Insights on Clio’s 2023 Legal Trends Report with Joshua Lenon

Episode Notes

Transcript

[Music]

Molly Ranns: Hello and welcome to another edition of the State Bar of Michigan’s on Balance Podcast on Legal Talk Network. I’m Molly Ranns.

JoAnn Hathaway: And I’m JoAnn Hathaway. We are very pleased to have Joshua Lenon join us today as our podcast guest. Joshua is Lawyer in Residence at Clio. Clio is a practice risk management application for lawyers and law firms. Joshua is here with us today to talk about Clio’s 2023 Legal Trends Report. And with that, Joshua, could you share some information about yourself with our listeners?

Joshua Lenon: JoAnn, Molly, thanks for having me here. I am Clio’s Lawyer in Residence. I’m an attorney admitted into New York, and for the last 11 years, I’ve been working at Clio helping translate the needs of lawyers to a technology company. And then when it comes to things like our Legal Trends Report, I actually get to do the opposite. I get to translate what technology tells us about the practice of law. So I get to help this company with compliance with understanding of the unique nature of the practice of law, with understanding the various stakeholders that impact a lawyer and a law firm. And from that, we hope to build just one of the better services out there to help lawyers run their law firms better.

Molly Ranns: Thank you so much for being here today with us, Joshua. To get started, can you help us understand what is the Legal Trends Report by Clio?

Joshua Lenon: Certainly. The Legal Trends Report is an annual report. We put it out every autumn that we’ve been doing since 2016. And in this report, we look at a couple of key topics that are data driven. So what do lawyers actually do that we can measure via technology, as opposed to what are lawyers telling us via surveys? That’s somewhat what makes the Legal Trends Report unique, is it’s not asking lawyers to tell us what they’re doing, but instead taking a more behind the curtain look at what really goes into the practice of law.

JoAnn Hathaway: Okay. So, Joshua, can you expound upon what type of data goes into the Legal Trends Report?

Joshua Lenon: Absolutely. So the Legal Trends Report is actually based on aggregated, anonymized data from tens of thousands of contributing law firms. And by contributing, what I mean is they’re all using Clio. Clio is cloud-based software for law firms, and that means that everybody is running the same software at the same time. And so while Clio cannot see the case files, the client information, all of those things that are a part of the practice of law, what we can see in aggregate, is how people are using Clio. And that does tell us, even with that limited view, a lot about the practice of law. One of the features in Clio is you can set a custom hourly rate from, again, that aggregated anonymized data. I can tell you the bell curve of hourly rates from every user in Clio. In fact, the average hourly rate right now for lawyers using Clio in North America is $327 per hour. In Michigan, it’s less. It’s actually $266 per hour.

Now, I can’t tell you what lawyer is charging that rate. I can just tell you it’s the top of the bell curve. And when we combine the various different types of features and data that lawyers are tracking in Clio, this is the first time, I think, in the history of the practice of law that we have this kind of real time insight into what lawyers are actually doing. And it’s generated some bombshells since we’ve been publishing it from 2016. The first big bombshell we published was actually how many billable hours, on average, are lawyers recording a day. And surveys, mostly by big companies like LexisNexis and West Law, who were interviewing big law firms, they were telling us that they were billing six to eight hours a day. And then when we look at the actual usage data of lawyers from law firms of all sizes, the average billed amount per day was actually just a little over two hours back in 2016. And so it really highlights the discrepancy between relying upon this small, almost biased data set that comes from these surveys, from these big companies and big law, and instead shows us that the practice of law is actually much more diverse and unique. And data driven insights can actually tell us how lawyers are performing, as well as how they can improve their performance and their law firm and their revenue.

Molly Ranns: That’s so interesting. Joshua, what are the main takeaways covered by the LTR?

Joshua Lenon: So, for 2023, I think there are three big themes that jump out of me.

