Research from BigHand shines a light on the increasing cost pressure law firms face in an unprecedented financial climate.
Law firms are experiencing economic changes and geopolitical instability that are challenging traditional profitability models. In this new era, firms need to think far more proactively about the value of financial data and how it can be better used to minimise profit leakage.
In August 2022, BigHand ran a survey gathering 800 responses from senior legal finance roles, CEOs, Managing Partners, FP&A and Finance Systems roles from law firms of 100+ lawyers in the UK and North America (NA).
Clients' expectation for financial transparency has increased, as attitudes evolve away from traditional ‘trusted partner’ approaches to matter management and total cost. The findings show over half (53% of NA and 51% of UK) of firms confirm they have received further increases in demand from clients for more financial transparency this year.
Faced with financial constrictions, firms are driving lawyers hard to increase billable hours – but lawyers, especially the next generation, are reluctant. The report shows 96% of NA and 98% of UK firms have increased the target billable hours for lawyers suggesting there is a disconnect between firms and lawyer expectations.
There is increased pressure for firms to identify and reduce leakage to safeguard profitability. The research shows over a third (34%) of NA firms (28% of the UK) confirm that standard rate discounts remain the most significant cause of profit leakage, suggesting firms are facing greater pricing pressures.
However, firms are addressing the concerns and responding to the need to improve, over a third (37% of NA) and 26% of UK firms plan to improve billable time entry over the next two years, while 36% of NA and 24% of UK will improve financial data visibility to gain insight into the issues that are leading to profit leakage.
To retain a profitable operating model and respond to client demands for financial transparency, firms are developing a far more commercial culture. 92% of NA and 93% of UK respondents now have data scientists. However, this shift towards a data-driven business model becomes challenging when lawyers aren’t empowered with financial information to engage in commercial conversations. Only 41% of NA and 39% of UK firms can provide lawyers with access to matter-level billing information.
Firms have made it a priority to extend profit responsibility from finance teams to partners and lawyers and are aware of the need to invest in technology to achieve real-time access to actionable data. 94% of NA and 90% of UK firms encourage lawyers to have an awareness of the profitability of a matter and over two-thirds (70% of NA and 65% of UK) are planning to introduce an advanced legal BI system over the next two years.With financial performance slowing down, the report provides an analysis of just how firms are managing increased costs in the face of an unprecedented and unexpected financial situation. Data will play a key role in driving essential change in the future, and firms must support lawyers with better commercial understanding and actionable data to safeguard profitability and address the concerns discussed in the Law Firm Financial Insights Report.
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