If buyers lack data on price and quality, sellers will charge more and be reluctant to innovate. Market data solves this problem.
When my co-founder Ketan and I were at Harvard Law School together in the late 1990s, we knew something was fundamentally broken in the legal profession. We saw the massive dollars being thrown at law school graduates, the perverse incentives in how law firms deliver their work, and the absence of any true market forces in how the industry functioned. Any high school economics student could make the obvious conclusion—there is no capitalism in the legal services market.
And strangely, virtually no one talked about this enormous elephant in the room. Everyone accepted this bizarre paradigm because “that’s the way it’s always been.” Despite the huge role the law plays in our society, culture, and government, the emperor has no clothes—yet, no one was willing to say it.
After graduation, Ketan and I pursued different paths. Ketan joined the DOJ as an antitrust attorney and then joined a top NYC firm for 15 years, while I worked as an elected official in state government, philanthropy advisor, and civil rights advocate.
In 2015, when we reconnected to start Bodhala, both our work experience and our passion for reforming the law drove us to a bold but simple mission: To create a transparent, functional market for legal services. We wanted to make the industry that helps set the rules for capitalism to be subject to those same rules.
How the legal market doesn’t work
For decades, the sell-side of the legal industry has been allowed to flourish unabated, billing hefty rates to the buy-side without much explanation. The sell-side holds all the cards, controlling the market in a way that obscures billing data, price discovery, competition, accountability, and—most importantly—innovation.
As a result, the buy-side has been forced to accept firms’ prices without consideration of their own needs and wants. These practices have manifested in annual law firm street rates increasing much faster than inflation, nearly at the same rate as healthcare premiums. See Post 181 (discussing “cost disease” in law, healthcare, and higher ed); Post 042 (same). In 2019, AmLaw 200 annual per partner profits rose over 6%, while US inflation rose less than 2%. The buy-side is disinclined to make improvements to their services since there is no real market need for competitive differentiation.
We knew that fixing this one-sided, dysfunctional arrangement and enabling checks and balances to the legal services market would require access to data; data that could be organized and analyzed in a way to give the buy-side better insight into their outside counsel spend and their value across practice areas.
We believe data is a critical source of truth. For all intents and purposes, legal billing data has been trapped in a black box. Despite some advancement in structured invoice payment systems, commonly known as eBilling. At Bodhala, we are building the solution to collect and unleash this data in the form of invoice data combined with publicly available information and our own carefully curated third-party data.
Creating a data taxonomy, getting clean data
As we approached this challenge, it became eminently clear that access to the data was only part of the solution. In looking at early customers’ data, an effective analysis has severely hobbled by the lack of consistency in the ways that legal teams were organizing their data. Specifically, there was no standard “taxonomy.”
This presented a big problem. With no organizational standard from firm to firm or company to company—even from eBiller to eBiller—it made it basically impossible to achieve meaningful comparisons programmatically. On top of that, there was a copious amount of misclassified data, as well as variations and duplicates that needed to be resolved before we could start extracting meaningful insights.
Restructuring, reclassifying, and standardizing customer data couldn’t be a manual task. But legal is tricky; it’s got very specific needs that are deeply rooted in domain expertise. Fortunately, we had the expertise. What we needed was to make our system just as much of a domain expert, so the data could be cleaned and structured as it entered the system. To do that we built a machine-learning engine, training it with legal-specific natural language recognition. We named it Hercules, because it did all the heavy lifting. [see lead graphic, which gives glimpse of the codebase]
With Hercules in place, data integrity was no longer an issue. We were now in a position where we could analyze data and deliver actionable insights. We identified a few key areas we knew we needed to address in order to drive towards transparency. At the top of that list was competition. We needed solutions that fostered transparency and competition. What were companies really getting from their firms? And was it reasonable for the price?
Enabling prices comparisons and competition
Transparency is the cornerstone of analytics. A clear view of how dollars were being spent was critical. Legal departments needed to know who was executing the work, what were they charging for specifically, and if that aligned with guidelines. Most importantly, they needed to be able to drill into the data by practice area, firm, timekeeper, or task. This need became the focus of Bodhala’s initial Reporting & Analytics offering.
How could we help our customers optimize their legal budgets now that they understood how their money was being spent? They needed tools to make the data actionable and thus foster healthy competition.
RFP tools—or both rate cards and individual matters—were early on our list. By streamlining and standardizing the process for corporate legal departments, they would be able to not only easily compare bids, but could also shave tons of time off the task. Just the process of submitting through a standardized system imparted firms with a sense of competition.
But to drive truly competitive bids—and have any real leverage—our customers needed to understand market rates. Sure, there was information out there about “rack” or “street” rates, the MSRP of legal service pricing, which were publicly available through bankruptcy proceedings, for example. But everyone knows that the rack rate isn’t what you actually pay. Law is a relationship-driven business. And longstanding relationships, or the desire to forge a new relationship, drove discounts. Rates for the same work from the same firm could vary wildly by client.
Benchmarking was supposedly available from other providers (eBillers for example). But eBillers hadn’t solved for data integrity, nor did they organize firms into relevant competitive cohorts. Comparing a firm that did insurance claims litigation to a firm that did M&A work was meaningless. Combine that with bad data and you had a mess, not a benchmark.
