Industry Contraction Exposes Potential Low Price Points

The legal industry is suffering just like the rest of us in this economy. Interestingly, not all legal firms are suffering. The firms that are suffering the most are the large firms, who have done well for many years. These firms typically bill their large clients between $700 and $800 an hour for legal work. They have more than 200 lawyers in the firm. The next tier down sees law firms with 200 or fewer lawyers. These firms typically bill clients between $200 and $500 an hour for work done by their senior partners. Overall, the smaller firms seem to be about 25% cheaper than their larger cousins. These smaller firms are actually growing in this economy. While their larger brethren are laying off lawyers, the small to medium sized firms are hiring today. (See Video #6: Competition and Low-Cost Expansion on StrategyStreet.com.)

These firms are hiring because many of the large clients for corporate legal work are shifting some of the work that they used to give to the larger, more expensive law firms, to these smaller firms. These clients have discovered that they have more than one type of legal need. And, at least in some cases, the legal need is for less skill and cost than the capabilities offered by the largest law firms.

Clearly, the larger law firms are having trouble adjusting their pricing to meet these cheaper legal competitors. It appears they could do so, at least in part, by acknowledging that there is more than one price point for legal work. (See Video #21: Definition of Price Leaders on StrategyStreet.com.) These larger firms might offer less senior staff at lower costs for projects that would be satisfactorily serviced with less experienced employees. They could create a lower price point that would enable the larger law firms to reduce the loss of business to the smaller firms.

The large clients for the larger firms will always need the larger firms for the most sophisticated transactions. But, in these straitened times, these clients have to reduce their spending. If the large law firms allow them to reduce this spending by shifting work to smaller firms, they are losing an opportunity to preserve their revenues. These revenues can go a long way toward covering the cash fixed costs that all law firms face. (See Video #56: Design to Value as an Approach to Cost Management on StrategyStreet.com.)