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The first of which is that law firms are improving. So, one of the things we published for the first time this year was a look back at various metrics from law firms since 2016, since we first started publishing this report. What we see is, for all the timekeepers that are recording time in Clio, there’s been a slow but steady increase in the number of matters that they’re handling and the number of hours that they’re able to record on a daily basis. And then we see this massive jump, actually, in the number of billed hours that end up on a bill, and then again, revenue collected from that. So, while matters and recorded hours jump about 25% to 30% since 2016, we see that when we adjust for inflation and increases in hourly rates that billed hours and revenue collected jump over 70%. And if we don’t actually do those adjustments, if we just go with, like, the straight dollars, billed hours and revenue per timekeeper actually jumps over 150%. And so that’s telling me that law firms are taking advantage of technology and improving, especially when it comes to utilizing the billing and collection features that we see in Clio.

The second theme that I think emerges in this year’s Legal Trends Report is that while law firms are improving, there’s still a lot of improvement yet to seize. One of the things that we do track, again, is hourly rates. And we don’t just track them for lawyers, but also for non-lawyer legal professionals. So your paralegals, your legal secretaries, anybody who’s not a lawyer, but still being an active timekeeper. And what we’ve seen over the years is that while lawyer rates tend to increase steadily over time, we don’t see the same for non-lawyer legal professionals. And, in fact, when we look at a blended rate of lawyer hourly rates and non-lawyer hourly rates, what we see is that blended law firm rate is actually below the inflation growth or the consumer price index. And so the fact that we’re keeping non-lawyer rates lower, kind of artificially, I think, shows that we’re actually maybe holding our law firms back and making it difficult for them to operate sustainably because they’re just not charging enough for these non-lawyer professionals. Interestingly, lawyer rates tend to track very closely with inflation and the consumer price index. But what we see with non-lawyer rates is it’s easily 5% to 8% lower consistently. And so, law firms that rely very heavily on those types of timekeepers should review how are they utilizing them adequately? Are there better ways that they could be realizing the work that’s being done by these professionals, and how can they continue to grow?

One of the things that we do talk about in the report is actually 11 different billing and collection features that we see increase the key performance indicators that we track in the Legal Trends Report. The last thing that’s unique to this year’s Legal Trends Report is we went out and we started talking to lawyers about artificial intelligence. And not just lawyers, but also clients. Our takeaway from those conversations is that artificial intelligence is being used within law firms right now, but their desired use cases for artificial intelligence and the benefits that they’re hoping to receive differ greatly from what clients are expecting artificial intelligence to do. And so there’s a mismatch there that I think we’re going to have to start navigating in the future. As both legal professionals and regulators of legal professionals.

Molly Ranns: We are now going to take a short break from our conversation with Joshua Lenon to thank our sponsors.

JoAnn Hathaway: Welcome back. We are here with Joshua Lenon talking about the Legal Trends Report by Clio 2023. So Joshua, what are the three law firm key performance indicators tracked by the LTR?

Joshua Lenon: So we have tracked since 2016 three key performance indicators. I often shorthand these as KPIs, so if I do listeners, I apologize. But in the Legal Trends Report, the KPIs are utilization rate, realization rate, and collection rate. They operate kind of from the top down in the order that I’ve listed. So utilization rate is actually the number of billable hours worked divided by the number of work hours in the day. Lawyers tell us that they tend to work on average eight hours a day. There are certain days and weeks when you work more, but it averages out to about eight hours a day. So your utilization rate is the number of billable hours that you worked in that eight hour a day.

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Next is the realization rate, which is the number of billable hours invoiced divided by the number of billable hours that you worked. And this one is a really interesting KPI, because it is 100% within the lawyer’s control. Utilization rate for example, you’re always going to have some interruptions, there’s always going to be a deadline that might force you to work longer. There’s always going to be something that’s dividing your attention. And lawyers don’t have 100% control of utilization rate but realization rate, they do.

I’ve recorded some billable hours and then do I put those hours on the invoice? And what we see is lawyers almost always give themselves a haircut. They reduce that amount that ends up on the invoice. Now, there are lots of reasons that lawyers have told us they do this, some is empathy for the client, some is fear that the client will push back on what they see as a bill that is too high. But we consistently see lawyers take this one thing that they control and actually seed a little bit of that control by giving themselves that haircut. And the last KPI is collection rate, which is the number of hours that you have collected upon divided by the number of billable hours that went out on that invoice. And so, it’s utilization rate at the top and then all of these cuts happen at realization rate and collection rate to where you end up with kind of your KPIs.

