Overview
Ask a managing partner what drives the value of a law firm, and she is likely to tell you that it is the reputation of the firm. Push a little harder and she might also concede that it’s the people in the firm that create value. Now ask a third question: How much would your firm be worth if everyone that worked there left? At most law firms, the most important assets walk out the door at the end of each day.
Many law firms are sitting on valuable bricks of gold, but treat those bricks like change that fell behind the cushions of the couch—they don’t know how much is there, and it’s too much trouble to find it, dust it off and put it in their pocket. Firms that commit to a strategy for knowledge management realize that value is created every day, and if correctly harnessed, it can improve productivity, competitive advantage, and professional development.
Productivity Is Not an Option
Productivity is masked by the billable hour for law firms, and that pricing model is under pressure from multiple fronts. Insurance companies and other volume purchasers put downward pressure on attorney rates, typically dramatically below market or standard rates. Large corporate clients are doing their own pricing analysis to determine which law firms are delivering more value for the dollar. Ever increasing price transparency and mobility adds additional pressure on the billable hour model.
The 2019 Georgetown Law “Report on the State of the Legal Market,” makes the case for a rapid rate of change in the legal services market, led by clients and ignored by some law firms. These shifts result in decreased demand and higher competition. The report notes a “complete shift from a seller’s market to a buyer’s market” since 2008 and says that “clients are insisting on more value for their legal spend. And by ‘value’, clients now mean higher levels of predictability, efficiency, and cost-effectiveness in the delivery of legal services.”
Here are some key statistics from the report:
- Demand for legal services over the last seven years has outpaced the growth in attorney headcount, while hours worked by attorneys fell 11% since 2007, suggesting that law firms are generally becoming more productive.
- The modest growth in demand for legal services is mostly enjoyed by the Am Law100, with midsize firms showing only marginal improvements in productivity in 2018.
- As standard rates nationally have increased, many clients have pushed back by renegotiating bills. Am Law 100 firms in 2018 collected only 81% on their standard rates. This speaks to client relationships and perceived client value.
- Demand for law firms has been negatively impacted by the rise in law firm rates, as larger companies bring more legal work in-house with a more favorable cost model. Curiously, it seems to go against the conventional economic theory that declining demand would be countered by increased pricing in an attempt to make up for the shortfall in revenue.
Taking Stock of Your Inventory
Your firm may already have data that will help improve efficiency and deliver more value to clients. To some, this might seem like a daunting task. Your office likely holds years’ worth of files, some client files, some not. The mission, should you choose to accept it, is to take inventory of the documents that you have. Pick your metaphor—for me, it was facing the condiments crammed in the refrigerator door. It looked plentiful from a distance, but a closer look showed four ketchup bottles, nine mustard containers and an untold number of salad dressing bottles. Like my fridge, we knew we had to face our vast, aging data, check the expiration date, and taste it if necessary to validate that it still had a purpose.
To start, you may want to make sure you understand the scope of your firm’s data. Identify all of the sources of firm data. Compile a list of your document repositories and start to evaluate redundancies. If you have non-digital data, you may want to scan those files to bring it into your digital inventory. If you have orphan data, you may want to bring documents on isolated laptops back to the reservation. Review your firm policies regarding document storage, consistent with preservation requirements and business continuity planning.
Next, you may want to consider dividing your data world into three digital cabinets: 1) client files, 2) Library, and 3) firm files.
Client files will obviously include active and closed matters. Many law firms will jump into a new document management system just for the improved functionality for client files alone. Today’s leading document management systems include robust version control, customizable document attributes, document meta-data, precise permission options, and even eloquent document collaboration and workflow solutions. Search capabilities based on these ever-expanding document attributes give law firms the power to find, tag and group documents with unprecedented options. All you have to do is update the attributes for the hundreds of thousands (millions?) of documents in your system. There’s the rub.
The second digital cabinet is your Library. These are non-client files that represent your firm’s collective knowledge. They include checklists, templates, forms, CLE presentations, model briefs, court instructions, subpoena forms, referral lists, preferred vendor lists, etc. Bringing these documents into a centralized data repository gives access to everyone at the firm and allows for a more methodical process for keeping these assets up-to-date.
The third digital cabinet is for your firm files. This would be all of your operational files, financial reports, KPIs, employee files, project initiatives and any firm digital collateral that is unpublished or a work-in-progress. You will obviously want to set your policies and permissions around the structure of this data collection as appropriate.
