This article was first published on Bloomberg
It has received surprisingly little attention, but some large corporations have been mining and analyzing data on their legal spend for years.
What initially started out as fiddling with Excel spreadsheets has now evolved into sophisticated data analytics. This has not been an easy journey. These companies have subsidiaries all over the world and invoices from the law firms they used were structured in many different ways and often filed locally on different systems.
Pulling all this data together and making it uniform has been a herculean task, but it has been done, facilitated by the adoption of e-billing systems.
Legal matters come in thousands of different forms and shapes. To do meaningful analysis on the basis of which valid conclusions can be drawn, incredible amounts of data are needed. This is the prime reason that law firms have great difficulties in using data analytics to predict the amount of time needed for a new matter. Law firms simply do not have sufficient data to work with.
For the world’s largest corporations this is different. Their legal spend outpaces the revenue of any individual law firm. These companies by now have more than enough clean data to do meaningful analytics.
For data, more is always better. There now is a cross industry alliance called SALI working on a uniform industry standard for the classification of legal matters. Once this standard has been finalized and put in place, every party in the legal industry will be able to classify legal matters in exactly the same way.
This will open the door to pooling of (scrubbed) data in order to make data analytics even more reliable and relevant. Soon there will be sufficient data to analyze and benchmark any type of matter in any jurisdiction. Every increment of time spent will be transparent.
Using Data to Increase Efficiency
Analyzing time-keeper data will enable companies to see where and how they spend their legal budget. Data analysis will also be used to pinpoint the inefficiencies that have up till now been an inherent part of the process.
After the financial crisis, the Association of Corporate Counsel launched the value challenge as a platform to help its members lower the costs of external lawyers. For more than 10 years now clients have employed a number of methods to get better value. All were centered on price and rates. Despite all efforts, little progress has been made. Data analytics now opens the door to have a closer look at time-spent. Early results look promising. Eliminating inefficiencies in the value chain can deliver savings up to 25 percent, everything else remaining the same. Same law firm, same rates, same quality, same result, just less time “wasted” along the way.
In a business that is selling time, it will pay off more to save on time than on price per unit.
Data analytics will not stay limited to the small group of pioneers that first started it. As the SALI initiative shows, there is a potential for open source sharing. Why keep all the data for yourself as it is clearly in everyone’s interest that the pool of data gets as big as possible in order to provide even more reliable insights?
There will be a huge opportunity for the party that will host and maintain the data, albeit without monetization (no company will contribute data to a database and then have to pay to access it).
Not All Hours Are Created Equal
For about the past 50 years, the legal industry has worked on the basis of time-based billing. Yes, we increasingly see alternative fee arrangements, but in the end, these are also based on time-spent. The value of legal services to the client is, however, in reality not related to time.
From the client’s perspective it is strange that an hour spent by a partner on a defense strategy has the same price as an hour spent by the same partner listening in on a conference call. One could argue that the hourly rate does not cover the value of the hour spent on strategy, but that the hour listening in on a call would be overpaid. Not all time spent by a lawyer holds the same value to the client.
However, in real life this imbalance is more or less evened out because of the large total number of hours on a matter. When clients with the help of data analytics start focusing on time-spent this balance will be distorted and the underlying business model will no longer work. As there will be less and less “over paid” hours to compensate for the “under paid” hours, the time-based billing model will crash.
Time does not represent value. It never has, but it sort of worked. Not anymore. Data analytics will reshape the business of law. The future will be value based billing.
Read more on this topic in my new book: Data & Dialogue, a relationship redefined (available on Amazon)