Decoupling price from cost in legal services

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Virtually all the talk these days in client circles is about the cost of legal services. It’s well established that institutional purchasers of these services are under great pressure to reduce costs by, for example, “taking bids, asking for discounts, shopping around for lower-cost options.” Patrick J. Lamb points out that many in-house lawyers don’t care what rates are charged, so long as they can bring back to corporate HQ the trophy of a 10% discount. One of the most popular discussions at Legal OnRamp right now is under the heading “Top Ten Ways for Clients to Save $” — and the list has grown well beyond ten.

What’s interesting is that most conversations about “reducing costs” are one-dimensional. They focus on the client getting the same kinds of services from the same kinds of law firms at a lower price; or, more concisely, the same-old same-old for less. They don’t envision rethinking the source of the services, or more importantly, the ways in which those services are produced. Ron Friedmann points out that when looking at ways to control costs, in-house counsel tend to focus on pricing elements — rate freezes, flat fees, discounts, alternative fees, and so forth — while ignoring the potential savings of reforming the process by which legal services are provided:

Where, for example, are efforts to require matter budgets, application of best practices, automation, risk analysis with decision trees, document assembly, and proper use of KM systems?… Real costs savings mean changing the process, focusing on how lawyers practice. The profession needs to overcome its “I am an artiste” attitude and develop better ways of working.

Both lawyers and clients have succumbed to the long-standing lawyer assumption that the price of legal services is directly connected to its cost. Lawyers produce work today pretty much the same way they produced it 60 years ago: through the individual-focused, time-insensitive application of principles and formulas to fact situations. Some time back, they figured out how much it costs them to do that, built in a percentage for profit, and arrived at a selling price for clients. And every year or so, to reflect both inflation and inflated earning expectations, they raised those prices. It’s an insulated, self-sustaining system in which price = cost + profit margin.

Here’s the really important thing that’s happening right now: the price of legal services is finally becoming uncoupled from the costs lawyers incur to produce it. Partly through efforts to identify the underlying value of a service to the client (something unrelated to lawyers’ cost), and partly through the relentless advances of technology and globalization, legal services price has been liberated from lawyers’ costs and is starting to establish its own gravity and orbit. Consider these examples just from the past week or so:

- In-house counsel getting legal work done differently: “[W]hat caught my eye, however, was the part about less work going to outside firms. … If inside resources are relatively flat (a high likelihood today), then in-house counsel are doing something. Among many possibilities, here are four that come to mind: (a) pulling back on more generic work (redefine as low-risk and perhaps non-legal); (b) trying to re-use or re-cycle some work, and have it done by non-legal personnel (including clients); (c) using technology to automate or streamline work; or (d) have it done by “non-law firm” firms, whether here or offshore (flat rate or fixed price).” (Wired GC)

- In the downturn, more legal work outsourced to India: “The nature of the work already has changed. When Ankita Mullick joined Pangea3 three years ago from a Mumbai law firm, she spent time researching U.S. laws on drug labeling. This year, she has done work for banks on auction-rate securities, which have been a factor in the crisis on Wall Street. ‘The sophistication is increasing,’ says Ms. Mullick.” (WSJ)

- Outsourced patent work to hit $200M in 2012: “The Indian patent services industry has grown significantly in the past three to four years to include about 50 vendors with 1,500 professionals, according to a release about the new report. … The area lends itself to such overseas outsourcing because it typically entails ‘manpower intensive and process-driven services.'” (law.com)

- Practice support lawyers to become online service: “This week, I saw an online demo from Practical Law which has taken the PSL concept, married it to technology and is offering it as an online service. … Under an annual subscription fee, you can run searches, browse subjects, compare international laws and even generate quality first-draft documents. And when you hit the wall and need assistance, they have a team of PSL-like lawyers available to help you. They’ve termed this approach ‘know-how” services….'” (3 Geeks & A Law Blog)

- Social media offering opportunities for new firm models: “Although social media will not cure cancer or the common cold, it will provide the opportunities for the new law firms to emerge. It will be the arena where the new leaders will identify, develop and build their tribes. We are already experiencing how social media and social networking are allowing lawyers and clients to easily meet and connect. And the rules are changing every day. The era of the institutional client, who was handed down, without thought or concern, from senior partner to junior partner, year after year, is dead. Clients are no longer constrained by the ‘top’ firm in their marketplace. Clients can easily go out and explore their options.” (Legal Watercooler)

