The rise of market pricing

So yesterday, I posted some thoughts about the problems I saw with value pricing in the legal market. The post drew a lot of interest and several insightful comments, especially from Ron Baker, and I encourage you to read the post and comments together when drawing your conclusions about value pricing.

Today, in this follow-up post, I want to expand on yesterday’s closing comments about how I think the future likely belongs to “market pricing” — that is, a system based almost entirely on how much the buyer is willing to pay the provider. I’ll preface these thoughts with what I should probably have prefaced yesterday’s — that I’m not a pricing expert by any means, and that I’m not advocating for or against any particular pricing mechanism (well, except the billable hour — I’m always happy to rail against that). What I’m aiming to do here — what I do most of the time at Law21, frankly — is not to describe the preferable future, but the probable future. Sometimes, happily, these are the same thing. Sometimes they’re not.

In order to have “market pricing,” one of the first things you’ll need is a market. Law has not always provided this element — in fact, I would argue, the legal sector has not been a functional “market” in the traditional sense for most of its history. To have a market, you need both buyers and sellers — plural. If you have one buyer and one seller, you’ve got a transaction. If you’ve got one buyer and many sellers, you’ve got a monopsony. And if you’ve got many buyers and one seller, you’ve got a monopoly — in this case, personified by the legal profession.

When you think about it, monopolizing a city’s housing market is a weird subject for a family game.

As I’ve written before, whatever the positive outcomes of restricting the authorized provision of legal services to a single class of provider, consumer choice is not among them. It’s trite to observe that most lawyers don’t view themselves in commercial terms (“Law is a profession, not a business!”), don’t like to compete against each other (it’s still forbidden in many jurisdictions for one lawyer even to suggest she’s better than others), and strike back ferociously against “non-lawyer” market activity. Lawyers have always been the exclusive supplier of legal services, and the organized Bar devotes enormous energy and resources every day to keeping it that way.

That’s why “market pricing” in the law has essentially always been “lawyer pricing.” We value our services according to the effort required and the costs incurred in applying our talents, and we decide what those efforts and costs should be. As I argued yesterday, this is largely because we don’t know any other way of doing it — but let’s be honest, it’s also because doing it this way has been easy, convenient, and profitable. So long as we’re the only authorized and competent providers of legal services (and lawyers get the final word on both authorization and competence), so long as we have knowledge and access and skill that no one else has, then we are the market. And we’ll price our services however we like.

That’s the world we all lived in up until about a decade or so ago. That’s when we began to see the emergence of unauthorized (hello, LegalZoom), newly authorized (hello, LLLTs), and unanticipated (hello, computer) suppliers of competent legal services. You could write a book about this (some have), but what matters for our purposes is that there is now more than one type of seller in the legal world.

And while these new players are still in their relative infancy, and lawyers still command the vast majority of legal spending, the seal has been broken. Lawyers’ share of the legal services market has peaked. (Since it used to be 100%, it really had nowhere to go but down.) Our share will decline from this point onwards — not down to zero, not anywhere close to it, but low enough that other suppliers can gain and solidify viable positions. And we will have an actual, functional market in legal services.

As we approach this event horizon, a lot of things are going to change, and the pricing of legal services will be among them. A multi-provider legal services market will breed intense competition for market share. There are three principal ways to win and retain market share in the legal sector.

Compete on quality. This is where lawyers instinctively gather — we maintain a nearly religious belief that our excellence, expertise, and education will persuade clients to choose us (as they should!) over anyone else. The problem with trying to compete on superior quality, though, is that not many clients can accurately assess quality, and fewer still base their purchasing decisions on getting the “very best.” And as technology upgrades and process improvements continue to take hold in the legal sector, the standardization (get used to that word, lawyers) of legal work will come ever closer, and quality distinctions between providers will cease to be very meaningful. Quality, from the client’s perspective, is table stakes: they assume it. What else you got?

Compete on service. A number of smart providers (not all of them lawyers) will differentiate themselves on the basis of the way in which they deliver their services, including the client’s experience throughout the transaction. Ron Friedmann’s excellent post on this subject should be a call to arms for lawyers to take service seriously, through better operations, user design, relationship-building, and responsiveness to client preferences. The great thing to remember about competing on service delivery is that anyone can do it — it takes no special intellect or pedigree to treat your customers like gold, just effort and commitment. But for all I champion competing on service, there are still significant investment costs to get there, and as more providers figure it out, it could well be a diminishing differentiator over time. And that leaves:

Compete on price. This is where the legal market is going — slowly and fitfully in some areas, rapidly in others. We’re going there because price is the one thing clients can understand at the beginning of a transaction — service doesn’t manifest itself until during the transaction, and quality doesn’t manifest itself until afterwards. Price is clear, obvious, comparable, and certain — you know what your investment is going to be right from the start. A billable rate and an estimate of hours is not a price — it’s a non-binding estimate. Nobody prefers non-binding estimates over a set price, including lawyers. The legal market is now filling up with providers willing and able to offer a set price at the outset. They’re going to take business away from providers who can’t.

