Hi there,
GCs know that if they want to elevate their standing within the organisation and become trusted strategic advisors to the business, they need to play by the same rules as the rest of the C-Suite (or do they 🤔?).
That means an end to murky billable hour arrangements and legal procurement sitting in a black box.
Against that backdrop, in-house teams are under increasing pressure to “do more with less” (42% of CLOs say they’ve received a cost-cutting mandate in the past year), while at the same time under the barrage of undeterred firm rate increases.
Something’s got to give.
But even as I hit “send,” there are undoubtedly countless firm leaders and corporate lawyers shrugging their shoulders thinking:
“Yup, just more of the hype cycle on why the billable hour system is broken. It hasn’t changed yet and it won’t change anytime soon.”
Here’s why I think they’re wrong and why we’re moving closer to a true tipping point for a market shift.
1. We’ve underestimated firms’ influence in the marketplace for legal services.
Corporate legal teams wield the vast majority of purchasing power in the marketplace for legal services. So I’ve said it before many times, the power to change the marketplace for legal services rests with these in-house teams.
I don’t think I’m altogether wrong here. But now I wonder if we’ve been underestimating firms’ power in effecting this change?
After all, they are the ones who have managed to hoodwink corporate legal teams into double-digit rate increases year over year for over a decade (and I readily admit I used to be one of them).
They also continue to find countless creative ways to game billing guidelines to protect their margins at all costs (shocker that top firms are again reporting double-digit revenue growth despite lagging demand and hours worked, as well as associate layoffs).
And if what firms think about AFAs and value-based pricing schemes (or at least corporate teams’ perceptions of what they think) weren’t driving at least some of corporates’ decision-making on outside counsel management, our PERSUIT team would happily cross this common objection to using our platform off the list: “We’re worried it will ruin our firm relationships.”
2. Transparency and predictability in legal sourcing are critically important to firms if they want to stay profitable.
The truth is that even before AI prompted predictions of widespread associate layoffs (they’re here, by the way), firms have long realized there is tremendous profitability in a business model that rewards value provided rather than time spent on a matter.
While most firms are still heavy in the R&D and piloting process with AI, in another 12-24 months AI will begin to hugely impact the efficiencies in how firms deliver their services and vastly increase the margins of profitability for those who can crack that code (pun intended 🤷♂️).
If you’re using your resources more effectively to do something in 20 hours that would take most other firms (or your own firm two years ago) 100, well you’ve just won.
But that requires in-house teams to take firms at their word and look to them to deliver outcomes, rather than continuing to micro-manage the relationship with overly burdensome billing guidelines and shadow billing arrangements.
Should firms be allowed to bill for work done by AI?
Absolutely!
But no client is going to be OK being billed hourly for work done by a robot 🤖 — just like they aren’t OK being billed at partner rates for work that’s really being done by junior associates.
That means that for firms to reap the benefit of these new AI-enabled efficiencies, they have to move beyond the billable hour and embrace AFAs and value-based pricing.
In short, firms’ profitability in the near future largely hinges on the market’s acceptance of AFAs and value-based pricing as the status quo, rather than the “alternative” when it comes to sourcing outside counsel.
But what do you think?
Are we really at a tipping point for how the business of legal is done?
Or will the marketplace for legal services walk away from this current hype-cycle unscathed?
I’d love to hear your thoughts.
Hit reply and tell me.
Cheers,
Jim
P.S. If you’re one of those legal leaders I mentioned above who is looking for new ways to level up your business acumen and standing within the business, you’ll definitely want to check out our latest resource: 5 Questions to Guide Your In-house Team’s Next Legal Tech Investment.
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