Mind the gap…

January 10, 2007

Talking to one City law firm partner the other day I was left a little nonplussed by an assertion of economic hardship? ?You would not believe? he said ?how hard it is for us to attract and retain the best young talent. It is just getting to be so expensive?.

I felt that I should point out that many of his clients might also be aware of the issue given that their hourly rates were now typically 20% higher than eighteen months ago. We also both noted that the age of the ?1000 per hour partner was here despite all this ?fearsome competition?.

Is it only me who wonders how increased competition has meant that the cost for the consumer is going up? Doesn?t this suggest that something isn?t quite right from the client side in this model?

I also wonder if this impacts at all on how in-house lawyers see the world.

I wonder, for example, if a seven years qualified in-house lawyer feels any pang of regret when the two years qualified associate is paid so much more?

I wonder, when the General Counsel is beaten up (again) by their Finance Director for yet another adverse variance on the legal spend management accounts, does the law firm feel that irritation too?

I also wonder, when those same law firms announce they are moving to even swankier premises (where their new glass fronted edifices have so much empty space in the reception area they could double up as hangers for a small country?s air force) do their clients ever think if it might just be getting a bit, you know, too expensive?

It concerns me and I think the legal services profession has got to be careful because I am not sure much of this is sustainable for very much longer?

It is undoubtedly true that the professionalism, care and quality of much of the client proposition has improved in recent years. Debates about value-add no longer result in blank expressions, but are seen by all as a key strategic lever to enhance the client?s perception of value across the whole relationship. I also think that for many individual lawyers, the service they give is quite brilliant being both expert and empathetic.

This is all excellent, but on the downside, costs continue to rise, sometimes sharply, and are too often disconnected from plausible conversations about productivity improvements, enhanced services or greater added value. Worse than this is the persistent damage done by clinging to a basis of charging that goes back decades ? the hourly rate.

I have heard every justification for it; people say the system is well known (but that is like knowing somewhere is an accident black spot, it doesn?t make it safe to drive there); they say it is too difficult to put a price on variable factors (so fifty years of data on thousands of files means we still don’t know the length of a piece of string ? not really credible is it?) or they say it is too difficult to change I.T systems (roll on private equity investment in that case).

A great many in-house lawyers also defend the system. I am often told that it is the only consistent method of charging that allows a comparison across firms. But it allows them to compare ?375 with ?400; it doesn?t compare efficiency, value, risk or quality.

Meanwhile law firms get all het-up as they take on the increased costs of trying to secure the best talent, but then relieve their anxiety with a compensating entry on the other side of the profit and loss account! Super strategy; if only all their clients could do the same?

The point however is that while many will find reasons not to change, it doesn?t mean the system is fair, competitive or in the long term interests of the client or the law firm. In the end, loyalty to a relationship will matter less and less; it will be reserved for those few matters where cost really does not matter or where it is a significant stress purchase.

For everything else, the inexorable creep of commoditisation and the rise (and rise) of procurement style disciplines will simply demand that pricing becomes much more transparent.

If law firms want to compete in five years time, the objective today should be to invest in the systems that can quantify and qualify how much the services they offer will cost. The firms that can genuinely offer transparent pricing will be the firms that are most likely to compete for work.

They will also be the firms most able to diversify their proposition by unbundling their service and joining with the client in a much more creative partnership.

We are already seeing how some clients want to appoint a single law firm to manage significant volumes of work across many subject disciplines. This, by accident or design, creates the potential for the much sought after seamless service as the line blurs between what is an internal and an external legal service.

Transparent pricing, seamless service, great management information, significant investment in value-add, confident risk-sharing and long-term investment in a mutual gains relationship?I was writing about this five years ago and now it is happening. And I firmly believe it will become the model of choice for a great many clients because it will be very attractive to business (if not to the lawyers).

As one chief executive said to me recently? ?This company has one strategic advisor, my Finance Director has one external auditor, my Marketing Director has one advertising agency, why does my General Counsel need a dozen law firms when one would surely do??

There is a lesson here for the whole profession.

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