Big Data Drives Revolution in Legal Pricing

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The billable hour. Darling of the legal industry and universally despised by everyone else.

The billable hour remains the predominant billing method used by lawyers in the United States. This is despite the fact that it has been widely criticized for inflating prices and failing to give clients cost predictability. Proponents of the billable hour insist that it is a necessary evil. Legal representation is inherently unpredictable, and an engagement might last for weeks or years depending on the circumstances. Flat fee pricing, therefore, requires an attorney to perform the impossible — to predict the future.

Yet we live in an era in which the future is well within our grasp. It’s called predictive modeling.

Predictive modeling is the modern manifestation of a crystal ball. It involves using machine learning algorithms to make predictions. The insurance industry, which faces many of the same pricing challenges as lawyers, is already harnessing the power of predictive analytics in underwriting.

Underwriting is the process of assessing risk and then setting the price of an insurance premium based on that risk. The provider’s incentive is to offer a competitive rate, but to ultimately collect more value than is invested. Insurance companies are using machine learning and big data to generate highly accurate risk models, resulting in value for providers and more competitive rates for customers. This is only the beginning. Already insurers are learning to use real-time big data obtained through the IoT (your phone, wearable devices, and smart appliances) to generate even more granular, up-to-date models.

So what are lawyers waiting for? Other industries have taught us that performing risk assessment is difficult on a micro-scale, but predictions based on large quantities of data are highly efficient and accurate. And lawyers are already using predictive analytics to craft successful case strategies and drive results. We clearly have the resources to adopt better practices.

Change is inevitable, even for lawyers, and the billable hour will eventually be obsolete. But embracing change requires agility. This means that big law firms won’t be leading the charge towards better pricing models. Those best poised to push the profession forward are outsiders, entrepreneurial lawyers who see the immense potential for innovation within the industry and reject the bureaucracy of traditional firms. Once again, we find that the legal profession is not so special. As with other industries, it will be the underdogs that spur tectonic change.

Image credit: rawpixel

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I strive to make the legal profession more transparent and to empower entrepreneurs through education.

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