Editor’s Note: The author of this post is a law firm consultant with Fairfax Associates.
By Lisa Smith, Principal, Fairfax Associates
In a recent post, I noted that a Harvard Business Review article published in 1979 has gained relevancy for the legal industry as a way to evaluate competitive forces and their impact on profitability.
Economist Michael Porter, whose ideas were incorporated in a more recent, 2008 article, “Five Forces That Shape Industry Competition,” lays out five factors that influence competitive pressures thrust upon corporations.
One of these forces – Buyer Power – is the area we have seen change the most over the course of the last few years, and one that is driving fundamental change in the industry.
Evidence of price pressures are everywhere in Big Law – with the most stark reminder being realization rates (collected rates against standard) that have dropped nearly 9 percentage points since the economic recession, according to Peer Monitor.
Discounted rate arrangements are almost the norm for firms – often a higher percentage of work is done at a discounted rate (or some variation, such as two- to three-year rate freezes) than is done at standard rates. And alternative fee arrangements are picking up some steam, albeit at a snail’s pace.
But it’s not just control over price that is giving buyers power – there are other factors at play.
First, it’s hard to underestimate the impact of increased transparency in the market for legal services. In the past, hiring outside lawyers was often based on personal relationships and reputation in the local market. Other than Martindale Hubbell bios, there was little public information available. Today there are league tables and rankings that provide information on practice strengths, reputation, and specific experience on deals. The RFP process that is so common today gives in-house counsel the information to compare firms across a range of data points. Access to information has changed the competitive landscape.
Second, in-house counsel are much more sophisticated when it comes to handling large matters cost effectively, and in particular, are looking for ways to disaggregate the work. In-house counsel now are more likely to be creating virtual teams of service providers, from top law firms to outsourcers, to handle a single large matter. They are breaking down the matters by skills required and value delivered and hiring to fit their needs. They recognize that the firm providing the strategic advice may be too expensive to handle the more routine aspects of a transaction. Few firms are in a position to object, although some are getting more creative about staffing models and approaches.
Buyer power is here to stay and firms need to continue to factor this in to planning for the future.