As the year ends, I am generally thinking about holidays, family, and vacations. However, many law firms are deciding right now how they will approach their clients for rate increases. Although most suppliers in professional services categories request annual increases or cost of living adjustments (COLAs), many law firms seek increases as large as 10 percent, well above the rate of inflation. Why do clients accept these increases, even though the marketplace for legal services has become significantly more resistant to them?
When I speak to my clients about reducing legal rates, I see them make the same facial expression my wife made when I suggested not buying the most expensive car seat for our newborn. This facial expression alone tells me all I need to know about why increases that far exceed inflation are being accepted: fear of risk.
“Why would I incur such risk to save a little money?” is a very common question I hear. “Why can’t you contain costs and not incur such risk?” is generally how I respond.
Common Objections to Price Negotiations
Clients voice many objections to the idea of negotiating price with their law firms. These include the belief that paying incumbent law firms less will result in the transfer of work to less qualified lawyers. Others believe that switching firms, even from one elite firm to another, won’t result in the same level of protection or quality. Some clients actually fear upsetting their incumbent law firms, as if making a law firm unhappy will somehow affect the quality of service. We believe these concerns to be exaggerated, as I explain below.
Law Firms Need Clients More Than Clients Need Their Law Firms
A slowdown in demand for legal services, coupled with industry consolidation, have created a buyer’s market. To stay competitive, law firms must adapt to these new market conditions. Therefore, clients can expect reduced rates, without increased risk or decreased quality.
Law Firms Must Protect Their Own Reputations
I was joking with a colleague about how similar “pitch” presentations are among the elite law firms. Litigation strategies, notable rulings, illustrious bios, and responsible budgeting plans are all impressively presented. Despite these virtually identical presentations, clients leave with wildly different opinions of each law firm. This is because they are thinking more about the firm’s reputation than anything else and that was presented before they ever walked in the door.
In this market, a law firm’s reputation is its greatest asset. Multimillion-dollar accounts are won and lost based on the hiring or departure of a single lawyer. Providing anything less than superior quality is not an option. No law firm, therefore, will risk its own reputation by doing less than its best work on a client’s matter, regardless of the rate the client pays. A top-quality performance on a single plaintiff matter can easily result in a class-action assignment.
There Are No Bad Lawyers at the Big Firms
A glut of law school graduates enables the big, established law firms to be very selective when they hire. Most won’t even consider candidates other than the top graduates from the top law schools. The fear that work will be transferred from a law firm’s “A” team to its “B” team as a result of negotiating lower rates just does not make sense. The fact is that in the major law firms, all the lawyers are on the “A” team. The true reason for the “B” team objection is that clients want the specific lawyers they like, who know their businesses, and their expectations. It is these lawyers who are the key to the relationship and they will always be included in negotiations.
This naturally leads to the next objection: “Although there are no bad lawyers at these firms, there most definitely are inexperienced ones.” While this is absolutely true, we are seeing more and more clients negotiate guidelines that prohibit law firms from billing for the work of year one and/or year two associates. Perhaps counterintuitively, the trend of over-capacity in the market is actually pushing work to Senior Attorneys rather than to the less experienced ones. This is also something that should be monitored to keep costs down.
Let a Procurement Professional Help
Whether it is understanding when a rate increase is in line with the market, or negotiating a contract with top law firms, a procurement professional can help give stakeholders the peace of mind they need, while containing or even reducing their total legal costs. Companies should never rely solely on one firm to handle all their needs for a specific matter type. They should conduct requests for proposals (RFPs) to stay informed on market rates and alternative options. Procurement professionals with experience in legal services can recommend top-shelf law firms from which to seek proposals, so that every firm that bids is as capable as the incumbent. In almost every case, these new law firms are significantly more aggressive with their offerings. It is this sort of competition that keeps rates market-competitive across the board.
Keep Law Firms Honest
The bottom line is that companies don’t necessarily have to change law firms in order to keep legal expenses in check. But if they want to get the best return on their legal spend, they should not automatically agree to annual rate increases. Instead, they should consider letting a procurement professional who has expertise in the legal services marketplace assess the situation and help determine the best course of action.