And when we look at the national average for KPIs in the United States, the average utilization rate is 37%, the average realization rate is 86%. So, lawyers cut themselves out of $0.14 of every dollar. And the average collection rate is 89%. Now, when we compare this to Michigan, we see that Michigan very slightly when it comes to utilization and realization rate. So, the utilization rate, again, that number of billable hours you actually work in a day is only 32% compared to 37%. Now, why is that the case in Michigan? Our data doesn’t necessary tell us that. I can hypothesize that we do tend to see a slightly higher realization rate in larger law firms. And so, Michigan, which does have a higher percentage of smaller law firms, may have lawyers who are just happy to do it all and divide their time and attention between administrative work and being a lawyer.

A place where Michigan compares favorably against the national average is realization rate. So, the average realization rate in Michigan is 89% compared to the national average of 86%. And so, lawyers in Michigan are actually I think valuing themselves more and getting more on to the bill, letting the client then make the decision, are they going to pay that bill as oppose to lawyers basically assuming that they’re not going to pay and cut themselves down. So, when you look at these KPIs, what we see is on average, lawyers are only recording close to three hours of billable work a day. Now, this is much more than it was in 2016, but it’s still not a full workday. Then when we hit the realization rate and they give themselves that haircut, we’re down to two and a half hours a day. And then once they collect upon it, most lawyers are only getting paid for 2.2 hours a day. That’s what the key performance indicators are telling us.

But while these key performance indicators seem low, I don’t actually think that’s the case. I think it recognizes again the diverse nature of law firms that are out there, the unfortunate push and pull of being both a business owner and a lawyer as well as the complexities that come from providing a professional service that really everybody needs to rely upon. And so, how do you make a professional service both accessible and affordable? Sometimes, you’re going to take that haircut realization rate and sometimes your collection rate is going to be a little lower than you like, but those are the key performance indicators. And we’ve been tracking them year of very seeing improvements overtime but also seeing where improvements can still be seized.

Molly Ranns: Joshua, what is lockup, the new metric published this year in the legal trends report?

Joshua Lenon: Lockup is really interesting. So, lockup is a measurement of your last year’s annual revenue, how much of that is being locked up in either billing processes or collection processes. And it’s something that actually hasn’t ever been tracked and published for law firms in the United States before. And it’s important because it’s really kind of a way to keep your eye on working capital.

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So, do you have enough money in the bank to cover things like rent, salaries, just keep enough printer toner so you can do all the things that you need to do, your professional liability insurance, your bar dues? Running a law firm, while cheaper than some other businesses – and I know there are some lawyers who are listening who are going to be like, “It’s not cheap,” but we don’t have inventory, for example that we have to order and have shipped and then store in warehouses and cycle in and out. Really, lawyers have a few key things that they need, right? They need their professional independent judgment. They might need access to a good law library. They need a professional liability insurance and a really good printer-scanner. And from there, you can build a law firm.

But if you don’t keep an eye on your working capital, what happens is law firms see their earned revenue locked up either in unbilled time or in debtor days where you find that your fees are locked up in somebody else’s bank account. And so, lockup that we published this year is way for us to gain insight on our billing and collection of workflows and how to improve them. There are actually three types of lockups: there’s realization lockup, which looks at is my billing processes getting my earned time onto the bill and out into the client’s hands in an efficient method; then there’s collection lockup, which looks at now that the client has the bill, how long am I waiting, how much of my revenue is locked up waiting for that client’s pay; and then lastly, we can combine those two to see total lockup.

And what’s interesting from this is we do have some non-North American comparisons that we can take a look at. The law society of England and Wales is actually been tracking lockup consistently for UK law firms for a long time and that’s somewhat the inspiration for us adding this to Legal Trends Report. And when we compare North American law firms, we see the realization lockup that revenue that’s locked up in your billing process, the median realization is 38 days. So, that’s 38 days of your earned revenue just sitting unbilled, is what we see. For collection lockup, again, locked up now in somebody else’s bank account, the median for that is 45 days. And the median total lockup for North American law firms is 97 days.

