There is a rapid commoditisation of legal services, why are law firms not feeling the pain?
NEW REPORT FINDS THE EXPLANATION AND IT IS NOT GOOD NEWS…
Clients see most legal work as commoditised while the lawyers still consider most of their work bespoke. Clients have already realised massive savings on their external legal spend while law firms report business as usual. A report by TGO Consulting finds an explanation for this paradox. The trend is clear, but the blow it yet to come. Commoditisation is silently but rapidly undermining the law firms’ traditional business model that is still tailored towards bespoke work. They might only find out when it’s already too late.
CLIENT REPORT RAPID COMMODITISATION Almost without exception lawyers consider their services as highly bespoke and price them accordingly. At the same time external legal services have largely become a commodity. Meaning that, from the client’s perspective, several law firms and multiple lawyers can perform the same task equally well [Bosman/Hakanson, Death of a Law Firm page 86]. The consequence is ultimately a downward pressure on price. The ability to choose from a wide array of law firms without sacrificing quality gives clients the upper hand.
LAW FIRMS REPORT BUSINESS AS USUAL For at least the last decade clients have been putting programs and procedures in place to reduce external legal spend. These efforts have already frequently been reported in the press. Our report shows that massive savings have been made over the years. At the same time law firms invariably report ‘business as usual’. Our research finds that 60% states there is little or no pressure on the hourly rates. This clearly constitutes a paradox. How can this be explained?
“Clients value their lawyers and prefer to avoid the direct discussion on price”
“In-house lawyers are professionals that understand the business of law. Unlike outsiders (like their CFO) they are not baffled by the hourly rates”
COMMODITSATION AS A SILENT KILLER The TGO report has brought to light that instead of negotiating price with their lawyers, clients have started to ‘push work down’. Matters are handed to law firms that are outside the main arena and less expensive to start with, or to alternative service providers or taken in-house. The effect is that an increasing amount of work is shifted away from the traditional business law firms. Clients tend to avoid telling their lawyers that they are too expensive, so the law firms are left to believe everything is still OK. Failing to recognise the impact of commoditisation makes that law firms fail to adapt their business model to a lower price point when there is still time to do so. It is likely that law firms will only find out when it’s too late. “The majority of law firms are ill adapted to compete on price”
STORY: EASYJET AND RYANAIR Remember the airline industry: about 25 years ago none of the traditional airlines believed passengers actually would be interested in cheap flights with self-check-in and without allocated seats and without inflight hot meals. The airlines were convinced that passengers wanted the glamorous way of air travel with all the goodies that came with it. By now we all know they were wrong and traditional airlines experience great difficulties competing on price because their business model is ill suited to do so. Today the legal industry in going through a similar process. Again there is disbelief and the traditional market leaders fail to adapt. Which law firm is going to be the next ‘Swissair’? The report on commoditisation in the legal services sector The trends is clear, the blow is yet to come, May 2016, is available via www.tgo-consulting.com For further information send an email to firstname.lastname@example.org
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