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Wednesday, 1 June 2011

BOGOF - pricing legal services

After a brief outing into the newsworthy world of injunctions, I'm going back to more workaday matters. Keeping control of departmental budgets and getting value for money from external lawyers.

This isn't a popular topic. I've seen plenty of negative comment about the recent article in the Economist on legal services ("A less gilded future" http://econ.st/lMdImV). I have reservations about the article too, but not because of the line which offended many "Ultimately, lawyering is becoming more of a business than a profession. Some lawyers decry this. Others welcome it. Few deny it." My issue with the article is that it deals badly with the second of two topics. After a lengthy discussion of fragility of the law firm business model and the cost of legal services, the final few paragraphs turn to creating business awareness in young lawyers, a topic which might have made for an interesting article in its own right, but is treated glibly. It's not often you get the feeling that Economist journalists have been told "I need another 250 words to pad this out", but I ran a word count on the offending final paragraphs. Exactly 250. That's suspicious.


Nevertheless, when a magazine aimed at around 1.5 million generalist readers, many of whom run the companies that pay the bills of big law firms, carries a prominent article about the cost of legal services and the law firm business model, anyone selling legal services to corporate clients ought to pay attention.


Lawyers in private practice like to say that there's a great deal of competition in the legal services market, but I struggle to agree. If you went into John Lewis and every television was identical and all of them were priced between £299 and £399, you'd hardly call that choice. That's the way the market for legal services looks to many clients. Hundreds of offerings, all at around the same quality at around the same price. 


Real choice might, to illustrate the point, be a law firm starting a "Value" range involving a no-frills service. I like to imagine how the marketing would go. "We take all our most ordinary associates and partners and offer them to you at half price. They're not the brightest crayons in the box but they're presentable enough. Perfect for that routine job you're not that fussed about". Or perhaps: "Buy one job from our Value team and get one for free" (the famous BOGOF). I would suggest "Buy now, pay nothing until next year" but, given the chaos in some law firms when it comes to DSO, that suggestion is hardly necessary. At the most extreme end, a firm recently sent me bills for work commissioned by my predecessor, completed three years ago. Needless to say, I declined to pay.


I'm not quite saying law firm pricing is like a cartel, but it strays in that direction. Nobody makes any significant move to break ranks and offer something genuinely new. There's also no ratchet downwards on fees. On the contrary, competitive PEP tables and events like the Howrey's collapse mean there are plenty of ratchets upwards on fees. Rather than whine about this, I think in-house counsel have a responsibility to start to find new ways to buy services. Law firms should be entitled to make a profit, but their clients are entitled to know they're managing their cost base properly. That means providing some tolerable pressure through more transparent pricing mechanisms.


I'm aware that some large companies and banks are already using online procurement tools to gain more meaningful price comparisons from the law firms that they use. But for smaller legal teams (my own is around 35 people), it's not likely to be cost effective to set up your own system from scratch. However, we recently tried a new tool called ProcureLaw (http://www.procurelaw.com). There's a video interview of me on their website explaining our initial experiences of the system, but I'll cover some key points here.


The concept of this kind of tool is very simple. A client asks its panel of firms to sign on to the system, which is hosted on the web. The client then issues an RFP, together with the criteria upon which it intends to choose a successful bidder. The firms ask any questions and then submit their responses. The tool doesn't allow any marketing wrapper to be placed around the responses, so the client can very easily make a like for like comparison. It's simple and quick for the client and I am sure the responses, whilst requiring some time to complete, are much less onerous for law firms than a full pitch at a beauty parade or in response to a panel review.


In our first trial of the tool, we published an RFP for an overhaul of our standard employment agreements in 15 countries. We had more than 30 responses, of which around 10 were comparable bids for the entire job (some firms only offered one country). We didn't chose the winner only on price, but I can tell you that the price we're being charged is four times lower than the most expensive quote and that the most expensive quote was from a law firm comparable in many ways to the winner. I could say there was a 400% difference, but I'm always suspicious of percentages. After all, "Jesus was betrayed by 8% of his disciples" is an accurate but fairly useless statement.


We selected a law firm we like and we're confident they will do a quality job. We are also confident we got a decent price. Not all legal work is susceptible to this kind of treatment, but some is. As for the price differential, this is like BP selling diesel for £1.30 per litre and Esso charging £5.20 over the road. It makes me wonder if law firms have any idea how to price their services accurately.

4 comments:

  1. Tom this is v. interesting. It's inspired a blog piece which I hope to one day write as, when and if I find the time. In terms of your comment about disparity of prices, I think the reason for it is that with legal services a business can (and will) set prices according to how much work it currently has on, and how much it wants the new client. It's common knowledge that during the recession the magic circle firms have been setting ridiculously low prices in some cases, and getting work that mid size firms would normally expect to receive. Law firms can quickly get into trouble if they don't get enough new work coming in. They have set running costs to meet, and so it is better to get some work in to meet those costs, than to not get any work. So a low price is better than nothing. Ideally, there should be transparency and set prices, but as legal work is so dependent on individual circumstances and requirements it's difficult to create a meaningful price list, beyond saying what your starting prices are. I've written on my personal blog about differentiation and law firms, and hope to write more... so hope you will read and comment as it's v. valuable to have the insight of someone who is a buyer of legal services.

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  2. Tom, I'm a bit confused because you start by suggesting that with respect to pricing, law firms act as if they were a cartel. But then you end with an example where the price ranged by a factor of 4.

    Is the moral of the story that the 'cartel' is indeed easy to break for any GC willing to put a bit of effort into doing so?

    In both the US and UK, there are now many boutique firms, often with BigLaw refugees, that offer lower costs and/or true alternative fees (e.g., Valorem Law).

    All that said, I agree that law firms are not good at pricing or value determination. So isn't that all the more reason for a GC to be an 'activist' shopper?

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  3. Really interesting post - I did a very similar RFP exercise when I was in-house. Harmonisation of employment documentation across 17 countries. The highest price point was also about 400% more than the lowest, although to be fair the lowest price point was from a firm that on closer examination didn't have the depth of experience of many of the other firms, and perhaps didn't know exactly what was involved. The killer however was the firm that slipped a £75 "project management" fee into their proposal, despite the fact that project management was explicitly covered by the main service fee.

    I wrote about some of my RFP experiences here: http://intelligentchallenge.wordpress.com/tag/rfp/

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  4. Interesting concept. The U.S. version of this is www.RFxLegal.com. We've used RFx Legal with great results. In addition to the competitive bidding module we used their RFP automation tool. We are currently using them to help us monitor and manage the post engagement results. Solid folks.

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