August 31st, 2016 by kheafey
Over the past few weeks there have been a series of related headlines about the business of law that, at face value, tell a puzzling story.
First, there was news that law firms have been raising their hourly rates. It was suggested this was tied to the fact law firms had significantly raised associate salaries for the first time in many years. There was also news that client demand for law firm services was contracting. And finally there was word that law firm profits were on the rise despite the decrease in demand.
Some news and opinion outlets have feigned surprise by the idea profits are up in the face of increased costs and lower demand. But this is nothing new. As recently as both 2013 and 2014 there were similar stories of lower demand, increased rates and higher profits for partners. And it has long been known that big law firms have flush margins. As Forbes noted, in 2013 only accountants and oil producers had higher profit margins than big law firms among all business classes. Even in difficult times, why wouldn’t law firm partners push the envelope of pricing behaviors to protect their interests?
Other outlets have suggested it is time for clients to demand change even as it is hard to envision that happening in any sort of sweeping manner. Law remains a highly fragmented and fluid industry. Law firms remain under intense pressure to preserve their business models that often rely on a small percentage of partners for an outsized portion of a firm’s revenues. It is not lost on them that important books of business are highly portable and that they must keep important rain making staff happy.
And companies have not been standing still. More work is done in-house today than in the past. Companies have worked to consolidate the number of firms they rely upon for work. They request discounts and are employing alternative fees to obtain predictable pricing. And most telling, demand, after all, continues to trend down. Change may not be swift and revolutionary. But it is happening.
What more companies should be doing is leveraging the market on a consistent basis via competitive bidding. In our experience when clients three-or-four-bid an individual matter with firms they know and trust to do the work, they will typically obtain more than a 20% spread on proposed billing rates and expected fees. This holds true regardless of the rate or fee method they request. On a matter that might cost in excess of half a million dollars this represents an expected savings of $100,000 or more. And this can be done very quickly and efficiently – within a matter of a couple of days via BanyanRFP.
The market is fragmented. It is asking companies to take advantage of it. Companies who use competitive selection processes to select outside counsel, who obtain budgets for engagements and then monitor budgets and bills closely are realizing the benefits of a legal market with excess capacity . They are allowing the market to drive the best possible pricing for their engagements and then assuring the bills they receive track appropriately to the work done.
By contrast, clients who are not leveraging competition to set pricing risk being taken advantage of in the marketplace.
If you’re an in-house lawyer, it begs asking which type of client are you.
About the author – Dave Sampsell is a 20-year lawyer with extensive experience managing large, complex legal engagements around the world and overall corporate legal budgets. He presently serves as General Counsel of a NASDAQ listed company and is a Founder and Principal of BanyanRFP. BanyanRFP enables better outside counsel selection decisions that save companies time and money through an easy-to-use, private and secure online application for the creation and processing of legal services RFPs. For more information, visit www.BanyanRFP.com