Identifying Your Own Greatest Hits
Attorneys are capable of creating amazing work. Faced with a challenge, they will assess the facts, weigh the strategic options, and search for precedents and other similar work done earlier. If you have a central repository that is not well maintained and updated, it’s possible that it has been years since anyone went there looking for something of value. More likely, an email blast goes out (or maybe an even more discreet phone call), that goes something like this: “Does anyone have a motion like the one we did for the Jones case, except that it deals with federal claims, but we need a multi-plaintiff example, with at least one a resident of California?”
Starting with checklists, then expanding into model documents, templates, forms and expanding into other practice collateral, will create a library of your greatest hits. They are easily identified, easily accessible, and facilitate cross-fertilization of knowledge that the firm already possesses. This approach enables the firm as a whole to be as knowledgeable as its best attorney and each attorney to be as well empowered as its Library.
Cultivating the Garden
Law firms can become collective curators of their own digital assets with the right leadership and cultural buy-in. The key is to promote an environment where contributions are expected and rewarded. If you build it, they will come. The more your collective assets are cultivated, the more they will grow and entice additional contributions of quality.
Document management may have been traditionally approached as a technology issue, but I challenge you to think of it as a management issue. It may be convenient to try to reduce digital files to a question of permissions, storage, security, back-ups, bits, and bytes. However, forward-thinking law firms will approach document management as a business opportunity. Naturally, the measure of a good business opportunity will be its positive outcomes, typically measured by ROI, NPV, or at the very least, a break-even calculation.
For What It’s Worth
Searching the web for an ROI calculator for document management projects can be less than gratifying. My research returned articles that mentioned ROI in the headline but then went on to discuss the intangible benefits of implementing a document management initiative, and reaching the inadequate conclusion that it must be a good investment because the unquantified benefits are appealing. Managing partners and law firm equity stakeholders deserve a reasonable estimate of costs and quantifiable benefits to make a considered decision on the investment of firm resources. Critics may argue that non-monetary benefits and costs cannot be truly calculated. To that, I would respectfully submit that benefits and costs can be estimated. Reasonable folks may disagree on my assumptions, but the discussion will be centered around “higher or lower—more or less,” not that it can’t be estimated.
The law firm that doesn’t have a target never misses. As a data-driven law firm, we decided to tackle the question of “how much” to determine if this most gruesome and tedious project would transform our productivity and whether it would be worth the investment.
We can approach the ROI calculations of a document management initiative as the return on investment of firm resources that generate a tangible net benefit to clients, and ultimately to the firm. Our model is focused on small to mid-size law firms, with the assumption that large law firms already have document management in place. The ROI model calculated the return for firms of five, 25 and 50 attorneys.
Calculating Benefits
Note: For purposes of calculating the cost of wasted time or the value of saved time, I refer to the “hourly bill rate” below. While I have argued against the hourly bill rate, you may substitute that with your effective hourly yield (the actual money the firm earned divided by the time spent to earn it). Both rates can be similar, but firms with exceptional productivity should witness effective hourly yields exceeding their standard hourly rates.
| Reduced time attorney searching | One hour of attorney time saved per week looking for documents at the hourly bill rate for 48 weeks per year. Critics may suggest that this is still billable time and does not result in recovering additional monetary savings. True—but in a flat-fee engagement, the client does not have to pay for the inefficiencies of the law firm and the firm benefits from productivity gains. Moreover, as price transparency in legal services continues to improve, clients eventually will refuse to pay for a firm’s inefficiency. |
| Reduced time paralegal searching | Three hours per week of paralegal time at their bill rate for 48 weeks per year. The same argument as above regarding who ultimately bears the cost (or reaps the benefit) from reducing inefficiency). We estimate paralegals waste three times more time than attorneys, as they are trying to track down the attorneys’ documents, client digital assets, and discovery data dumps. |
| Reduced time for version control issues | Half an hour per week of attorney time plus one hour of paralegal time for 48 weeks per year spent on keeping up with the latest document revisions or unwinding unintended concurrent document editing (when two or more authors are simultaneously working on different versions without each other’s knowledge) in a multi-party version control situation. |
| Offset to reproducing a doc not found | Six times per year an attorney will give up looking for a document that they can’t find and will spend two hours recreating that document for a total loss of 12 hours per year. |
| Reduced time researching | One hour per week per attorney plus three hours per week per paralegal for 48 weeks per year. The benefit includes the proper document management of research previously conducted and mapped to specific legal claims, motions, briefs and client situations. |
