AI-insight into Law Firm Leverage and Profitability

Leverage

In large law firms, a particularly important KPI (Key Performance Indicator) is “leverage.”  Leverage refers to the ratio of hours billed by non-partners (associates, paralegals) to total hours billed and is central to understanding firm profitability. Profit is calculated as “profit per partner” (PPP) and thus, highly leveraged cases, where most hours are billed by non-partners, are more profitable than cases predominantly billed by partners. 

Today, firms can calculate leverage on a firm-wide basis, but recent advances in AI allow firms to calculate leverage broken down by practice area and phase of litigation. By utilizing their own institutional litigation and billing history, firms can better understand where they spend time and which activities are most leveraged. More accurate billing forecasts provide confidence to firms considering phased-fee billing arrangements.

Leverage Dynamics Over a Litigation Lifecycle

Law firms strive to cultivate leveraged practice areas. Complex litigation and class-action defense, for example, often involve substantial non-partner billable hours. 

However, litigation is dynamic, and the profitability of a case changes over time:

• Early in a litigation’s pleading stages, there is often a modest split between partners and associates as the case begins. Leverage is limited.
  
  
• As the case progresses to discovery, associates, and support are added. Leverage increases. Discovery is often the most profitable part of litigation due to the volume of work performed by non-partners. The number and type of depositions (expert, 30(b)(1), 30(b)(6)) also change the cost dynamics of a matter.
  
  
• After discovery, there is dispositive motion practice, including summary judgment. Motion practice can be expensive, but depending on the firm may include more partner involvement. Despite being legally complex, dispositive motions are not necessarily highly leveraged. 
  
  
• High-stakes trials are exciting, bring credibility to the firm, and often come with high billings by both partners and associates. However, trials are typically short and may not contribute substantially to a firm’s profitability. The duration of the trial imposes limits on how many hours non-partners can bill—and the leverage that can be attained.

Understanding the dynamics of litigation is helpful to understanding the profitability of litigation at a firm.

The Role of Public Data and AI in Litigation Pricing 

Today, law firms do not calculate leverage over a case lifecycle due to the effort required to gather and analyze the information. However, advancements in artificial intelligence (AI) and the availability of extensive legal data are transforming this process. AI can quickly analyze vast amounts of historical billing and litigation data, identify business opportunities, and uncover previously hidden trends.

AI can access public dockets from past firm litigation, identify phases such as discovery, and correlate the phases with hours billed. This enables firms to understand exactly how much time they spend on various stages of litigation across multiple cases.

AI can also categorize matters by litigation claim, jurisdiction, and other metrics. By connecting specific phases, like discovery or pre-trial briefing, to billed hours and breaking them down by litigation claim, firms can pinpoint the most profitable practice areas and phases of work.

This represents a significant breakthrough, as information about case activity is rarely correlated to billing information. AI-driven pricing analysis will allow firms to forecast profitability more accurately and develop models for alternative and phased fee arrangements.