From Billable Hours to Business Outcomes: Rethinking Law Firm KPIs and Measuring Value

Glad to be back. Thank you, Eric and Daniel, for inviting me back.

We can't just have any conversation unless AI is included in it. Right? And I think the technology as a tool has been around all these seventy five years of law firms and corporate clients working together, but in different forms. And now AI has expedited that transformation or moving to the next tool. So basically there are so many things about the law firm relationship with the clients and of course one of the key observations I've had is moving away from billable hours and that's something on the surface which we can talk about it more. But one of the things that made me to just move toward like thinking about having a manual for law firm sites, not only putting standards and formula around how to define profitability models and all that, but in a bigger perspective, looking at this, how we define a value.

Because now if we just historically looking at the billable hours that were created to solve one problem, now we see that there are questions about those billable hours and clients are looking and say, how I can define the piece of work that things... The production has become cheaper using AI?

And then, of course, that comes to the meaning of at the end of the day, we need your law firm. You need your signature and sign off on this piece of work. But how do you define the value for that, if that makes sense?

Good question. And I wanted to confess here, I don't have the answer for that definition yet. I think not me and many people are trying to figure that out as we speak. But one of the thing I wanna dissect it here and share it and have...

Kinda, like, talk about it together is, historically, let's say, a piece of work was a combination of production, the work being done, and then putting an assurance next to it, somebody at the partner level. Right? And AI has come to kinda split that route, the work being split it because it's now more transparent where we can see this piece of work, this part of the production, which could be the initial review. It could be the standardization of, let's say, summarizations.

All that being done by AI, and now still the accountability part of it and putting some signature behind it is there. Right? So now for the law firm side to define value, let's go back to the business that created the question.

At the client side, outside of the legal department, somewhere in the business, they needed a legal service coming into the legal department, and legal department triage that and send it some to in house work, some to AI, some to ALSP, and some to law firms.

So that triage is another area that we can talk about it more. But basically, at that point, the value is coming from the business. And if the legal department wants to define the value of the work, in my opinion, we should start from the end result and coming back and say, this piece of work is critical for us even though the production of it doesn't take that much time, but we really need high value premium service from the law firm to validate the production of the material that we have so far, if that makes sense.

I think at the end of the day, maybe we're gonna have less hours at the junior level done at the law firm site because that...

Those hours are being shifted in house or using technology AI or ALSPs. But at the end, I think it's a different type of work is being delegated to law firm. Let's say when you get to the specific jurisdiction or even you get specific regulations in a different area, then you definitely need the law firm to basically be your strategic partner and adviser on that one. As opposed to in the past, you need a law firm also to do all the production work and the legwork being done for the same case.

Now legal departments are bringing some of that work in house with employing AI tools. And in some cases, they delegate that to the law firm. But even if they work the production, they delegate it to the law firm, they don't expect the same amount of effort and hours because now the assumption is AI is in a cut down on those hours. Right?

So then as a result, we see that law firms, some of the partner rates are going really high. And of course, know, we can throw some numbers $23,000 an hour. Those are become... Because at the end of the day, that assurance is the main key that the law firm is putting their credit and names on top of that work. That's an important one.

So metrics and KPIs, unlike the legal department, for law firm has been... Is not new.

Law firms as a business in order to operate they need to have these metrics and as you mentioned some of them such as utilizations and profitability calculation and all that is just part of the structure of the law firm. So my book, of course, we are talking about those because there are still variations of way... Different ways of calculation for maybe smaller law firms. That's something that we get a lot of feedback on that. But one of the sections that was my favorite and actually the part that I added in the book was the value and pricing on nontraditional billable hours model. And let me explain that. Like, instance, law firms... The corporate legal department historically after 2008 recessions, they started moving toward alternative fee arrangements.

And they were asking law firms to provide different ways of calculations such as fixed fee, cap fee, and all that. Right? So the communication between law firms and the corporate legal departments on those, let's say... Let's pick one such as the fixed fee to find out how to communicate with numbers. Of course, we can put a fixed value on a piece of work. But at the end of the day, both sides of the equation, law firm and corporate, they needed to do some calculation. Legal department, they needed to show the leadership by moving from billable hours to fixed fee. This is how much we saved.

