Law firms need a wake-up call on commoditisation
Law firms are suffering from commoditisation blindness as their profits disappear and clients call the shots.
Commoditisation is the single most disruptive factor in the legal sector and lawyers need to stop sticking their heads in the sand as it is eating their profits, a leading law firm consultant and author Jaap Bosman says. Contrary to law firm opinion it can be applied to a range of complex work such as project finance and is not just simple or bulk legal work. Furthermore, it is not measured from a law firm's perspective - it is the client who decides, Mr Bosman says, pointing out that a 10 percent drop in revenue will result in a 30 percent drop in profit. 'This leveraged effect is one of the main reasons why commoditisation is so dangerous for law firms, he says in the ABA Journal.
Mr Bosman says that firms need to realise that commoditisation will quickly erode profitability. 'Understanding and accepting the concept of commoditisation will help us to understand that in order to maintain our profitability, we will need to adapt our business model' He maintains there are several ways to do this. ' The traditional business model is based on the markup we make on our associates and on time spent. So if a client is billed $3,000 for an associate to complete a task, the profit for the firm will be (based on industry average) $1,000. What if we replace half of what the associate did by a computer, and at the same time charge the client 30 percent less? The calculation will now look more like this: Revenue $2,000, cost $1,000 (only 50 percent time of the associate’s time spent), profit still $1,000.'
But he says technology is only one of the solutions. 'Other measures include reducing the number of equity partners, making costs more flexible, or making the services more valuable though brand building and positioning.' However, the first step is to 'stop believing that what we do is so unique that it cannot be done equally well in every aspect by another lawyer or another firm.' Mr Bosman is speaking at the Law Firm Marketing Summit on 7 November in London. Source: ABA Journal