Posted by: johnocunningham | September 12, 2016

Charging More To Maintain Revenue On Shrinking Demand: Strategy or Death Spiral ?

The Wall Street Journal Law Blog recently featured a post about law firms battling weak demand by charging higher hourly fees, which noted that expenses per lawyer are rising faster than revenue per lawyer at most large law firms despite substantial increases in hourly rates in recent years.

Recent surveys of smaller firms have similarly shown declining demand, perhaps because individual consumer clients are increasingly choosing to do their own legal documents, resolve their own disputes and/or seek out cheaper alternatives to traditional legal services.

So what does all of this mean for the future of legal practice?

Lawyers and law firms that have developed expertise in specialized, high demand niches – such as patent practice for biotech or high-tech clients – can continue raising rates indefinitely. So can firms who have reputations for being “the best of the best” in high stakes matters, such as mergers and acquisitions or “bet the company” litigation. More competition may enter these practices, seeking a slice of the top-shelf pie, but savvy corporate clients will not be penny-wise and pound foolish in selecting legal service providers for these kinds of work (or so they have indicated in various surveys).

But the world is different for lawyers who are doing “commodity work” (and by the way, clients view most legal work as “commoditized work”). Those lawyers – most lawyers –  will have to figure out ways to use technology, improve internal processes and manage projects more efficiently, so they can deliver legal products and services less expensively while maintaining or even increasing margins. You CAN raise hourly rates if you figure out how to cut the hours in delivery time proportionally.

What you cannot do over the long term is raise rates simply to make up for declining demand. That is the kind of death spiral approach that the postal service tried (which only led to more customers fleeing to alternative providers).  Any business school can provide a long list of historical examples of companies or whole industries that became extinct by ignoring trends in demand and innovation.

For law firms, there is a critical need to innovate and become ultra-efficient right now. Lawyers will have to imitate their business clients, who are constantly obsessed with how to serve customers better because they must. Just because we are part of a profession, we are not immune from the laws of economics.

To see only a few examples of how just one firm is aggressively approaching the need to innovate and become more efficient, check out the following links to articles on changes in labor and employment practice at Littler Mendelson:

  1.  Putting Products Into Services at Harvard Business Review
  2. Using Big Data in Employment Work at Today’s General Counsel
  3. Why You Should Disrupt Your Own Company (by changing how it works) at FORBES magazine

And for a look at how four firms have approached innovation to lower costs in order to win the battle for more clients and more matters, check out this article by John Kennedy at Law 360.

NOTE: As of the current time, I do not receive compensation or perform services, nor have I ever performed services for any of the law firms mentioned in this blog post.

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