It’s no secret that law firms are under increasing pressure to reconsider legal service delivery, with an emphasis on price transparency and efficiency. Increasing competition from the Big 4 consulting firms, an economic downturn that has already seen many firms forced to lay off considerable amounts of lawyers, and a recent CJEU decision that stops just short of declaring war on the billable hour model have confirmed as much.
Where most firms in previous years have adopted a strategy of “innovation by press release”, many firms are now realizing the competitive advantage that increased efficiency can bring them. Take Wachtell, Lipton, Rosen & Katz, the most profitable law firm in the world when ranked by profits per equity partner, for example. In a leaked 2012 client letter, the firm reveals its fee structure for M&A work – an upfront fixed fee, followed by a percentage it takes home from a succesful transaction.
Nowhere is this evolution more apparent than in the sphere of legal document production(including, but certainly not limited to, contract drafting).
In our conversations with law firms, we find that many struggle to properly identify the best opportunities for document automation to ensure an optimal ROI. That’s why we’ve set out 9 crucial steps to go through when analysing a legal team’s opportunities for document automation, based on years of experience as lawyers ourselves and as vendors.
Step 1: Create a list of your team’s most frequently drafted documents
It’s important to consider concrete examples here. The following is a list of documents we regularly see our clients select for automation.
A legal domain filled with opportunities for document automation due to the highly transactional nature of the work.
Corporate housekeeping documents are by far the more voluminous type of documents that a law firm can produce, and that they fit in well with a document automation strategy. Do note that it gets trickier as soon as integrations with accounting tools are required.
Popular documents include:
• Management Agreement
• Share Purchase/Transfer Agreement
• Corporate housekeeping documents
Document production in the IP/IT department tends to be a mix between transactional work, litigation work, and advisory work.
In our experience, document automation in this domain can assist with getting to a first draft, but that first draft will usually be heavily negotiated, meaning the return on investment is limited in function of the negotiation process. If you also make use of a clause library, that process can be sped up beyond the production of a first draft.
Popular documents include:
• Licensing agreement
• Outsourcing agreement
• Privacy notice/policy
Again an excellent candidate for automation due to the transactional nature of the finance practice.
Aided by market associations like the LMA, agreements are highly standardised in this field. This, combined with the traditional “documentation heavy” nature of finance deals makes a law firm’s finance practice a no-brainer for document automation.
Popular documents include:
• Loan agreements
• Security agreements
• Legal opinions
Like corporate law, another top tier legal domain for automation. The average employee lifecycle at a large company sees around 50 types of documents, ranging from employment agreements to termination letters.
These kinds of documents sit at the perfect intersection of volume and flexibility to merit automation, but a lot of this work is kept in-house by companies’ HR departments.
Nevertheless, there is a real need for automation in these teams, and law firms are starting to wise up to the value they can create for their clients this way.
Popular examples include:
• Employment agreement
• Settlement Agreement
• Termination letters
Real estate law
Another great fit. Due to the nature of the sector, there is a limited set of documents that lawyers are drafting in large volumes, making it very suitable for automation. The real estate practice is also a perfect candidate for providing automated agreements (e.g. lease agreement) as a service to a client such as an asset manager or REIT.
Popular examples include:
• Lease agreement
• Deeds of sale / Asset purchase agreements
• Lease reports
• Rent deposit deeds
General commercial documents
General administrative documents like pitches and proposals are typically seen as a necessary evil by lawyers. They don’t count towards your billable target, but do them well and they could act as a gateway to them.
Therein a lot of potential in automating these documents for two very simple reasons: (1) they contain highly repeatable information and (2) lawyers hate producing them, making change management efforts that much easier.
Popular examples include:
• Project proposals
• Pitch documents
• Engagement letters
Step 2: Focus on documents with sufficient volume (e.g.: drafted more than 20-30 times in a year)
This is a spectrum. Some documents are more flexible and therefore take more time to produce first drafts for. Even if they are only drafted a few times a year, automation may yet be useful. Other documents may be drafted more frequently but require less time to draft. In that case, automation will only be useful if they are drafted frequently.
Document automation is concerned first of all with producing a first draft. Documents that are too case-specific or subject to negotiation should only be considered to the extent that the automation can set up the correct “skeleton” of the agreement, augmented with a clause library that users can use to plug in the correct content.
Step 3: Identify the cost for the client
Investing in document automation is particularly recommended in two situations: (1) the firm charges a client a fixed fee for a certain type of document and wants to be as efficient as possible to increase its margins, and (2) the firm offers automated documents for free to show value to existing clients or draw in new clients.
In scenario1 (fixed) fee), it’s important to establish the average price the firm charges for a certain type of document so there is a baseline for the fixed fee that can be charged once the document is automated. This baseline can change as you gain more information on efficiency improvements via automation and market standard price.
Consider the following formula to decide if a document is more or less interesting to automate: (Price of doc) x (volume of doc per year)
More expensive documents (i.e. documents that take longer to draft) can yield a bigger return on investment due to the greater potential for efficiency increase, but less expensive documents – in sufficiently high volume – should not be disregarded here. These documents even present the opportunity to(re)claim commoditised work that would ordinarily not end up on a law firm's desk anymore due to price concerns (e.g.: NDAs).
Naturally, the formula above does not hold up if automation is provided for free as set out in scenario 2 (e.g. in a client portal). The focus should then be on the type of documents that provide real value to clients, without “giving away the crown jewels”.
Many firms are surprised to find out how useful clients consider those documents. Law firms are perhaps asked to create a template for them, but are only infrequently asked to draft them for a concrete file, because clients think they can do this themselves. Law firms that provide automated versions of those documents are often surprised to find out how much clients have been flying under the radar without them knowing.
