Will Innovation Help Law Firms and Clients Control the 'Cost Monster'?

September 24, 2023

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Huge billing rate increases have helped law firms absorb hits to productivity and keep layoffs mostly underfoot so far this year. But they've also drawn strong reactions from clients, say in-house lawyers and consultants, with some describing the latest hikes as "mind-boggling."

However, there's fresh optimism that innovation, not only on pricing plans but because of Al-related spending and projects, can ultimately tame what one consultant called "the cost monster."

Law firms are renewing their efforts on automation, hiring leaders devoted to invention and creativity, and creating new tools themselves that could ultimately make business cheaper for both sides. Clients are taking notice, too. And in many cases, they're driving the change.

Vicious (Billing) Cycles

Firms across the Am Law 200 this year have benefitted from 7.7% average rate increases—"some of the highest growth in billing rates we've seen," according to Wells Fargo Private Bank Legal Specialty Group's six-month survey, published last month.

Jeffrey Lowe, founder and managing partner of the advisory firm Jeffrey Lowe Partners, said some of that significant increase is due to inflationary pressures. But even as those have relented, the conventional wisdom on rates for firms remains: get what you can while you have the chance.

"When the going is good, you raise the rates while you can. Because if the economy runs into a brick wall, like it did in 2008, the shoe is on the other foot, and they can find themselves with clients asking for big discounts," Lowe said in an interview. "With respect to 2023, things are going better than people expected, so there might be some renewed enthusiasm and confidence in trying to raise rates while they can."

That sets up a familiar showdown. Law firms usually find reasons to raise billing rates, and ways to collect on them. Clients protest. They may take longer to send in checks, or move some work around, but they ultimately pay up—or negotiate an arrangement and move on. Much like "Groundhog Day," the process repeats itself over and again.

Stephen Mar, chief legal and administrative officer of Odeko, a food services tech firm, said companies can broadly continue to work with firms on the issue, using things like volume discounts, alternative fee arrangements and limiting the number of law firm attorneys working on particular matters.

They can also work around firms by in-sourcing or moving work to alternative providers and different firms. Legal departments are still using both approaches and all the tools that go with them, observers said.

"The most sophisticated departments recognize it is a combination of all of the above that's needed to manage this cost monster," said Jason Winmill, managing partner of the legal department consulting firm Argopoint, who also called the latest round of Big Law rate hikes "mind-boggling." He said companies are "throwing the kitchen sink" at the issue.

As hourly rates continue to climb "it kind of goes exponential," added Ken Callander, principal of Value Strategies, a San Francisco-based company.

"My clients just say, Where does this end?"' he said.

Is Al a Win-Win?

It's not like firms and clients haven't tried to invent their way past this conflict before. Firms often point to alternative pricing techniques as a kind of innovation, and several firms have said they've ramped up their tools and personnel to help put them together.

But with a noticeable surge in the innovation talk this year, arguably catalyzed by the release of ChatGPT and other kinds of generative Al tools in late 2022, firms and clients may be closer to being on the same page when it comes to defraying costs with the use of this kind of disruptive technology.

Davis Wright Tremaine, Orrick Herrington & Sutcliffe and Seyfarth Shaw are just a few firms that have recently unveiled or emphasized the importance of the technology to their operations, noting specifically that their clients are helping lead the effort.

"Our clients embrace innovation, for the most part. They're thinking about topics like AI, the opportunity it creates and how they can do things better and smarter and faster," Lone Almon, Seyfarth chair-elect, told The American Lawyer.

"Clients see it as a potentially cost-saving tool that can make them more efficient and competitive," Shannon Yavorsky, co-leader of Orrick's AI working group, also recently told The Recorder.

Odeko's Mar also said in an interview he's seen "forward-thinking" law firms actively explore Al-assisted and other automated solutions that can reduce costs for firms and the companies they serve.

"In-house counsel should push their law firms to explore these types of solutions and to engage their clients' feedback as they do so. And, of course, in some instances it may make sense for in-house counsel to engage legal tech vendors to implement solutions internally," he said.

Jerry Levine, chief evangelist and general counsel for ContractPodAi, said some clients mandate the use of new and innovative technologies, such as his company's recently released Leah Legal Copilot, to ensure that their outside counsel use them to reduce time spent—and, therefore, billed.

Seyfarth noted one of its projects was the creation of an online portal for a car manufacturer looking to boost one of its model's transition to an electric fleet. The firm said it negotiated a fixed-fee price to create the portal, as well as fixed-fee pricing for drafting and reviewing hundreds of individual agreements between the manufacturer and its dealers.

But since the portal streamlined the intake and request process for those agreements, allowing for fewer emails and errors to correct, it's significantly reduced the amount of time and cost for both the firm and the client.

"To date, Seyfarth legal review time is coming in well below the fixed-fee price for each administrative agreement," the firm added.

source: ALM | LAW