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NASHVILLE — In an increasingly artificial intelligence (AI)-driven world, law firms of all sizes are wondering what new technologies might mean for their profitability. For large firms, there is a worry that clients might demand that AI cut into billable work costs, with fewer ways to make up those lost profits. For smaller firms, there are concerns that productized legal AI and in-sourced work from clients may leave no room for their own work.

Of course, in actuality, AI won’t actually kill law firm profits, mostly because law firms and their attorneys are extremely adaptable, and they will find ways to replace the legal tasks being done by AI with higher-value and more fulfilling work.

However, there is a caveat to this, of course: To move on to that higher-value work, the firm’s pre-existing work has to be worthwhile. That’s where data comes in — not only to ensure that AI and new technology solutions work correctly, but to ensure that the work which law firms do is correctly valued and in line with the firm’s strategic direction and focus on profitability.

At the (ILTACON) session, The Cost of Doing Business: Data Supported Profitability, representatives from three law firms broke down how they are using data to ensure their firm’s work is profitable — a job that’s sometimes easier said than done.

Make it actionable

Today, law firms have a treasure trove of data at their fingertips. Whether it’s litigation analytics, transactional workflows, or internal marketing and business development inquiries, lawyers in many cases have more reports and dashboards than they know what to do with.

There’s a problem with that, however, noted Andrew Gastwirth, Chief Information Officer at DLA Piper, because many of those reports are siloed and backwards looking. When he joined the firm seven years ago, he said that

one of his first initiatives was to “get out of email and get into workflows.”

“If it’s not actionable, you’re just collecting data for the sake of collecting data. We have to make a really big move to stop doing that,” Gastwirth said. Instead, law firms should be providing areas in which people can look at the same data at the same time, and put the data in the context of the larger business rather grouping it by individual clients.

Martha Louks, Director of Technology Services at McDermott Discovery, a subsidiary of law firm McDermott Will & Emery, said that something as simple as a help desk ticketing system is beneficial. At first, when McDermott introduced a more formalized help desk workflow, there was pushback because, naturally enough, everybody just wanted their own individual problems fixed quickly.

“If it’s not actionable, you’re just collecting data for the sake of collecting data. We have to make a really big move to stop doing that."

Soon, however, having this additional workflow meant the firm had a whole new slew of numbers to analyze. And they found by searching the help desk tickets that people were burned out, especially project managers. The billable hours weren’t reflecting any sort of change, but upon closer inspection, the number of cases each day had increased significantly.

Indeed, the firm was losing billable time because of how much these managers simply needed to switch from one task to another. “The billable time was flat, and we were not capturing as much as we could have or should have,” Louks explained.

Costs and profit

In many cases, law firms not only struggle to get a handle on billable time, but also the cost side of the equation. At McDermott, Louks said she undertook a major initiative to not only determine the standard costs of an e-discovery matter, but also the costs that often aren’t captured: write offs, write downs, and value-adds. “All of it is a cost to the business,” she said, adding that it’s not often thought of that way since it’s not easily measurable.

This need to standardize and accurately measure costs was a major issue at DLA Piper as well, Gastwirth added, and it was a major reason why he pushed the firm to move to the cloud, for more standardized pricing, and also to move from a capital expenditures economic model for technology to an operational expenditures model. As a result, “my spend has become incredibly predictable, with fewer peaks and valleys,” he said.

Of course, this isn’t a panacea for everything. Cloud services can also be more expensive in some cases, for example. Plus, when it comes to the in-sourcing/outsourcing question, it often comes down to scale on operating expenses compared to licensing fees, the panel suggested.

All in all, managed services don’t add to a firm’s infrastructure, Louks explained, but “when you involve more help, it does tend to cost more money. It’s a challenge.” And if a firm has a good sense of its usage and what it’s measuring, it’s better able to make a decision. “It’s a delicate balance.”

“If you’re not specific in the problem that you’re trying to solve with AI or automation, you will fail.”

With proper measurement of these costs, firms are better able to make a true profitability decision — in some cases, that may even mean treating technology as that write-off or value add.

Monique Sever, Litigation Support & eDiscovery Supervisor at Canadian midsize law firm Harper Grey, said her firm’s stated strategy is “to gain the trust of our clients in order to service them best,” which means a more personal service because it’s a midsize firm. The result is that the firm has to be strategic about where it generates profit: a large and profitable insurance defense client, for instance, may mean that e-discovery is often a write-off or value add, Sever said.

In this way, technology is not necessarily a profit center, but a strategic investment to better serve the overall profit interests of the firm; however, any technology interests should also be careful to track so the firm can see where those trade-offs occur.

“We also do want to get credit,” McDermott’s Louks said. “There’s a cost to all of that. I can actually quantify and say how much this is costing us per year so the firm can make an informed choice.”

The future of profitability

AI is not going to fundamentally change how law firms function, the panel agreed, but there will be benefits. “It’s going to be an enhancement for the way that we work,” DLA Piper’s Gastwirth said.

At the same time, however, any AI or generative AI implementation needs to be done with the firm’s overall strategy and profitability in mind. “If you’re not specific in the problem that you’re trying to solve with AI or automation, you will fail,” Gastwirth said, adding that he always asks two questions of any technology project. First, are we in this business? For example, if the firm doesn’t want to be an email hosting provider, it should outsource that capability.

Second, is this a 24-7 requirement? “If it is, it’s got to go out of the house,” he said, citing network and security operations, in which the firm has a core team. DLA Piper also supplements these operations so the firm does not worry about being called all the time.

Gastwirth said he was “shocked” about the understanding of profitability within legal, but notes that it doesn’t have to be that way. Today’s law firm leaders, he said, should be “refocusing the firm overall that you really are running a business.”

And technology can play a key part, but only when properly slotted into the firm’s overall profitability strategy. As Gastwirth stated, quoting from a Microsoft colleague: “A fool with a tool is still a fool.”

You can find more about how GenAI can impact professional services here.