| Improved value through cross-fertilization | Benefits beyond classic inefficiency measures include the value of better briefs, arguments and client advice based on improved cross-fertilization of firm knowledge, updated collateral, and best practices. We estimate the benefit of 3% of revenue based on this improved knowledge share leading to better decisions and results for clients. |
| Reduced delays in recruiting | Attorney turnover of 20% (average attorney tenure of five years) times the number of attorneys times the cost of a one-month delay in recruiting (because your competitor at a small or mid-size firm has a comprehensive digital repository of legal services digital assets and your firm doesn’t) measured by one month of lost billing. If this doesn’t seem reasonable to you, feel free to skip it, but we are hearing that top associates are expecting that from law firms when interviewing. |
| Offset of duplicative document storage | The cost savings for retiring the subscription of the current system and any other duplicative document storage systems made redundant by the adoption of a new document management system. |
Calculating Costs
| User Fees | Cost of subscription per user |
| Project Management Costs | 150 hours of project management time times hourly rate (either internal or external rate) |
| Design Costs (SMEs) | One hour bill rate per attorney times the number of attorneys participating as Subject Matter Experts (SMEs) plus one hour per paralegal SME. |
| Pre-Conversion Document Analysis | Admittedly, this is a tough one to estimate and a tough part of the project. During this part of the project, documents need to be triaged for migration to the new system. Outdated and worthless documents should be purged so they don’t clog up a new document management system and take up space. We estimated 2,000 documents per attorney per year in practice at the firm times one minute (average) per document reviewed and mapped to new design classification with 75% of documents being reviewed by paralegals and 25% reviewed by attorneys at their respective bill rate. |
| Document Migration Consulting / Services | Market price or cost of internal resource to manage new system design implementation, document download, packaging, upload, and quality assurance. We estimated $15,000, which included design best practices, document migration and “train the trainer” consulting services. |
| Training | Three hours per user and five hours per administrator. |
| Post-Migration Classifications and Tags | This is where the true value of your document management system will be realized to take advantage of the system functionality that you have invested in. It will probably be your most labor-intensive project investment. We estimated that 80% of our pre-migration files were outdated (old CLE, forms, projects, reports, files replaced by a new system) or irrelevant (prior versions of a finalized document). Of the 20% of relevant documents that were migrated to the new platform, we estimated two minutes per document to identify and classify author, doctype, subtype, date, author, notes, key dates and tags. Calculate the number of documents times your estimated time to review (based on your particular design and system file attributes) times the bill rate of the staff for lost billable time. You can also triage the classification approach consistent with your firm’s strategy and needs (e.g. all new matters, all active files, all litigation files or everything). |
The Results
Our model for a five-attorney firm with five paralegals and 15 total users, based on the above assumptions, showed an ROI of over 500% (5.1x multiple) for the first year following completion of the project, and net present value of just over $1 million for the first five years using a 15% discount rate. The break-even (payback period) was around 2 ½ months.
Total estimated costs, including both internal opportunity costs of foregone billing as well as external hard-dollar costs (vendors, users fees, etc.) were $94,000 in the first year and will generate over $476,000 in value annually.
Results for the 25- and 50-attorney firms were similarly positive, with slight improvements in return for the larger firms respectively. Improved results could be realized from purchasing power on user fees. Additional drivers of improved returns for the 25- and 50- attorney firms are project management and consulting expenses that are scalable and increase at a slower rate than other variable costs based on firm size.
However, we did not find many scalable costs in our model, since most of the costs associated with the effort are variable and correlate with the size of the firm. Our model calculated that non-variable costs were only 21%; almost 80% of costs and all of the benefits were variable with the size of the firm.
Compared to the five-attorney firm multiple of 5.1, we estimated the 25-attorney firm would return a multiple of 6.3 and 6.6 for the 50-attorney firm. The payback for both the 25 and 50 attorney firms would be just under 2 months.
Conclusion
Each law firm will have to estimate the value of its own digital assets and their strategic use within the firm. However, the costs and benefits of curating and managing those assets across the firm is a knowable value.
A firm’s strategic commitment to knowledge management is a commitment to driving value for the firm beyond just its current staff, its logo, and printers. Knowledge management cultivates your hard-earned assets. Knowledge management benefits your staff productivity and training efforts and can raise the bar for internal best practices. It might be the most boring project you undertake this year, but if it means generating better outcomes for your clients, it might just be worth it.
About the Author
Josh Kalish is CFO and director of client services at The Noble Law, a plaintiffs’ employment litigation firm in North Carolina. Contact him on Twitter @heyjoshkalish.