Step 4: Assess the automation-to-manual-drafting ratio
This ratio refers to the time it takes to automate document vs the time it takes to manually draft one.
Naturally, you want your automation efforts to be commercially viable. Spending lots of time automating a document to ultimately gain limited time savings compared to manual drafting can be disappointing and may sabotage further document automation initiatives.
A general rule of thumb we have found to work in practice is the “x20 rule”– the time it takes to automate a document should be no more than 20 times the time it takes to draft it manually, in order to recoup your investment cost in less than a year.
This rule covers both ends of the document automation spectrum:
• High in volume / low in complexity – e.g.: an NDA that takes 30 minutes to draft from a template should take no more than 10 hours to automate
• Low in volume / high in complexity – e.g.: a share purchase agreement that takes 8 hours to draft from a template should take no more than 160 hours to automate.
Of course, this is a just a general rule of thumb. Other factors can play a part in this assessment. A document that doesn’t satisfy the x20 requirement may still be interesting to automate if the automation fulfils some other benefit than time-saving, like the creation of a single source of truth where important documents can be accessed in their most up to date version. The quality seal that inclusion in an automation platform signifies, outweighs the speed at which that document is drafted.
Step 5: Distinguish between billable and non-billable documents
Non-billable documents like engagement letters are a popular first step for law firms starting out with document automation. This is because the billable hour is still their default mindset.
Eliminating non-billable hours so more time can be spent on billable work is not necessarily wrong. If, even after the introduction of a document automation tool, the firm continues to price its services under the billable hour, then this can already be useful.
That said, the real revenue can be captured from billable documents being automated.
Consider a project proposal/pitch document that takes 3 hours to draft manually and 15minutes to draft after automation. The document is non-billable and is drafted by an associate whose hourly rate is 200 EUR/hour. After automation, the firm captures 550 EUR (or 2.75 hours) worth of value.
Now consider a license agreement. The document takes the same amount of time to draft as the pitch document, both before and after automation, but the work is billable. Under the traditional billable hour system, the work takes 3 hours and at a rate of 200 EUR/hour, the document is charged at 600 EUR for the client. After automation, that same price can still be charged (why should a firm be punished for being more efficient?), but it only takes the associate 15 minutest draft. The firm captures double the value: (1) the time the associate saves which can be spent on other projects (550 EUR or 2.75 hours) and (2) the margin which the firm still has on the price of the document (550 EUR or 2.75 hours).
Step 6: Assess which documents lawyers hate drafting
Consider this a more human element. Many lawyers feel threatened if you start automating work that falls squarely in their comfort zone. Especially if they rely on this work to reach their billable hours target.
Change management is hard enough as it is. If you want people on your side, you will have to make sure they love what it is doing for them.
Pitches and engagement letters can be a good place to get started if you are worried about this. Very few lawyers miss this type of work when it is automated.
Consider surveying lawyers to assess what document production work they perceive as boring or rote. This doesn’t have to be limited to just a single type of document. One commonly hated task in multi-lingual jurisdictions is setting up two language versions of a document in separate columns, something document automation can also help with.
Step 7: Identify the average turnaround time
Documents that take a long time to produce provide an opportunity for a competitive advantage. Most clients lack the legal insight to assess whether a document you drafted for them is “good” and will just assume that it is. There are no points to be scored there.
What they will remember is how quickly you got it to them.
Step 8: Assign the right person/assemble the right team
One of the biggest mistakes we see law firms make is to randomly assign (an) associate(s) on a document automation project, with no further support or with no amendment to their billable target.
Let’s face it. The number one concern for virtually every associate on the planet is to reach their target. In many law firms, it’s not just the most important KPI; it’s the only one. Any project that doesn’t contribute to reaching that goal (or threatens to make it unreachable) is going to the back of the priority queue. Document automation is no different.
Furthermore, it is tempting to staff junior associates on a document automation project since they tend to have more time and are considered more digitally literate. While this is not wrong, it is important to include the input of people who have experience drafting the chosen documents on a daily basis since they tend to have a good idea where a lot of time can be saved or frustration removed. They know the ins and outs of a document and can point to the relevant areas of flexibility, know which information to present by default, and are able to provide fall-backs and alternatives to standard positions.
Step 9: Don’t treat individual documents as silos
Document automation projects go hand in hand with template building. In an ideal world, law firms already have advanced templates that indicate different legal positions, fall-back clauses, alternatives, etc. These types of templates are automation-ready from the get-go. And also extremely rare. In our experience, only 12% of law firms can claim to have done their homework.
Knowing that there is still quite a bit of said homework to do for most firms, we typically advise – at least within the same department –to treat the building of these templates as a holistic exercise. In many cases, different types of documents within the same domain will have clauses that can be reused between documents.
Boilerplate clauses are obvious candidates for this “clause synchronization” exercise, but additional examples are myriad:
• Corporate law – indemnification, change of control provisions
• Employment law – duration, termination, indexation,…
• Real Estate law – duration, renewal, subletting, default,…
If you intend to use a clause-based automation tool for your project, like Clause9, this exercise not only makes it easier to get everything up and running, but also to perform continuous maintenance once documents have been automated.
Need some help?
Unable to provide an answer to all the questions above?
Don't worry – you’re not alone. Few firms that start looking at document automation have all the answers.
The ClauseBase team is happy to assist in unlocking the hidden value in your current contract drafting process. Get in touch now if you would like further advice related to your specific circumstances!