Many lawyers fear that the use of technology could reduce profitability, or worse yet, be the death knell for their practice. However, data from a 2020 survey of 418 Australian law firms of all sizes regarding document automation and profitability suggests otherwise. Rather, the data suggests that lawyers can achieve not only profits – but greater profits, when they use document automation software. Specifically, lawyers can drive such profits particularly when clients perceive their needed documents to be complex – even when billing is flat fee or alternative fee agreements instead of hourly.
Traditional assumptions about billing and automation
For law firms in general, and small firms and solos in particular, both document automation and flat fees have been assumed to be a tandem threat to profitability. The assumption was that automation and flat fee billing would reduce the yield, or spread, between the time the attorney put into a task and the amount the client could be reasonably billed.
The facts based on available data, part 1
In fact, however, data from the Australian survey suggests that document automation, when combined with fixed fees, can actually drive increased profits. How? It turns on whether your clients perceive their legal needs to be complicated or not. In a nutshell, if clients perceive their legal documents to be complex and time-consuming, the lawyer can charge a premium flat fee – and then use document automation software to generate the necessary documents using far less attorney time.
This allows the attorney to capture the difference between the premium fixed fee and the actual time put in by the attorney. In many if not all cases, this can drive increased profit compared to that achievable through non-automated attorney work and the billable hour.
This raises the question: What types of legal documents do clients consider to be complicated? As the following chart shows, on one end of the spectrum, complex transactional documents such as asset sale agreements are considered by many clients to be among their most complex needs. On the other end of the spectrum, basic power of attorney documents are considered least complex. In the middle, perceptions of complexity increase from health directives and simple wills to transactional and financial agreements:
Source: Artificial Lawyer
As such, using the Australian market as an example, as Artificial Lawyer’s study did, the average hourly rate that attorneys can charge their clients for these types of documents ranges from less than Aus$200 (for health directives and POAs) to Aus$400 (for business and financial agreements) to over Aus$500 (for asset sales agreements). The question is, can small firms and solos capture similar effective returns if they use document automation and agree to fixed fees? As we discuss below, the answer is yes.
The facts based on available data, part 2
First, to recap: The reason why document automation can drive and improve existing profit margins for small firms is because client perceptions of complexity allows lawyers to charge a premium fixed fee, and document automation then allows lawyers to significantly reduce the amount of time they spend generating the documents. This creates a profit curve based on the return per unit of time spent by the attorney.
This matters to small firms and solos because of the second set of facts revealed by the survey, which suggest that flat fee structures are continuing to replace the billable hour. This is shown in the following chart. More and more firms, including smaller firms, now generate over 50% of their revenues through flat fee agreements instead of hourly agreements. How to capitalize on this evolving reality? For the reasons above, small firms and solos should integrate document automation software into their practices.
Source: Artificial Lawyer
Automation can also drive profitability without complexity
It’s clear from the data that, for small firms and solos whose practices areas focus on documents that clients perceive to be complex, those lawyers can drive increased profits through the use of document automation and fixed fees.
But what about those firms and solos whose practice areas involve relatively less complex documents? Document automation software can still drive increased profits for such documents and practices, too. Because document automation significantly reduces an attorney’s unit of time involvement as to each document, the attorney’s time becomes available to seek and retain more business, and thus increase the overall volume of flat fee work.
In fact, document automation frees the attorney in two ways that can drive profitability. Not only is attorney time now available to focus on volume-generating business development, but attorney time is also now available to develop and expand the firm’s practice into related areas that involve documents that clients perceive to be more complex. Examples of such practice areas include employment law, representing small businesses, and family law, all of which require documents perceived by clients to be relatively more complex, as demonstrated in the first chart.
While many lawyers assume that document automation and flat fees will reduce profitability, the available data suggests that, in fact, automation in combination with fixed fees will drive increased profitability, particularly when clients perceive their document needs to be complex and complicated.