We trained Hercules to understand how to identify similar work and study firm reputations and tiering. Using historical invoice data and publicly available data about a relevant competitive set, we were able to produce benchmark reports that delivered real clarity on market rates, which in turn translated into real leverage in rate negotiations.
At least for our clients, truly competitive intelligence shifted the power dynamic in the market. The buy-side now had the transparency to understand the value they were getting relative to the price that was being paid. Real market intelligence gave them the means to contextualize that knowledge and identify when they were getting a deal or when they should fight for better rates. And if they wanted better rates, they had the evidence to take it to the bank (literally).
We are, in effect, creating a capitalist structure in the legal industry where one did not exist before.
What does price transparency look like?
Bill Henderson [Legal Evolution’s editor] asked that I share specific examples of the types of analytics and reporting used by Bodhala’s customers.
As noted in the top left of the graphic, the benchmarking information is for “M&A – Capital Markets” work. Here are the key interpretive principles:
- The Red-Yellow-Green bars indicate the actual price by type of timekeeper being paid by our client. Green = below average (within the relevant cohort), Yellow = above average, Red = top of the market.
- The grey striped boxes draw upon Bodhala data to summarize the range of prices paid by other clients for M&A – Capital Markets work from firms in the same benchmarking cohort (see list of actual firms in the right side box). In short, these data enable true apples-to-apples comparisons.
- The grey bar is a composite “street rate” (or “MSRP”) for M&A Capital Markets work by firms in the benchmarking cohort.
One of the striking takeaways of this Bodhala report is that every client is getting a large discount off of street rates, yet some clients are clearly paying significantly above market for the same legal work.
Armed with this information, in-house lawyers at our client can evaluate whether the M&A – Capital Markets work they are getting from HHM justifies top-of-the-market rates. If the answer is “no”, HHM can adjust their rates down. Or, alternatively, our client might decide to move the work.
What does spend management look like?
We are, at best, in the early days of competitive pricing within the legal industry. Further, the discipline of competitive purchasing is destined to start with large companies that have both the incentive and resources to invest in first-generation spend management tools. Thus, it should come as no surprise that this is Bodhala’s current customer base–very large consumers of legal services (large PE firms, financial services, healthcare, real estate), high-volume/thin-margin businesses (retail, consumer products), or both (insurance). However, as the state-of-the-art develops, we are confident that metrics-driven spend management will become a normal part of in-house practice.
The graphic below is another type of Bodhala report that reveals the scale of legal services being bought by a large corporate entity and thus, by extension, the need for basic metrics to ensure that in-house lawyers are allocating these dollars in a way that makes sense to CEOs and CFOs.
Over the two-year period of January 22, 2018 to January 22, 2020, the client spent more than $11.8 million with HHM (a AmLaw 50 firm, but different from the first graphic), which is 18.56% of this client’s total legal spend. It is also second-highest amount among all panel law firms. Yet, on every dimension, HHM costs more, and takes longer, than other panel firms.
Perhaps there is a good reason for this. But maybe not. Below is additional information supplied in the same report, which enables in-house lawyers to drill down on specific matters and specific timekeepers.
The end game for spend management analytics
While Bodhala is absolutely a solution to help companies save money and optimize their legal spend, it’s really a tool to help them take control over their relationship with the sell-side.
Bodhala is a mechanism to bring competition, transparency, and innovation to the legal industry — and thereby create a transparent, functional market for legal services. We’re empowering the buy-side to be in a position to drive the narrative with their panel firms and create their own impact. This is especially important in 2020 as few law firms have come forth to share the economic pain caused by the global pandemic.
Data can also improve the internal relationships, like between a CFO and the general counsel, solidifying the legal department as a business partner rather than a cost-center. It makes collaborating with finance and operations teams less onerous. And data fuels strategic decisions and has the power to improve bottom lines making companies stronger and more sustainable.
What else can Bodhala data do? Using insights from the platform we help companies achieve run-rate reductions, uncover hidden measures like partner matriculation, request discounts in certain practice areas where demand is lower, and offer to pay some key partners higher rates while demanding discounts for other parts of the rate card. Our price discovery data helps companies realize up to 20% in legal spend savings in the first year.
Bodhala’s rate pricing data also helps drive competition in the market. Knowing a client has the basis to take their business elsewhere is one of the best ways to spur change at firms. It can also inspire innovation, forcing them to reconsider their operational and staffing efficiency, or even outsourcing standardized tasks to less expensive resources.
Competition is a precursor to innovation
Just to be clear, innovation isn’t necessarily about taking work away from law firms. It’s about helping them reflect on their business model and identify ways to become more competitive. There is already marketplace disruption as alternative legal service providers (ALSPs), accounting firms and new technology companies start infringing on traditional law firm turf. Tasks and matters that used to be billable hours for law firms are now being allocated to faster, more cost-efficient resources like on-demand flexible talent pools that let lawyers set their own billing rates.
Data is the flashlight that will shine brightly on the sell-side and change the dynamics that have allowed law firms to “justify” their fees and approach to date.
I’ll even make a prediction. In the post-COVID world, with balance sheets under scrutiny, I anticipate that the spread of new technology and data means law firms will start to lose the near unilateral price control they have enjoyed for decades, with a potential drop in revenue of at least 5%, probably more.
Data is right, objective, and cannot be wished away—no matter what law firms say. At Bodhala we’re creating the much-needed catalyst for the legal services market to finally become transparent and “capitalist” in the most virtuous sense.