- Corporate KM systems pulling way ahead of law firms’: “Law firms will struggle with this concept, as ‘savings’ means less time to complete legal work, which means lower billables and revenue. A key piece of [Conoco]’s system is compensation rewards for those who save the company money. Law firms will actually benefit from more efficient work processes, but since the efficiencies benefit clients and are not rewarded via compensation, law firms will struggle to drive this type of knowledge sharing and change.” (3 Geeks & A Law Blog)

Law firms have, from time immemorial, justified internal expenses with the line, “We’ll pass the cost on to the client.” We’re now entering an era in which whatever it costs a lawyer or law firm to render a service has at best a tangential relationship with the price that service commands. In order to turn a profit, firms will be forced to streamline their costs of production, whatever they might be. “Price” is what the ever-more sophisticated market will bear; “cost” will be whatever the lawyer incurs to deliver its services; and rarely shall the twain meet.

It’ll be the need to turn a profit in the face of all these liberating forces that will finally force firms to take Ron’s advice and rethink how they work. All the price discounts in the world won’t keep it at bay.

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3 Responses to “Decoupling price from cost in legal services”

  1. Bernie Keating

    Jordan:
    Read and loved your article. BUT, no decoupling in my field, personal injury.

    Isn’t decoupling ephemeral unless the equilibrium between the supply and demand of lawyers changes? Legal fees are directly related to the number of lawyers offering a particular service. The more lawyers offering a particular service in relation to those seeking to buy them, the higher the price, and vice versa?

  2. Jordan Furlong

    Thanks very much, Bernie! I think you’ve hit on exactly the problem — the laws of supply and demand work fine in an open marketplace, but the legal services marketplace isn’t open and lawyers have done their best to keep it at that way.

    Even giving “the unauthorized practice of law” the most generous interpretation and saying it truly is meant to protect the public from unscrupulous legal service providers, the effect surely is to keep “the practice of law” exclusively a lawyers’ domain. But you can’t UPL an Indian practitioner, a document management company or an online Practice Support Lawyer, and these kinds of competitors are already undermining lawyers’ lock on their markets.

    To the extent lawyers have ever sought to justify their rates, they’ve relied on the argument that “no one can do this but us, so you’ll have to accept our prices.” But others can do a lot of this stuff now, and lawyers are scrambling to come up with new rationales for what they charge. They may argue they provide better-quality service, and that’s valid — that’s how markets are supposed to work, different providers finding different price points with which they’re comfortable and at which they can still turn a profit. But lawyers still face the problem that a growing number of clients are quite happy to trade quality for price, and will take the 75% solution at 15% of the cost. I’m not sure lawyers have an answer to that.

    You’re quite right that litigation will be largely immune to these forces — you can’t outsource a cross-examination. But the litigation process is still rife with inefficiencies, especially in the discovery phase. You can pay 20 associates to spend three months reviewing millions of documents; or you can outsource it, automate it and knowledge-manage it (the associates may lose their jobs, but they’ll probably lead happier lives). And in any event, the rise of the self-represented litigant is going to take a different kind of toll on litigators.

    Actual trial advocacy, and the real hard-line preparation that goes into it, will survive — but these are among the relatively few “pure lawyer” services out there. How many things that lawyers do today could not, under great pressure, be done by someone or something else that’s not a lawyer? Not nearly as many as the profession would like to think. I suspect the next 15-20 years will bear that out.

  3. Jason Wilson

    Jordan,

    Terrific post. I concur with Friedmann’s comment “[r]eal costs savings mean changing the process, focusing on how lawyers practice.” Your observation that the process for producing work hasn’t changed much over time is spot on. Advancements in tools (e.g., CALR) to assist that process have made some aspects more efficient, but haven’t fundamentally changed the way lawyers approach a single client’s issue. I wonder if the rise of outsourcing isn’t simply another enhancement, something for lawyers to integrate into their practice without fundamentally changing it.

    I do wish lawyers and firms would spend more time on KM. The loss of intellectual capital, and in some cases real process change, from one lawyer and department to the next is tragic and wasteful. As your last example suggests, becoming efficient does not mean less profitability. If anything, it’s the exact opposite.

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