Note that I haven’t said “Compete on the lowest price.” That’s not what I’m talking about. Number one, we’re not there yet — first we need to get to a point where most legal services are sold with a price tag, not a running meter, and that’s still some distance away. Number two, the lowest price in any market is not always the winning one — for many buyers, price is a proxy for quality, both low and high, and some buyers are not comfortable with the lowest bid. But rest assured, as quality differences among suppliers continue to narrow — and we are a lot closer to that point, in both the corporate and consumer legal markets, than many lawyers think — and the risk that “low price = low quality” falls, then prices will fall, too. And as price competition heats up, many legal services will become much more affordable than they are now.

Ideally, the value of a legal service will match up reasonably well with its price, but there’s no guarantee of that. Ask a criminal defence lawyer how that feels. (In my own perfect world, governments would significantly subsidize the income of lawyers who practise criminal, family, and refugee law, in recognition that the value of their services to the client and to society far surpasses what even healthy market mechanisms can provide. This would be more than just “legal aid” — this would be a restructuring of private legal services in these areas into a quasi-public service, maybe even a utility.)

Steer clear of Water Works, though.

Some areas of the law will be less amenable to automation and standardization pressures, of course. This is where you’ll find your outstanding advocates, your shrewdest negotiators, your most insightful counsellors. They’ll charge staggering amounts of money for their services, far more than they do now, because their customers need what they’re selling and can afford it. In some ways, they’ll come closest to “value pricing” as I described it yesterday — really getting paid what their services are worth — but probably still won’t achieve it. (If you give one piece of good advice every week to the $50 million CEO of a $50 billion company, what should your take-home pay be? I’d say a lot more than $1,000 an hour.)

My larger point, however, is that the pricing of lawyers’ services will be affected by many factors — but lawyers’ opinion of what their services are worth won’t be among them. This is what I mean by “market pricing” — buyer preferences, enabled by market forces beyond lawyers’ control, will determine how much money buyers fork over for legal services, and in what format. If the new legal market resembles other markets to any degree, then buyers’ pricing preferences are going to include:

  • simplicity,
  • convenience,
  • reliability,
  • comparability, and
  • affordability.

Roughly, I suspect, in that order.

And I’ll add this: It is in the direct financial interest of clients to accelerate the evolution of the legal sector towards multi-provider status. This might not yet have occurred to groups like corporate counsel associations and chambers of commerce, but if not, it very soon will. The more sellers, and the greater diversity of sellers, of legal services in this market, the sooner that buyer-driven pricing will become a reality. Lawyers and bar groups that continue to fight the “non-lawyer” battle should be aware that it won’t take long for their clients to choose a side in that fight.

So what’s the takeaway for lawyers? Above all, I think, it’s this: In a market in which you have little control over your price, you must have complete control over your costs. You cannot tolerate a situation in which your costs of doing business are unstable or unpredictable. You can’t be at the mercy of your suppliers of goods and services (as indeed, your own clients cannot be at the mercy of you). You can’t run a business riddled with inefficiency and duplication, or you’ll be cleaned out by other businesses that aren’t. You must know not only how much it costs you to deliver a service, but also how to continuously reduce that cost, how to increase your productivity, to remain competitive. If you invest well in process enhancements, service upgrades, and marketing improvements, then you’ll be able to influence your price, perhaps significantly. But complete control? Very unlikely.

Pricing is hard. One of the reasons it’s especially hard in the legal sector is that we’re just now emerging from a monopoly situation in which pricing didn’t really matter — we didn’t even have “price,” in many cases. Our current struggles around pricing are just part of the birthing pains of an actual, healthy, bouncing baby market. If you don’t have a handle on it yet, don’t be too hard on yourself — not many people do. But you do need to get a handle on it as soon as you can. When it comes to legal pricing, our time is not our own.

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I’m honoured to have received this review of my new book, Law is a Buyer’s Market: Building a Client-First Law Firm, from James G. Leipold, Executive Director of the National Association of Law Placement (NALP).

“This is a book you should buy and read if you take an active interest in the future of large law firms in North America, but I would go further and recommend you buy two copies, sneaking one onto the desk of your managing partner or dean by stealth in the dark of night. [Jordan] does as good a job as anyone of diagnosing the current law firm malaise, and he does it with an easy grace and style that makes the read a pleasure — then he goes further and offers a road map for building the law firm of the future.”

Learn more about Law is a Buyer’s Market, including how to order here at Law21.



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