How can law firms navigate economic instability
- Written by Adam Ryan, Head of Product at Litera
Businesses in Australia have been affected by the tough economic climate, with the annual rate of inflation rising yet again to 3.8%, echoing the struggles we have been hearing from law firms. Research by Litera shows that half (50%) of Australian law firms have been forced to seek ways to cut costs, and almost 46% had no choice but to increase their fees to adapt to the evolving economic landscape.
As we see a fundamental shift in how clients evaluate law firms’ ability to deliver predictability and value when providing legal services, many law firms have implemented various strategies to navigate the challenging environment. In fact, we are seeing over 88% of law firms in Australia are using Alternative Fee Arrangements (AFAs) for nearly half or more of their work. AFAs like flat fees, success-based or contingency fees, fee caps, portfolios, risk collars, and subscription-based plans allow law firms to move away from cost-based pricing to value-based pricing and showcase the true value of their work beyond just the hours spent.
And, with 64% of law firms exploring phasing out billable hours globally, we should expect to see more firms shift in this direction, as AFAs not only help law firms demonstrate their value but also offer clients greater predictability and transparency.
Strategically adjusting pricing models
Facing the current economic environment, our research highlights that over half (51%) of law firms in Australia have started tweaking their pricing models. The trend towards client-centric and value-driven AFAs is indeed gaining traction, with most firms (88%) in Australia using them for at least half or more of their work. It’s clear that the old billable hour model is fading, making way for approaches that focus more on client value.
The perceived ‘death of the billable hour’ is seen as a positive change, prompting firms to assess how to transition more of their work to AFAs. This shift aligns with clients’ expectations for more predictable and value-oriented billing practices. Technological advancements will play a crucial role in facilitating this transition. By adopting tools necessary to streamline workflows, enhance data analysis, and improve decision-making processes, law firms can offer more transparent and value-driven services. Firms that proactively embrace these technologies will be better positioned to meet the evolving demands of their clients and maintain a competitive edge within the legal market.
Embracing technologies to meet client's expectations
Besides adjusting their pricing models, we are seeing law firms increasingly interested in fully connected all-in-one tech platforms. In fact, globally, 55% of law firms are planning to invest in such solutions in the next year with the aim of streamlining their processes, simplifying usage and encouraging adoption.
And as businesses are looking for ways to become more productive, law firms have turned towards AI as a solution to increase their efficiency with 80% of Australian legal professionals looking to adopt AI solutions in the next year to boost efficiency, profitability, and overall value.
Historically, lawyers have often spent significant amounts of time on manual data and administrative processes. However, with AI, tasks that once took six to eight hours can be completed in a mere 15 to 20 minutes, according to Litera. This frees up lawyers to focus more on strategic work rather than getting bogged down in paperwork. It's a game-changer for meeting clients’ growing demand for value-driven and predictable legal services.
For example, Litera's AI-powered Foundation Dragon offers an all-in-one solution that provides legal teams with immediate access to all relevant data points from prior corporate transactions. Such comprehensive access helps save time, improve collaboration, and ultimately lead to better client outcomes.
Effectively navigate economic fluctuation
While law firms have weathered a tough economic climate, law firms have demonstrated remarkable adaptability, with proactive measures such as changes in pricing models, cost-cutting initiatives and openness in adopting new technologies. Legal professionals are increasingly recognising the value of technological integration, with AI emerging as the focus for enhancing efficiency and value creation. The increased adoption of AFAs highlights law firms' adaptability to meet evolving client expectations.
To stay competitive and maintain financial resilience in today’s unstable economy, law firms should continue to address the challenges they face and capitalise on emerging opportunities like AI so that firms can position themselves for success alongside their peers.
Adam Ryan, Head of Product at Litera