And the law firm side, in order to put a price of fixed fee on a piece of work, they needed to make sure that still they are profitable with a good margin.

And now looking at KPI and metrics, how they are valuable here, first is how to calculate it in a healthy way that is not after the fact. You finish the work, you look and see, did we make money or we lost money?

So that calculation and the metrics become very essential here. And in my book, there's a big section about the whole area of alternative rearrangements and metrics around it, how to do basically this assessment for the law firm side. In my second edition of the legal ops KPI, since law firms... We did it for law firms, then the legal department, they said, can we now have those metrics for the legal department so I can use the same metric from a different angle to see how we can measure savings using... And also predictability using these AI phase.

I would start from the legal department. And when we talk about accountability, I was thinking it more on you produce a piece of work now with AI quickly. Right? Who's accountable for this piece of work?

Because you quickly get to the result, but somebody needs to put a signature and say, yeah. I reviewed this, and this is correct. Right? And putting that signature carries credibility and money.

And even though it's, like, ten seconds, but again, somebody needs to just do the review. So that's one. But but if you wanna talk about accountability of how much this work cost and then verify it, I have some thought about that. And I think that comes from the business value.

And this is something that in industry, if we wanna make a deal, we look at the outcome. This piece of work is gonna cost me m and a, for instance, right, 5% of the deal or 2% of the deal. Here's a check. I don't know how much time it is.

You know what it is, and I wanted you to do a great job. Right? It's kinda like getting a cut off it. So that way, it's more of fixed fee calculation, very simple for the business language because we don't have to go through all the messy of how do you do the calculation for this.

And I think the accountability is important, but I think the accountability is also important relative to talking about when we set up the KPIs. And I'm really hung up on this as as we talk more about this because any organization can establish KPIs. Any organization can set up OKRs. But tying back from top level, so top level being management, to a partner who is worried about, you know, hours and profit, to an associate who is worried about really just hours to make sure that they're making their goal and to the paralegal who's just also hours. And so you've got this cascading organizational KPI hopefully, that's leading downward.

So let's go back to the theory a little bit, and I like this... Definitely, I love this question. So I use this analogy sometime about driving from LA to San Francisco.

And you wanted to take a route and then either you can take one on one freeway next to the coast or you can take five freeway. You need to measure stuff in order to make this happen. So you can take five freeways much faster, less time. Maybe you can finish it in, like, six hours. If you go along the coast, it may take ten hours. So the question is that why would you take this one versus the other one?

And then there are so many metrics that you need to track here. So, you know, of course, the gas is gonna be much more, the speed is gonna be low and all this stuff. Right? And it comes back to the goal and the success factor definition.

What are you trying to accomplish? Are you taking your family to a trip, or are you just traveling some boxes and, taking it to a destination? Right? So first, start from the end goal, and then you define your metrics and KPI that you're tracking.

So I know in that analogy I wanted to use this. At the end of the day once you get to the destination, you are asking some outcome questions. If you're taking your family with you, you look at the kids and say, did you guys have a good time? How many stops did you have?

Did you...

How many take picture did you post on Instagram? And things like that. Right? That shows their satisfaction of that road trip.

But if you're traveling with a truck and you're getting there, the speed, time, how much gas you use, an MPG, that's important to you. Right? So I think in the business settings, law firm or legal department, at the end of the day, the KPIs at each of those levels that you mentioned, you need to have some set of metrics that you need to have defined them properly based on your goal so you can measure your performance against them.

And if you don't have them and you have a vague idea of working hard, putting all these hours in place, yes, you can finish all those two thousand hours. But if the outcome that you're accomplishing is based on the old model, at the end of the day, you see that the clients are not happy. Because the goal is now they are asking for not billable hours, for instance. They are asking for outcome.

They're asking for value. So I wanted to connect though...

These two. Definitely KPIs and each of those levels, they need to be defined based on the critical success factors. And critical success factors are coming from objectives. What is the goal of objective for your organizations?

Then you go down to the success factors, and based on those, you define the metrics and KPIs. Now we talked about OKR and KPIs. One of the golden rule is if you have more than five KPIs on your dash board and no matter what level you are, you are a paralegal, partner, you're general counsel, something is wrong because you cannot track more than five at any given time because then you're basically confusing yourself.

