. Again, data can give cues to where the pressures are most acute. The 2016 Legal Trends Report from Clio aggregated anonymized data from approximately 40,000 active users of its practice management software to identify national and regional trends. The report shows, for example, that bankruptcy lawyers and corporate lawyers on average have the highest billable rates, while criminal, personal injury and insurance lawyers have the lowest billable averages.

Setting Benchmarks

Even within the firm, lawyers can collect “small data” about their own practice to better understand client costs and firm profitability. A firm’s billing and accounting system is a trove of data about historical trends.

One promising innovation is the idea of standards for matter IDs to describe legal work, a uniform vocabulary that firms, lawyers, companies and clients can use to describe legal services performed. Individual firms can compare how long it takes, for example, to draft a research memo, using a standard code. This would allow a firm to compare time and billing by different lawyers on different matters to complete the same task. Because the matter names would be open, it would be possible for outside counsel to benchmark the average time and cost of common tasks across firms. Firms could use these common legal task standards to see where they outperform regional averages for the same work or where they need to become more competitive.

Standard task IDs are being developed by Adam Stock of SALI, the Standards Advancement for the Legal Industry, a consortium of groups working on open matter standards who debuted the idea at Stanford CodeX’s FutureLaw Conference in April 2017. The idea promises to address one of the most vexing problems of value for legal services – comparing similar tasks across different firms, when each firm calls the service by a different name and groups the services differently. By giving the tasks open legal task IDs, clients, firms or researchers can compare levels of efforts on similar tasks, creating for the first time metrics across multiple firms and lawyers about the efficiency
of legal services.

Creating More Billable Hours

One of the most publicized findings of the Legal Trends Report was the average collection rate for lawyers – not the number of hours worked or billed but, instead, the number of billed hours for which the law firm collected. The report showed that, on average, lawyers logged 2.2 hours of billable time per day but only billed clients for 1.8 hours per day. Worst of all, lawyers collected on average, 1.5 hours worth of time per day. As the report pointed out, this collection rate illustrates why, despite billing an average of $232 per billable hour, small firms nevertheless
have a hard time running their firms profitably.

Low utilization, realization and collection rates likely have many different causes. One cause is simply not enough work. Data-driven marketing and competitive, data-informed pricing may help to create new work. Another cause for low collection rates may be that small firms cannot allocate enough time to billable tasks. When the lawyer is the litigator, marketer, webmaster, legal researcher, facilities engineer and HR manager, it’s hard to make enough time for billable work. Data can help inform when it is time to outsource tasks to independent contractors or hire new staff, as well as what to
pay them.

Efficiency here may also require investing training time and money in learning new tools, such as practice management software, smarter legal research tools or even ways of more fully using standard tools such as Microsoft Excel or Word. For example, 49 state bar associations offer legal research free as a benefit of membership, allowing firms to recover thousands of dollars per year of unbillable subscription costs. For example, the Oklahoma Bar Association offers free nationwide legal research access through the Fastcase legal research service, a subscription that costs $995 per user per year – but which is free as a member benefit of the OBA.

Law firms can be more competitive by investing in process improvements to make their legal tasks more efficient. Firms that charge fixed fees can create even more value in handling more transactions in the same amount of time but with better processes. This can involve simple data collection, such as collecting information about what legal documents the firm creates in a year.

Forms that are created frequently can be standardized, for example, among different lawyers in the firm. Companies such as Contract Standards collect standard contract terms, derived from hundreds of thousands of public contracts, for reuse in firm contracts. Even better, lawyers can use document automation tools to make these documents fillable and reusable (instead of finding and replacing party names and pronouns). Accounting for the number and type of documents produced by the firm may not seem remarkable, but it is nothing less than collecting data, one of the key legal services the firm offers.

Efficiency comes in many forms. Well-managed firms can collect data about who and what is most effective in certain circumstances, gathering information about best practices and debriefing on things that did not work or resulted in nonbillable overhead. Then, importantly, the firm can use that information to improve and, iteratively, to become more effective. Small data of this sort can drive process improvements and better outcomes for clients at a lower cost.

Practice efficiency has many benefits. In addition to reducing firms’ nonbillable administrative work, these practices should help lawyers to serve more people more effectively. According to the Legal Executive Institute, the size of the market for legal services in the U.S. was $437 billion in 2015. A 2014 study by the American Bar Foundation showed that roughly 80 percent of people who have legal problems do not address them through the legal system. Even if the latent market for legal services is not as lucrative as the traditional market, the total size of the market for legal services may exceed $1 trillion.

A more efficient, data-driven practice is not just a way to serve more people; it’s also a way to tap into an enormous latent market for legal services.

CONCLUSION
Big data is often seen as the province of large entities with a historical trove of data from thousands of data sources, combed over by data scientists and knowledge management personnel. But big and small firms can improve their practices by using small data that already exists in their firms today. For example, information about marketing and its connection through a matter to collected revenues for the firm can be an amazing source of insight about profitability, marketing and which practice areas are most profitable for a firm.

Small data does not require specialized personnel or expensive software, although the use of simple practice management software goes a long way to standardizing data collection. More than anything, using data in a law practice requires a different mindset about the value of this information in the practice. Billings and collections are often seen as administrative tasks in small law firms, but they are a source of very powerful insights into the things that concern small firms the most.

Using this kind of information in small-firm practice requires firms to think differently about their work as it is typical for firms to warehouse files after they collect fees, never to be seen again. Firms should use the same mentality as Google or Amazon, collecting data in the course of everyday business, whether or not it’s immediately useful. Running a data-driven firm requires lawyers and their teams to treat information about the work as part of the service, and to collect, standardize and analyze data from a file’s cradle to its grave. It does not require vast data sets. Many firms can tap into data already sitting in their offices to address their most pressing concerns.

ABOUT THE AUTHORS
Ed Walters is the CEO of Fastcase. He practiced law at Covington & Burling in Washington and Brussels, and he attended Georgetown University and The University of Chicago Law School. Mr. Walters teaches The Law of Robots at Georgetown Law and at Cornell Tech in New York.

Morgan Morrissette Wright is a product manager at Fastcase. She earned her undergraduate degree from Hood College and her J.D. from the University of Richmond School of Law. Ms. Wright worked at the Institute for Actual Innocence and the Office of the Capital Defender in Virginia, as well as in the Maryland Court of Special Appeals.

Originally published in the Oklahoma Bar Journal -- OBJ 89 pg. 32 (May 2018)