In my previous post, I described some factors that typically influence clients' pricing choices, and I shared a useful fee assessment guide. In the concluding installment of this three-part series, I focus on the emerging challenge of pricing automated legal services.
Automated Legal Services: Pricing Options
The proliferation of new legal technologies on the market has created new opportunities to automate and productize legal services. With these new opportunities come new challenges, and an obvious one is how best to value and price new legal services that blend both automation and human work product. It's a process that takes time, experience and trust between in-house and external legal teams. The goal is to find win-win pricing structures that incentivize both sides to keep innovating and finding efficiencies, while allowing both sides to reap the benefits of the improvements.
As with any new process, trial and error are to be expected as we seek out the right approaches – learning from errors as well as successes. Here are some thoughts on how in-house and outside legal teams can start to tackle these pricing questions together.
Deconstructing an automated or productized legal service into its component parts
Although it's tempting to view automation as a magic wand, in fact it takes a lot of human effort to implement and integrate technology and automation so that it can be used seamlessly to deliver a legal service to a client. This is true whether it is a commercial off-the-shelf technology or one that is bespoke and custom-built. There are essentially three potential components to any legal service where elements of the legal work have been automated, and each component can be valued differently:
- Buying or building the underlying technology
- Applying the underlying technology to automate a specific legal work product or process using a combination of coding expertise and legal knowledge
- Customizing and integrating the newly-automated product or process into the overall engagement, providing additional human advice, judgment and work product tailored to the client's needs and the circumstances of the engagement
Component 1: Pricing the underlying technology
This is probably the hardest element for in-house and external legal teams who have grown up with hourly rates to tackle in the abstract. However, a number of market practices exist, especially in other professional services fields.
For "off the shelf" legal technologies that a firm licenses from third parties, the cost to the firm is quantifiable. For some technologies used across all clients and lawyers, such as document proofing software, clients expect that a firm will make the technology available as a cost of doing business that allows the firm's professionals to deliver maximum value for their hourly rates. For other technologies specific to individual clients or matters, a "cost recovery" charge is often used, as is the case with e-discovery fees and data storage charges, for example.
Anecdotally, it appears that accounting and actuarial firms often use a "technology surcharge" reflecting a percentage of the total account, or a charge per unit such as a page or document. All of these are possible approaches that internal and external legal counsel can explore to determine what makes sense in the circumstances of their matter.
For proprietary technologies that a firm has built, a range of different approaches are used in the market, including license or subscription fees, a flat fee charge added to each matter where the technology is used, or subsuming the technology element in an overall fee arrangement for the engagement as a whole. As always, dialogue between the client and external lawyer is crucial to determine whether the client wants to use specific technology to automate and support a portion of the legal work – and if so, how much value can appropriately be assigned to the technology element.
Component 2: Pricing the automation process
While some technologies are designed to be used "out-of-the-box" such as closing management tools or A.I. due diligence tools, others require significant time investment and specialized knowledge from legal and IT experts to tailor the underlying technology to the specific legal application. The extent of the time investment and specialized knowledge becomes obvious in practice when a firm acquires an off-the-shelf technology product at the stroke of a pen, but then spends many hours of expert time to deploy the technology to automate an actual legal service for a real client. Some examples of situations where a firm automates a client service are generic productized services made available to a wide range of clients, such as a subscription-based expert tool to provide advice on a specific legal question. At the other end of the spectrum are bespoke automation engagements for specific clients, such as automating a suite of documents tailored specifically to that client.
Possible approaches to valuing the labour-intensive automation component of the process include:
- Using hourly rates for the technology specialists and lawyers who work on the automation;
- Covering the automation process as part of a flat-fee charge added to each matter where the automated product or service is used; or
- Subsuming the automation element in the overall fee arrangement for the engagement as a whole.
The last alternative is sometimes viewed as a disincentive to innovation, but can be effective where the firm has been engaged to do a high volume of similar repeat engagements.
Component 3: Pricing the human labour required to customize and integrate the technology and the automated product and deliver the service
In many engagements, even if the technology or automated legal work product can be readily embedded in the overall engagement, there is still a large element of traditional "trusted advisor" lawyer time required to deliver the end-to-end service to the client. For example, using an A.I. due diligence tool can make the diligence process more efficient but usually does not replace the need for legal experts to review, analyse and assess the output. Similarly, where a firm has automated documents used by a client for frequently repeated transactions, it is still necessary for legal experts to review and tailor the legal documents automatically generated, project-manage the non-automated parts of the process, liaise as needed with the client for necessary communications, instructions and deliverables, provide legal opinions, and oversee quality control to ensure service excellence.
This element of the overall service is the easiest to value because it is already familiar to us, so common methods such as hourly rates, budget estimates, or other familiar AFAs can be used.
Click the image below for an infographic guide illustrating some common scenarios and pricing options where technology products are embedded in legal work.
Assessing the win-win pricing proposition
Automated legal work is still relatively new and, in our experience, not yet widely used, but the "use cases" are growing. Pricing new or unfamiliar engagements is always hard, but as with almost everything in legal life, communication is the secret sauce. As noted in Post 2, the "value conversation" is essential to any productive discussion about pricing, and this conversation boils down to a discussion of questions such as:
- What does a successful result to this engagement look like to the client?;
- What value does the client ascribe to that result?; and
- Can the law firm deliver that result cost-effectively in a manner aligned with the client's view of value?
In the context of automated legal services, there is an additional element to the value conversation:
- Are technology and automation a desirable part of the process and if so, what is the value of those elements?
Some factors that clients and external counsel would typically consider in assessing the value of automated services compared to traditional services are: speed, quality of work product, ease of use for the client team, availability of other non-automated options, and cost. By weaving into this value conversation an explicit assessment of the value of automation, in-house and outside counsel can create a dialogue that will hopefully lead us over time to practical approaches that will enhance the quality of legal services for us all.
Please share your experiences – whether as a user or designer of automated legal services – and any insights you can offer on value and pricing.
Further Reading and Resources
Mohanbir Sawhney, "Putting Products into Services", Harvard Business Review, (September 2016)
Eisha Armstrong, Turning Customized Services into Scalable Products: Where to Start (blog post)
Eisha Armstrong, The 3 Cs of Cannibalization: A Product Strategy Primer (blog post)
2019 Law Firms in Transition (Altman Weil survey)
Investment Trends in Legal Technology (HSBC 2018)
Rob Mattern, Cost Recovery Strategies that Work for the New Legal Market (lawtechnologytoday.org – 20 January 2015)
Simon Chester, "Technology and the Hourly Billing Challenge", LawPro Magazine (Summer 2008)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.