If productivity increases are passed along to customers via lower prices or better quality services, then the demand for whatever goods and services are being provided is likely to rise…
Daniel Susskind
A World Without Work: Technology, Automation and How We Should Respond
Imagine a well-heeled consultant coming to your law firm and saying guys (yes, its usually guys. See my most recent rail on this subject) “I have great news. You can lower your rates and make more money”! He or she would likely be fired on the spot for such heresy. After all, the mantra of most law firm consultants and the practice of most law firms is always to raise hourly rates. At every chance. Whether clients like it or not.
Yet lowering rates to make more money is exactly what Ralph Baxter, former chair of Orrick hypothesized in a recent LawClerk virtual presentation. How can this be? Says Baxter, law firms focus too much on revenue and not enough on expense. The two biggest expense drivers for law firms are real estate (fancy office space) and personnel. (Think troops of associates and the glut of unproductive partners). Baxter calls this the “bloated overhead.”
But COVID 19 has taught us that working remotely is not only possible; too many, it’s preferable. That means law firms could reduce their real estate costs over time by adopting an aggressive work remote policy. And technology can undertake more and more work that lawyers, paralegals, and administrative staff are now performing, reducing personnel expense. One lasting impact of the pandemic may ultimately be a rethinking by law firms of how to control real estate and perhaps personnel costs as well. Controlling these costs may affect the legal services market in fundamental ways.
For example, Baxter says law firms could reduce costs and deliver service at a lower cost. Firms could then use the savings to lower rates and then use the reduced rates to get more business. The result: law firms make more money by charging less.
It’s sort of like your flat-screen TV. When these TVs first came out, they were super expensive, right? But then, production costs decreased, the price of the TVs went down, and the manufacturers sold more TVs. And made more money. All things being equal, consumers would buy the TV offered by the manufacturer at the lowest cost.
The same thing should apply to law firms. Reduced rates should be an incentive for clients to provide more work. Indeed that’s the theory behind volume discounts. And lowering rates would allow firms to reach untapped markets and clients now priced out and don’t hire lawyers.
I talked to Varun Mehta, CEO of Factor, formerly Axiom Managed Solutions, about the potential impact of more strenuous cost controls by law firms recently. Factor is one of the largest and most well known alternative legal services providers. Mehta believes that a reduction in fixed costs makes flat and alternative fees more attractive to law firms. It could also lead to more outsourcing by law firms. Law firms might be moire willing to offload to lower-cost providers some tasks that law firms can’t perform as efficiently. He cited the medical field as an example of how cost reduction and different work process models could yield higher profits. Mehta notes many of the tasks physicians used to perform are now performed by lower-cost providers. This shift enables physicians to do more high-end tasks where the financial return is better.
But are law firms and clients for that matter ready for this? Three reasons would suggest that even during a recession, changing cost structures may be a tough sell.
On the law firm side, it’s been the operating mantra for as long as I practiced law always to look to raise, not lower rates. Consultant after consultant recommended it. Many measures firms use to compare themselves and gauge performance (think profit per partner) reward those who charge higher rates. I’ve seen too many lawyers who bring in millions of dollars of business penalized by their firms because that business did not command the high rates the firm wanted.
Of course, one reason for the unrelenting quest to increase rates is the bloated expense of most typical law firms
Of course, one reason for the unrelenting quest to increase rates is the bloated expense of most typical law firms. Staggering rents in the high rent district for no reason. Well apportioned offices. Grand offices for important partners. And troops of associates and administrative personnel even though many of the firm partners were unproductive. All these costs demand lots of money coming in, and the only way to sustain profits, according to conventional wisdom, is to charge higher rates.
To change this culture and mindset, would require a titanic shift in thinking. And firms would have to overcome the temptation or merely reduce costs and charge the same rates and make more money in the short term. As we all know, firms are not know for forward, long-range thinking.
Which brings me to the second reason. Lowering rate and doing more with less would cause staggering human costs in the short run. It would mean a reduction in staff and displacement of many people who are least economically capable of withstanding it. It would mean reducing associate and paralegal numbers substantially. This change defies convention and would be a blow to a firm’s self-image. Perhaps hardest of all, it would mean addressing the nonproductive partner problem and reducing partner numbers and compensation. Law firms aren’t known for making tough decisions or taking shots to their ego in the short term.
Which brings me to the final hurdle: the clients. The first reaction of most clients to a proposed rate reduction proposal might be an assumption that the offering firm is in dire trouble. That it’s no longer has the same expertise and abilities, it once had. That its dangerous to hire lawyers there. The whole concept of lowering rates hinges on the belief that the reduced rates would bring in more business. If they don’t, then the firm generates less revenue because its billing fewer hours. Unless the savings are so significant that even by billing fewer hours, the net profit increases. (But if that true, why reduce rates at all?)
But clients are already dissatisfied with their current representation. Approximately 73% of in-house counsel believe their legal departments are spending too much on outside counsel
But clients are already dissatisfied with their current representation. Approximately 73% of in-house counsel believe their legal departments are spending too much on outside counsel, according to a report published this month by In The House and LegalBillReview.com. As I previously reported, a recent Wolters Kluwer study indicates a fundamental disconnect between clients and their law firms. Some predict that the economic impact on the revenue side will delay large law firms from regaining market share lost by the pandemic. They also predict mid-size law firm may never recover.
So will reducing costs and rates ever happen? Can law firms take advantage of cost savings to redesign the delivery of legal services like the medical profession has done? Is it a viable strategy?
For many firms, maybe. In today’s competitive marketplace, firms need to distinguish themselves. They have to be different if they want to survive and thrive. This need is especially acute for mid-size, local and regional firms. Too many of these firms are basically the same and offer the same expertise, experience and delivery model. One way for these firms to stand out: cut expense. Invest in technology. Reduce personnel costs. Offer lower rates. And market the hell out of it.
In the mid-market, this may be a game-changer. Most of your clients are doing exactly the same thing.
Photo Attribution
@sharonmccutcheon via Unsplash