You put yourself in a shoe of, let's say, an associate sitting in the law firm and you're tracking your hours and you wanted to keep your utilization high above 85% and such. Right? And now you have a technology tool can free up some of your time and you can produce the same amount of work. And if you look at the old metrics that used to have utilization, you can have some free time.

But now what to do with that free time is another thing. And then how you shift your work from just doing the production into more analytical thinking and just see how you can basically look at understanding the business context of your client, understanding what is it like that the clients really want get out of this work, that's bring the more value. And I think that that creates these different...

Two different mindsets of driving, delivering a cargo versus family. Because, again, if you wanna take the family and just let's go go go go faster faster, right, you're gonna get to destination, but the satisfaction is gonna go down.

So knowing the context... And I think one of the things that's getting more and more valuable and... For law firms become more visible by shifting from billable hours to the value. Some of the other things become more highlighted such as understanding the business context of our clients, understanding the outcome. What is it that really truly matters to them as opposed to just like, you know, having some metrics at the end of the day about our utilization or profitability. And I think the clients are looking for that, maybe not explicitly mentioning it, but they are getting the same vibe from their business partners within the legal department because the transformation of looking at the legal department as a business partner has already started. Not only in The US, outside of US as well.

And they want that to be transferred to the law firm too, but unfortunately, I think more I see the traditional way of relationship between legal department and law firm still has those legacy layers of cost saving and billable hours and negotiating on the rates and things like that, which I'm trying kinda with the book and also with our community to break and break into and going...

Moving toward definition of those values as you mentioned.

The way that we're doing this in a legal organization is through going through these steps of defining those metrics. And they have seven steps. We...

I kinda, like, touched on it. Start from the objective, defining the critical success factor, and so on. Right? Now understanding the context and those elements that you mentioned is one of the important keys because by knowing those contexts like human sitting in the car and understanding the metrics that they are important to them, you can come up with a triangle metrics dependencies.

Let me give you an example. For instance, if a legal department hire a legal ops person and say, you're assigned here to cut the cost by 10% of the outside counsel. By only looking at one metric, cutting cost, and not looking at the quality and other factors, right, easily you can fall into the trap of hurting a relationship by just putting too much pressure on cutting the cost. So by triangling these metrics together, and that's one of the things that Daniel we talked about, the OKR, one of the good way is just always have a OKR next to this KPI's metrics and metrics because that's going to guarantee that this is the objective we're gonna move toward.

The underlaying of those are these KPIs that are gonna make that happen.

Well, it's normally two three times a year abroad in The US. Yeah.

One of the thing that surprised me, the difference between regions are not as much as the difference that you see within the different maturity level within one region. So let me give you an example. For instance, the concept of legal operations, let's say in Brazil compared to US, very similar. Or maybe in Japan and US, very similar.

Let's say in The US, CLOC has 12 competencies, in Japan they have eight competencies, very similar. But what happened is that when you go to...

I've noticed outside of US when you go within the region you see the difference of drastically some companies, some legal department are very advanced whereas the rest of it they are very primitive and they are way behind. And one of the thing I see that globalization, if I may, you wanna use another analogy. Right? We talked about Instagram.

Instagram is all across the globe, and everybody they know understand the same thing. I think legal following the same path, the same challenges that we have as far as billable hours, fixed fee, arrangement is everywhere. What I surprisingly you would see is in some countries historically they were like fixed fees and AFA for decades before even US. And now they are moving toward a little bit of more billable hours because that gives them some flexibility, which that happened like seventy five years ago in The US.

Right? I would say not much difference. I was surprised that in some of the jurisdictions, some of the countries, they are very advanced on doing modernizing their operations. But at the same time, the clean data availability, having some of those underlying technology, there's a big lag in some of the areas, some of the countries, and they're struggling to figure that out.

The number of people attending the legal tech gathering was a huge surprise for me. I just I wanna throw in some numbers here probably. I don't know if you talked about this, but let's say I was just in France a couple of weeks ago. They have a legal tech gathering with 3,000 attendees, just only in France.