This is the first time that this information’s ever been published for North America. What we see is a total lockup of three and a half months. So, 25% of your annual revenue is not in your bank account once it’s been earned but instead sitting in either on unbilled time or uncollected revenue. So, “Is that good or bad?” is the question we’ve had to ask ourselves and that’s when we turned back to the Law Society of England and Wales. And so, while North American law firms have that total lockup of 97 days, UK law firms have a lockup of 140 days. And that tells us that these firms in the UK unfortunately are still struggling with billing and collections whereas firms in North America, at least the ones using Clio, are doing better that they’re able to get their working capital into their own bank account rather than having it locked up elsewhere.

JoAnn Hathaway: Interesting information. So, Joshua, what Clio features improved billing and collections for law firms? And how was that impact measured?

Joshua Lenon: That’s a great question. So, one of the things that we did this year was we looked at a couple of different ways that lawyers bill and collect. And one of which is Clio’s payment processing feature. We name everything Clio something, so we called this Clio Payments. And what we found is that law firms that are using Clio Payments actually are getting paid twice as fast as the law firms using Clio that either downloaded the bill and mail it or communicate bill in some other way. And that’s important because 41% of law firms are telling us that they struggle, they get clients to pay on time even though 84% of client that we talked to tell us that they do pay their bill on time. Then there’s this mismatch going on between what lawyers say is happening and what clients say is happening. So, we asked law firms, “Hey, do you think you have any problems with billing?” And what we saw is that one in three legal professionals tell us that their firm take too long to get billed out of clients.

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And when I say too long, when we ask clients, have you had to wait for a bill? 15% of them told us that even though they had hired a lawyer, had work done, right? And felt they owed that law firm money, 15% of clients reported they never received a bill. So that led us to really dig into all the different ways that Clio can potentially help a law firm with their billing workflow or their collection workflow. And there are eleven different features that we go over in this year’s legal trends report. I’ll just highlight a couple of them. One is email billing, where you share the bill via email rather than downloading it, printing it, putting it in an envelope, putting postage on that envelope, getting that envelope to a mailbox, and then waiting. Instead, you just use a feature in Clio that emails the bill.

What we found is when firms were using a feature like email billing, it was getting paid twice as fast because the client can just click a button, it goes to where they can pay. But that’s just one feature that we looked at. There’s bulk billing, there’s automated bill reminders, there’s trust requests where you get advanced fees and have them deposited directly into your trust account. There are payment plans. So, 11 different features. And what we found is that in 10 out of these 11 features, there were higher realization rates and higher collection rates. And realization rates was a really big one for email bill sending. We saw that there was an 18-percentage point jump in realization rate. So remember, realization rate is that haircut that law firms give themselves, right? And so, firms that were not using email bill sending had an average correlated realization rate of 73%. Michigan’s average is 89% right now.

But firms that were using it using email bill sending jumped that 18 percentage points and had a correlated average realization rate of 91% just by sending bills from email. They just knew that their clients were much more likely to click the link and pay the bill. And that gave them confidence to include their billable hours. Some other notable features that really jumped out in this section were outstanding balance, which is a feature where you can look at any outstanding invoices that a client has, wrap them up in a new message with a total, and have the client pay again, and click to pay that. And again, that was another 18-percentage point jump and bulk billing, the ability to generate your bills and send them automatically again, was a big impact in realization rate with a 16-percentage point jump.

What these tell me is that things like automating your collections, doing fee forward billing like advanced fee deposits into trust, and just recognizing the certainty of the value of your work are leading these firms that use technology to a higher realization rate. But then, when we looked at collection rate, so how much of this bill are clients paying? Even though the bills included, on average, more of a lawyer’s time, we still saw that clients were paying a higher percentage of those bills. So lawyers included more hours on the bill, and clients were much more likely to pay the full bill. And so, again, the features that really jumped out here were email sharing, which gave a correlated average of 90% collection rate. Outstanding balances, again jumped 87%. One that I found really interesting was stored payment methods, where clients can store their credit card or their e checking information securely with a law firm. And so then if you have the right retainer, engagement letter, or contract with the client, you can send them the bill, and then go ahead and just bill their stored payment method for payment. And that one gave correlated average for law firms of 89%.

