Recently I wrote about the Law Factory debate from a structural perspective. I noted that in markets where there is no extrinsic “precipitating factor,” it’s common for entries serving the lower (commodity) end of the market to expand “up through the floorboards” to capture an increasing share of the overall market.

The market for law firm services currently has no obvious precipitating factor, and there is slow but growing pressure from the bottom, from legal-process outsourcers, lower-cost firms sitting below the AmLaw 100, and so on.

The situation seems ripe for those firms to make significant inroads into high-profit BigLaw business in the coming years. No one is arguing that these firms, like my mythical Smith & Wollensky, will do heavy-duty mergers-of-equals and bet-the-company litigation. However, such work makes up a small portion of BigLaw’s portfolio, perhaps 20%.

As I said, it seems ripe.

But there’s an exception to this market model.

Aspirational Goods

Why is Apple successful? They came out with an MP3 player of sorts almost a decade after the first MP3 player and took over a languishing commodity market, turning immense profits. They jumped into a Smartphone market at an exceptionally high price point and delivered high profits. They brought out a tablet PC ten years after these machines first hit the market and again built a phenomenon. And of course their computers continue to sell, and sell profitably, even though it’s been 27 years since they really had a breakthrough innovation in that field.¹

Smart people predicted all of these thrusts would fail. (Not all smart people said that, but enough did.) Those smart people were wrong, and the smart people at Apple were right.

Why?

Why is Lexus successful? It’s a Toyota at twice the price! It’s a bit nicer inside, just as the iPhone is a bit nicer than most of its competitors. Android is catching up, though… and so are Toyota’s competitors. The Lexus isn’t twice as nice by any means — not twice as good as a Hyundai these days, let alone the Toyota from which it’s made.

You can buy everything but the Lexus logo for $7K to $10K less. Yet Lexus is highly successful.

Why?

Lexus and Apple position and market themselves as aspirational goods.

People buy these goods in part because the purchases affect not just how others seem them but how they see themselves. They aspire to be “the Lexus man” or “the Apple woman.” They prove they’re the best by buying the best.

It’s not just the luxury-goods issue. It’s obvious that a Rolex and a Casio watch make very different “statements” despite keeping the same time. There’s little doubt that people buy the Rolex precisely because it’s expensive.

Not so with Apple and Lexus, where people give all sorts of reasons other than price for purchasing the goods. That’s the difference between luxury goods and aspirational goods.

It’s important to recognize that Apple and Lexus products are at least as good as their competitors, maybe a bit better in certain areas — especially “fit and finish,” which we might call professionalism — and cost somewhat more but not outrageously more. The Lexus isn’t really twice the price of a well equipped Toyota or Hyundai, but, like Apple goods, perhaps 25% more costly for relatively equivalent functionality.

The Aspirational Law Firm

How do you evaluate a iPhone or a Lexus? Of course, you first check the basic functionality; you can make calls on the iPhone (except if you hold it wrong, one of Apple’s few big slip-ups), and you can get from here to there in the Lexus. But after that? For most people, they’re dealing with intangible differences: how do the products make you feel about yourself?

So how do you evaluate a law firm? Most attorneys are smart, they all have a certain minimum level of competence as attested by various bar associations, and so on. The firms all have clients they’re willing to parade, track records of successful outcomes.

The firms also all have track records of unsuccessful outcomes; it’s the nature of the business, where most every action has an equal and opposite reaction from a lawyer for the other side.

For most work, firms are chosen based on intangibles. Relationships. Past business. Confidence. A bunch of attorneys specializing in the field of interest.

Here’s where aspirational goods come into play.

Corporate clients have less ability to judge how successful a firm will be than most people like to admit. Will they win this action? Can they get the best terms in this transaction? In advance, who knows? There are no certainties.

The tendency in such a market is to fall back on a clear quantitative differentiator: cost. For commodity work, price is almost always the differentiator after some basic tests have been met. For the “up through the floorboards” expansion of such work, for Smith & Wollensky horning in on some mid-level matters that might normally go to BigLaw, over time it’s likely that price will be a differentiator too.

But BigLaw firms may be able to use the aspirational-goods approach to push back on Smith & Wollensky. “No one can guarantee the outcome now that we’re moving into mid-level matters disputed with good attorneys on both sides of the question. Smith & Wollensky can’t. We can’t. So when you lose and the CEO comes asks you why, which answer do you want to give — We went cheap, or No one could have done more because we went with the big guys?”

Translated, that question becomes, “How do you see yourself? How do you want others to see you?”

That’s the aspirational-goods question.

And that, I believe, is the countervailing factor to law factories pushing up from the bottom into the vast majority of corporate legal work.

It won’t stop Smith & Wollensky from expanding. Some GCs will turn the “cheap” issue into a positive, speaking the cost/benefit-analysis language of the CFO. But others will not.

The law firms that exploit the aspirational-goods aspect of their services will, I believe, protect more of their work from Smith & Wollensky.

But there can’t be 100 aspirational-goods firms. Clearly a few firms already position themselves in that bucket (subtly). I think that those that join them will hold greater market share in the coming years than those that don’t.

And…

Still to come in this series: The role of Legal Project Management, and the comparison of educational institutions with aspirational goods.

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¹This paragraph refers to the iPod, iPhone, iPad, and original Macintosh, respectively, though I’m pretty sure this footnote is totally unnecessary. People are very aware of what Apple does.