In Brazil, I'm I'm sure you know there is gathering with more than 10,000 people attending the legal tech gatherings. Right? So this is a global phenomenon. And what we're doing, just only focusing on the using the metrics KPIs in our forum, which we have now about seven chapters, is to have basically cross pollination some of the things that happening and the working sessions that, for instance, one of the area that we're in Singapore very, very high visible is how to calculate ROI on the AI effectiveness or AI implementations, which is pretty much everybody's trying to figure that out.

But their government is allocated grants for law firms to basically... They transform their operations. So they are very eager to make that happen. That's what I'm kinda... In our global community, we're planning to accomplish, and we're very excited about this because there's so many professionals all across the globe. They are working and working on the same goal.

That's a very good question.

My knowledge is limited on the law firm side. I thought of US much, you know, even though I have been talking to many of the law firms. Actually, as a matter of fact, in the Balkan countries in my trip this time, I spoke with 10 different law firms in different countries and very interesting models that they have there. But one of the thing I can say that technology and availability of the data has been playing a key role in The US in the nineties and all that by coming in the ebilling and tracking the records and then, you know, creating the standardization of the electronic billing. That created movements of moving to billable hours in my opinion because that made it possible. And there are a ton of analytics could be done on that data, and that was the reason I just got into the KPI and metrics.

That is something that in many countries you won't see because that availability of standardization of coding and the technology to track numbers. Now because of that, in my opinion, that a lot of other countries outside of US or... They go with the fixed fee and arrangement because that's how they operate historically.

And now with availability of the technology, they are experimenting the billable hours, they are looking into those models, if that makes sense. So there is a shift that's happening there, and everybody trying to figure out a model that that works. But you can combine that with the new technology of AI now, and you can see, wait a minute. We're moving to this, but at the same time, we're moving back to the fixed fee. It's a little bit complicated, but that's why people are drawn into this conversation that we're having in our forums that they're coming in. I wanna be honest with you that, of course, this is not something surprise.

Our communities of people from the legal department are much opener and getting together and share knowledge and all that as you can imagine compared to the law firms because there is a secrecy always there Sure. On sharing that information.

I think that interest in art has been always there for me.

I happen to be in the technology, but I think that those are not only bringing the peace moments in my in my daily and just like working with numbers and all that, but at the same time I feel that it brings in a different perspective. I always...

Especially in our industry. Right? So I'm a technologist by background, but working with law firms...

Sorry. Working with attorneys and business people, in that intersection I see something interesting. If you look at it, the attorneys work at the core is some sort of art by looking at creating some creativity on a solution that they bring for their clients. And I think that me working in some of the art part and doing some craft next to the technology, I think it just create that perspective and make me easier to communicate to my business partners or my basically attorneys.

Because if you put an engineer maybe next to an attorney to talk to each other, they have to have some common ground and understanding of each other. So I think that suited me because I'm in that intersection of business process, law, and technology, and I really enjoy being there. And somehow this resonates with the stuff that I'm doing outside of business.

There is some art in cooking. Right? You can have a robot creating exact measurements for a recipe and putting the ingredient together and make it a standardized, industrialized. And just at the end of the day when you get that dish versus a grandma not measuring anything, they're just throwing ingredients and they call it a pinch of love.

And the end you taste it. It's completely different. Right? And I don't know the answer to that, but I know that once you add a touch of humanity and love and passion into any type of work, the outcome is different.

And don't ask me how to dissect and explain it because I don't know the answer.

Exactly. And that's why I feel like that no matter how beautiful a painting can be done with a robot, at the end of the day, once a human person does it, when it's not perfect, you can see the difference. And that's how I think the humans are built in any type of work. And that's how we can interpret the relationship between the client and the law firm, right?

No matter how efficient you are, that relationship can help work to become long lasting or relationship lasting for decades. And that's something that I don't know how to measure it. If somebody can come in and put a KPI next to a relationship, that might be a hard one to define. And I know that you talked about the human elements in a system.

Maybe it can be done, but I don't know how that can be done.

Well, thank you again. I really truly enjoyed having our conversations, and I can't wait to discuss more about your roasting coffee conversation with me later.

Yes. Thanks.