Posted by wlansden |
Filed under general, news and comments
By Brian Malcom
Someone break out the SALE signs and cheesy television and radio advertisements. BigLaw is having a sale.
The ABA Journal is reporting that law firms are engaging in price wars. I realize that this is kind of a 'duh!' observation in this market, but the severity of the price wars merits some attention. Major firms are playing legal fee limbo. The bar for legal costs clients are willing to incur keeps getting lower, and firms are nearly breaking their backs to slide underneath.
Jim Hassett, writing for the Legal Business Development blog, recently surveyed alternative fee arrangements in 15 large law firms. He asked, "There is a lot of price pressure these days, and some say it is leading firms to bid on projects as loss leaders in a way that is not sustainable. Have you seen any examples of this?" Apparently, all 15 of the large law firms surveys answered yes.
One responder said:
“Some of our competitors across the country are doing work on an hourly rate that is drastically less than what they would ordinarily charge. Some firms will do all of the discovery in a case for free, and then take the case on a fee basis from there, or will charge half of their hourly rate for the first phase of the case. We’ve also heard about some firms that have actually said that they will do these motions that will probably occur during the course of the case for free, or they will do the motion work at 30%, or some other drastically discounted rate like that, because they’re really hungry to get work."
Another responder reported hearing "well-established New York law firms" telling clients that they will not be underbid. Until now, I had never heard of a low-price guarantee for legal services.
Why are firms doing this? Well, some people think the answer is clear: capacity. Some firms are of the mindset that they need to keep their talent busy and generating revenue, even if the revenue is substantially less that what their work is worth. Notably, “worth” is determined by the market. So, maybe the current fees are just a lagging indicator of the market's altered perception of what legal services are worth in this economic climate.
Are these prices sustainable? Time and observation will tell. My guess is that it will be difficult for these loss leader law firms to retain top-tier talent, if they cannot generate the revenues to pay competitive salaries.
Will these alternative fees lead to full-fee or full-price work? My guess is no. One responder to Hassett's survey observed, "I have never seen loss leader work lead to higher end work, and I have been at this a long time. Loss leaders just cause people to expect lower rates, rather than focusing on fair pricing for the value provided."
In other words, people don't go to Costco to buy Gucci. If clients come to a loss leader law firm, they are going to expect low fees. If they expect quality representation and see the value in paying more to receive quality representation, they will be willing to pay a bit more to get value.
Maybe law firms should work on demonstrating value instead of undercutting their competitors. Eventually, sustainability will require loss leader law firms to raise their rates. Something tells me they may lose a few clients when they start to inch their rates back up. I could be wrong, but we shall see.
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