Geek #1 had the opportunity of asking Casey Flaherty a question during a presentation recently. One of his takeaways is that clients still do not trust their outside law firms. After posting my recent piece on SOLP 2013, a thought clicked in my head. Consumers of any product will grow angry if they believe the providers are extracting profits at higher-than-market levels for any length of time.
Consider oil companies. During the mid 2000’s, the price of oil per barrel was jumping dramatically. There was much talk about what was driving this. Some claimed it was due to speculators. But the result was higher and higher prices at the pump. In a relatively short period of time gas prices increased by 50% and then stayed there. It was not long after that the Majors started announcing record profits. It was not long after that people started clamouring for Congressional investigations into price gouging and the like.
History is replete with examples of customers who react negatively when they think providers are using market power to raise prices and extract higher than normal profits.The Sherman Antitrust Act is the embodiment of this reaction.
I should point out that lawyers do not have a monopoly on legal services in the classical economics sense, since there is competition in the market from a large number of providers. However, there are definite restrictions on who can enter the market. These restrictions were placed as a protection on consumers, keeping them from receiving significant legal harm via untrained and incompetent providers.
At that top of the market (a.k.a. BigLaw) there has been a more restricted set of provider options for customers. I recall a consultant telling me as recently as 2008, that clients were afraid to ask for bigger discounts since their BigLaw providers might choose to not take their cases. Of course that has changed.
The real crux of this issue is that many clients perceive legal providers as engaging in price gouging. One can easily argue the market has been setting prices (via hourly rates), just like the case with the price of gasoline in 2007. Law firms have been behaving ‘rationally’ in an economic sense, as their price increases were accepted by the market.
The main difference between oil companies and law firms is that alternative legal providers are more readily available and more are emerging.
The old saying goes “Perception is Reality.” Therefore firms need to find a credible way of responding to this market influence. I’ve noted recent record profits from big banks. Back in 2008 these clients asked for their firms to work with them through the downturn by holding the line on rates. I wager that even with the market turnaround, they will not be going back to their firms with offers to raise prices and will continue their downward pressure on legal costs.
This is the market we now live in.