There was only one feature that we looked at that did not increase a law firm’s collection rate, and that was payment plans. It actually decreased it. And we found that really kind of mind blowing, because when we look at the collected revenue under payment plans, so when law firms issue an invoice and then let clients have a fixed payment over time to pay off that invoice, it’s hundreds of millions of dollars, with another hundreds of millions scheduled out into the future. So it’s got really heavy adoption and really successful at getting lawyers paid.

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And so why is it lowering the law firm’s collection rate? And what we discovered is that how we calculate collection rate is we look at kind of a rolling 90-day average. But for payment plans, oftentimes the payment plan goes longer than 90 days. And so the invoice is technically marked unpaid. It might be like 50% paid, but it’s still unpaid. And so that is lowering a law firm’s collection rate. But is it actually hurting the law firm, was our next question. And what we found is that law firms that were using payment plans had a correlated 49% increase in their average monthly collected amounts per lawyer. So it was basically like a 50% pay raise by using payment plans. And if you’re a solo law firm, the jump is even more striking. It correlated out to a 71% increase over solo law firms that weren’t using payment plans. And so it’s a really powerful way to actually jumpstart your clients paying.

And this is the other stat that I’m really proud that we included in this year’s legal trends report. That is, what is the average payment plan installment like? What are clients really able to afford and pay on a consistent basis? And it turns out for the last four years, it’s been right around $300. And so I think we have discovered kind of a win-win access to legal services and potentially access to justice by looking at this data. Law firms that are using payment plans have a higher average monthly collected revenue, and clients are able to pay what they can afford, which is about $300, but still get access to legal professionals and expert advice and advocates and counselors who work on their behalf. And it actually then extends the amount of potential clients that can work with that law firm. Because if you can’t find somebody, you can do an advanced fee deposit of, say, $5,000, but can do 1000, and then do a $300 a month payment plan. You can now sign that client when you couldn’t before.

So, again, when we look at this data driven insight into the practice of law, we’re not just seeing how to make law firms better, but potentially how to make legal services better as well. And I’m really excited about the research we’ve done this year around that.

Female: Joshua, you spoke briefly about artificial intelligence earlier. How are lawyers using AI tools in the practice of law, and how does that differ from clients’ expectations?

Joshua Lenon: That is a great question. You can’t swing a dead cat right now without reading about some new artificial intelligence tool and potentially somebody using it incorrectly. And so we at Clio have started to take a look at artificial intelligence, how it might be utilized in the practice of law and how we might contribute to that. In fact, we have a project right now that we’re calling Clio Duo, which is a chat-based artificial intelligence tool that, and again, this isn’t live. This doesn’t have access to anybody’s data, but could look at your law firm’s data and answer questions. So it could be like, how much have we built this client this year already? Clio Duo could come back and just give you that number quickly, or look through the documents and what was the adjusted gross income for the opposing party in the year 1999? And again, it could look through the documents that you have on hand and see if that’s available or if it doesn’t tell you that that information isn’t available. And that might then be an interrogatory that you send out.

There’s really big interest in artificial intelligence. And we started asking lawyers like, do you want to use that? Do you think you’ll be using it soon? Do you think it’ll be difficult? And the last one really stood out to me, because only 8% of lawyers told us that they think AI tools are going to be too difficult to learn. And I’ve been working with lawyers on how to better utilize software for the last decade, and nobody has ever told me that software is easier to learn before. So the fact that they’re telling us that AI tools seem to be easy to learn is really exciting. So we asked lawyers, how many of you are actually planning to use AI in the near term? And that was over 50% said that they do. And then we asked, okay, how many of you are actually using it right now? And it was an incredibly small amount. Only 19% of legal professionals say they’re using artificial intelligence tools right now in their practice. And how are they using it?

