About a decade ago clients started to realise that, in order to negotiate price with their external legal service provider, they needed some form of emotional detachment. Enter Legal Procurement. At that time, almost every major company started to let the procurement department handle the negotiations with law firms. As we all know, initially in its original form, this did not go well. Buying legal services is in many aspects different from buying office equipment, and price and quality do have, to a certain extent, a relationship. Many found that the Request for Information (RFI) and Request for Proposal (RFP) processes were only focusing on price and left no room for quality and people skills. The result was that both sides were unhappy and the role of the procurement department was gradually diminished over time.
If we look at today’s legal market, we can see that it is highly saturated. In most countries, there are just too many highly qualified and experienced lawyers. This means that the client will have plenty of choice when it comes to finding the right lawyer for the job. We call this effect ‘commoditisation of legal services’ (see my book Death of a Law Firm, chapter 4). In any other market, this would lead to fierce competition between the suppliers and result in what we call a ‘buyers’ market’. This is a market situation where sellers are heavily competing on price and in which the buyers have the upper hand.
Competition on price
On first sight, looking at today’s legal market, there is some form of competition on price. Every law firm is familiar with pitching and every law firm has lost pitches due to the price being too high. Only when we start looking more closely, we learn that this has not affected bottom-line revenue and profit. Law firms have quickly learned to mitigate the effects of price pressure by quoting higher rates to begin with, limiting the scope of work and charging extra for everything that can be considered ‘out of scope’, or simply by quoting lower rates while making more hours. Effectively, a ‘good deal’ for the client worked out just as it would have before. As we all know, it is extremely difficult to know beforehand how long a certain matter will take. Typically, even experienced partners at a law firm tend to significantly underestimate how many hours a certain matter will take. Let alone that clients would know. Interestingly, all this is now about to change.
The threat of data
Some years ago, some clients introduced the function of ‘Legal Operations’. These are experienced people who work in the in-house legal department and know how to analyze data. The official job description reads: Legal operations is a multi-disciplinary function that optimises legal services delivery to a business or government entity by focusing on twelve core competencies: Strategic Planning, Financial Management, Vendor Management, Data Analytics, Technology Support, Legal Support Models, Knowledge Management, Professional Development and Team Building, Communications, Global Data Governance/ Records Management, Litigation Support, and Cross-Functional Alignment.
Inefficiency no longer paid for
Quietly over time, these legal departments have been gathering and analysing hundreds or even thousands of legal matters and compared the data. By now, some of the biggest companies in the world have vast databases which tell them how much lawyer time a certain matter will take. All of this has been broken down in smaller blocks. These clients now know better than their external law firms how long it takes to complete a certain matter and what level of experience is required to do it. This is what will ultimately give clients the upper hand. Just imagine that the client knows better than the law firm how many hours will be spent. Even if the hourly rate is not heavily negotiated, the impact will be enormous as any inefficiency is no longer paid for. No more low-rate long hours.
What’s more, clients do these analyses not only on their own. For example, CLOC, the Corporate Legal Operations Consortium, is a non-profit organization where Legal Operations professionals exchange and share data and best practices. Just imagine what this means for the accuracy of the data if you have access not only to thousands of matters but tens of thousands. The outcome would be pretty accurate, don’t you agree? This is exactly what has happened and is continuing to happen. Due to the sheer amount of data available to clients and due to the advantage clients have in analysing these data, most law firms, if any, will be unable to keep up. This might for the first time in history that clients have the upper hand when it comes to the pricing of legal services. Sellers beware…
Jaap Bosman is widely considered one of the world’s thought leaders on the future of the legal profession. He is the author of the critically acclaimed bestseller Death of a Law Firm, which was first published in 2015. He is also one of the founders of TGO Consulting, a strategy boutique focusing on the legal sector that operates from New York, The Hague and Hong Kong (www.tgo-consulting.com) Jaap will deliver the closing keynote at The Law Firm Marketing Summit 2017 to be held in London on 7 November 2017.