Pressure at the Top – An Emerging Trend in Legal Fees?

Since Ayelette called me out on delivering depressing news earlier in the week, I thought I would end the week on a consistent, low-note by highlighting a emerging trend in downward pressure on legal fees.
The existence of fee/pricing pressure in the legal market is common knowledge. However, based on my experience I see some trends appearing in different layers of the market. My basic thesis is that the higher up in the market you go (by size of company), the more pressure you will have on fees and rates. On the surface, this thesis may seem a bit mundane since conventional wisdom holds that the clients with larger budgets have gotten more sophisticated and are leveraging that to lower their legal fees.
However, I suggest this sophistication is more about willingness and ability.
And by “willingness” I mean the CEO told the GC to cut outside legal fees – no excuses. By “ability,” I mean the CEO said to the GC, “Purchasing will help you do this.” Too often I have heard in-house counsel apologize for their cost cutting behaviors. This suggests their willingness is mandated. In-house lawyers also appear to struggle with Purchasing’s involvement in how law firms are hired. So this ability is external to the legal department as well.
Why is this happening? As previously noted on 3 Geeks, the legal department is no longer exempt from cost-cutting. Having been exempt for so long, legal is now a prime target. As one GC put it, “Legal is the last bastion of untapped cost savings for the CEO.” Evidence of this trend is the evolving role of Purchasing. Originally very general RFPs for legal work were going out from Purchasing. These initial efforts may have resulted in fewer firms being on a client’s list. But now things have evolved to the point that clients are releasing RFPs on specific work. With a definable scope in place, price competition is becoming commonplace. The result for law firms is a more consistent, higher level of fee pressure with this class of client.
Moving down market to mid-tier companies, there seems to be less willingness and ability to push down on fees and rates. I believe these clients are just as “sophisticated” as the Fortune 500 types. However, they are not yet feeling the same pressures from leadership on cutting fees and their Purchasing departments are not as large, powerful and involved.
That being said, the same behavior will find its way down-market over time. The Perfect Economic Storm I have previously mentioned, will eventually find its way to all corners of the market.
As this evolution continues, I predict getting work from large companies will present a real challenge for law firms. Their old-school instincts will tell them that staying with this type of client is good, given the size of their legal spend and for being marquee clients. But the ability to sustain reasonable margins on this work will continue to erode.
Here comes my depressing comment: How long will it take firms to understand this trend and adjust to it? My answer: Too long.

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