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They’re using them mostly for legal research. And so, listeners might be familiar with artificial intelligence tools by case text, which was recently acquired by Thomson Reuters, or certain tools that are being built by fastcase and vLex, who just recently merged. And they have their own Vincent Tool that’ll take a look at documents and provide the artificially intelligence generated search results around things like the validity of statements made about case law. And the other area where they’re using artificial intelligence tools is in drafting documents. I do obviously have to bring up cautionary tales here. We’ve all heard about the law firm in New York that asked ChatGPT to write a brief for them. The artificial intelligence tool hallucinated. Case citations for cases that did not exist. The law firm ended up submitting that brief unedited to the court, and it actually became a front-page news on the New York Times and all of these other different leading publications around the world.

So they’re using these to draft these documents. But I do think lawyers, while they can see some powerful advantages in using AI drafting tools, they still can’t shirk their professional judgment and oversight responsibilities that are part of our ethical conduct. So lawyers are using these tools for legal research and drafting documents, but that’s not actually what clients want lawyers to use AI for. So the three biggest expectations for AI from clients is that it will help lawyers track expenses, track billable hours, and get better at calendaring. And US PMAs may know, especially in the last one, calendaring can be a bit of a malpractice risk for law firms. But when we ask clients what do they mean by tracking expenses and tracking billable hours? What they want is they want lawyers to be so efficient and use AI that it actually decreases expenses and billable hours, which is, I think, somewhat the opposite of what we see law firm’s expectation of AI. They hope AI will make them more efficient, yes, but also help them find more billable hours, reduce the amount of administrative work that they’re having to do, and instead allow them to be lawyers longer, increase their utilization rates, and get more billed hours out of their day. So I think we’re going to see a lot of push and pull about artificial intelligence tools, not about whether a law firm should be using them.

I honestly think that horse is out of the barn. Instead, what we’re going to see is what are going to be the benefits from artificial intelligence tools and their use in the practice of law. And who benefits the most? Will it be clients or will it be law firms? I don’t think it’s mutually exclusive. But I do think we are going to navigate a period of controversy over who’s really seizing the benefits of these tools first. That’s what the Legal Trends Report tells us about artificial intelligence.

JoAnn Hathaway: So, Joshua, this has been so intriguing and so information packed, if you will. With that, though, we have come to the end of our show, and Molly and I would like to thank you again for a wonderful.

Joshua Lenon: Oh, well, thank you for letting me be here. I know I threw a lot of data out there, so I hope it wasn’t too much.

Molly Ranns: Not at all. If our listeners would like to follow up with you, Joshua, what is the best way to reach you?

Joshua Lenon: Absolutely. So the first thing I would recommend is that you go ahead and grab a copy of the Legal Trends Report. It’s available for free at clio.com/ltr. That’s Clio, clio.com. And then once you’ve read it, if you have questions, you can reach out to me and my email, which is [email protected] or connect with me on LinkedIn. I’m always happy to continue the conversation. I actually need more lawyers input into how they’re practicing and how technology can help better support them, because that’s my job, is to make technology better for lawyers. So please connect with me. I very much want to hear from you.

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Molly Ranns: Thank you again. This has been another edition of the State Bar of Michigan’s on Balance Podcast.

JoAnn Hathaway: I’m JoAnn Hathaway.

Molly Ranns: And I’m Molly Ranns. Until next time. Thank you for listening.

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Male: Thank you for listening to the State Bar of Michigan on Balance Podcast, brought to you by the State Bar of Michigan and produced by the broadcast professionals at Legal Talk Network. If you’d like more information about today’s show, please visit legaltalknetwork.com. Subscribe via Apple Podcasts and RSS. Find the State Bar of Michigan and Legal talk Network on Twitter, Facebook and LinkedIn, or download Legal Talk Network’s free app in Google Play and iTunes. The views expressed by the participants of this program are their own and do not represent the views of, nor are they endorsed by Legal Talk Network or the State Bar of Michigan or their respective officers, directors, employees, agents, representatives, shareholders, and subsidiaries. None of the content should be considered legal advice. As always, consult a lawyer.

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