Due to the economic climate, 51 per cent of law firms in Australia have changed their pricing models, with most firms (88 per cent) in Australia using alternative fee arrangements (AFAs) for nearly half or more of their work, according to new research from Litera.

In the new report, Navigating the Legal Horizon: Trends in AI Integration, Alternative Fee Arrangements, and Profitability Metrics, 50 per cent of law firms said they were looking for ways to cut costs, with 46 per cent having to increase their fees.

The research was based on a survey of more than 300 law firm leaders globally and showed that the legal profession is reacting to current “economic instability” – as clients become more sophisticated and want value rather than billable hours, M&A integration vice president Barry Solomon said in the foreword of the report.

“The billable hour isn’t going away completely, at least not anytime soon. However, alternative ways of more accurately capturing the value of what’s being delivered is going to change. And as GenAI makes it easier to analyse thousands of tasks in mere seconds, we can expect both law firms and sophisticated buyers of legal services to develop new ways of exploring strategies for increasing ROI as more firms offer clients AFAs.

“Looking back is a good way of understanding the future. By staying ahead of the curve and recognising the evolution of client needs and expectations, our profession can learn and adapt to changes and trends in legal billing practices.”

In terms of how they are adapting to the current economic climate, 51 per cent of Australian law firms said they were changing their pricing model, 50 per cent said they were cutting costs such as business travel and marketing, 48 per cent were implementing a hiring freeze, 46 per cent were reducing their headcount and increasing fees, and 30 per cent were adopting tech to increase efficiency. Only 1 per cent of Australian firms said they hadn’t yet been affected by the economic downturn.

In terms of firm size, smaller firms were more likely to adopt tech and implement a hiring freeze than their BigLaw firm counterparts.

“Results reveal that an overwhelming majority of legal professionals, 89 per cent, acknowledge the efficiency enhancement brought about by legal tech, with 82 per cent attributing the same to AI tools. This underscores a significant recognition of the value of AI and technology in the legal sector, with 87 per cent per cent understanding the benefits of AI tools,” the report said.

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Further, 93 per cent strongly agreed that legal tech helps them spend more time creating value – and 55 per cent of respondents globally said they were planning on investing in tech platforms in the next 12 months.

Litera Asia-Pacific lead Stefan Steenveld told Lawyers Weekly that the report shows a number of trends within Australian firms.

“We see a trend of law firms increasingly showing a preference for alternative fee agreements (AFAs) over billable hours with the changing economic climate and the rise of artificial intelligence (AI). In fact, our survey shows most firms (88 per cent) in Australia are using alternative fee arrangements for nearly half or more of their work, as clients are becoming more sophisticated and want to evaluate law firms’ ability to deliver predictability and value when providing legal services rather than hourly based billing only,” he said.

“AI has been the top-of-mind technology for many Australia law firms, but we are also seeing more law firms recognise its potential as a leading tool to enhance the utilisation of legal tech and look towards the widespread adoption of AI for efficiency and quicker decision making.

“As GenAI makes it easier to analyse thousands of tasks in mere seconds, we can expect both law firms and sophisticated buyers of legal services to develop new ways of exploring strategies for increasing ROI with the rise of AFAs. As more law firms move towards AI adoption, it is imperative that law firms continue to leverage cutting-edge technology in order to stay competitive to navigate the complexities of modern legal practice.”

Ninety-five per cent of participants said they were confident with their firm’s probability metrics and feel they have proper accessibility to those metrics. Accessibility to revenue metrics is also notably high, with 90 per cent finding it easy to access revenue data, with those in Australia reporting slightly easier access overall.

In Australia, 32 per cent of firms said they were tracking profitability via digitalised dashboards, with 28 per cent tracking it manually and 22 per cent using some dashboards and some manual tracking

Andrew J. Masak, strategic pricing and portfolio management director at Seyfarth Shaw LLP, said: “Generative AI represents the next frontier across the legal landscape, and pricing services is no exception. The use of these technologies introduces new complexity due to vast efficiencies in work product with far less time investment.”

Embracing both AI and AFAs can ultimately lead to success – or survival – in turbulent times, Steenveld said.

“As the legal industry continues to evolve in response to technological advancements and shifting client expectations, it is imperative for legal professionals to remain abreast of emerging trends and adopt agile strategies to thrive in a dynamic landscape,” he said.

“By embracing AI, AFAs, and innovative technology solutions, legal firms can position themselves for sustained success while delivering enhanced value to clients in an ever-changing environment.”

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Lauren Croft

Lauren is a journalist at Lawyers Weekly and graduated with a Bachelor of Journalism from Macleay College. Prior to joining Lawyers Weekly, she worked as a trade journalist for media and travel industry publications and Travel Weekly. Originally born in England, Lauren enjoys trying new bars and restaurants, attending music festivals and travelling. She is also a keen snowboarder and pre-pandemic, spent a season living in a French ski resort.