An IT lawyer recently made a striking observation to me. He works in the flat-screen TV industry and noted that a flat-screen TV from twenty years ago could cost $20,000 or more and lacked much of today’s technology. But every year, the technology has gotten better as the cost has declined. You can now buy a flat screen TV for less than $1,000, and the competition is fierce. Compare that to law firms, where the “technology” (expertise) generally stays the same while the cost ticks up every year. Although that’s the way it’s always been in the legal profession, the value proposition is getting harder to justify to clients.
We are hearing GCs and other in-house counsel share their frustrations with this system more and more. Recently, the GC of global public company shared in an interview that his in-house goal is to be as close to 100% off the billable hour as possible, including litigation. For his company, that will include fixed fees, caps and other alternative billing systems, and he feels strongly that law firms can’t pass along inefficiencies to clients any longer. He was incredibly frustrated that all of his primary firms had sent increase letters for between 2% and 6% at the end of 2016 and noted how angry his company’s customers would be if they received standard cost increases every year. He added that while he can justify increased costs for improved skills and efficiency that occur as an associate develops greater expertise and experience between years three and seven, the reality is a lawyer who has been practicing for 25 years does not get 6% smarter each year.
Practically, this means firms are facing very serious competition from two different places:
- Other firms willing to think creatively:
First, there are the firms and service companies already starting to think about their value proposition. They are taking steps now and getting way ahead of the curve for when clients leave the traditional model in more significant numbers. GCs have been talking about those boutique firms that are willing to price things differently, such as creating different price points for lawyers not on the partner track or offering secondments at very low cost.
Or consider accounting and consulting firms that weren’t in the legal space until recently but are starting to handle some of the work given to law firms in the past. And of course don’t forget the non-traditional outsourced models such as Axiom, which continues to receive praise from a lot of our interviewees. Yes, the personal and long-standing relationships matter, but often they don’t matter enough to counteract the efficiencies built into non-traditional outsourced models like Axiom.
- The in-house team:
The other real challenge to traditional firms is the in-house team itself. For years, the in-house lawyer was more operational and viewed, at least in some circles, as a less sophisticated lawyer. These days, as GCs are reminding us, the level of legal work done in house is becoming much more sophisticated, and outside counsel are competing with in-house teams as much as other firms for the work.
As one GC reminded me, his team knows the business better than anyone and is much more cost effective than any outside lawyer. Other than capacity challenges and very specialized expertise, many GCs say there isn’t much reason to go outside for the work.
For GCs, it’s getting harder and harder to see the value proposition with traditional outside counsel. If you want to succeed in the years ahead, you need to be able to articulate your value with creative and client-focused actions.