Adam Smith, Esq., on Law Firm Pricing
You’ve probably seen it by now, but Bloomberg Law has an interesting (is that the right word?!) interview with Bruce MacEwen, who writes as Adam Smith, Esq. In it, he notes:
- Firms are under pricing pressure (no news there)
- Firms are offering “suicidal pricing” – i.e., below real costs (see my note below)
- They’re In danger of collapsing if costs – including partner payouts – exceed revenue (scary news if/when true, but not all that surprising in the general case)
- It’s somewhat isolated for now and not a race to the bottom (but… races to the bottom explode out of nowhere; I’ve seen it in many industries1)
- There’s a near-future threat from LPOs2 (I’ve written about another aspect of this threat twice in the past few weeks)
- Big firms need to have tough conversations with partners… and likely trim either the ranks or the compensation model (Stein’s Law: If something cannot go on forever, it will stop)
- Firms have little or no retained earnings with which to weather tough times (Bruce has focused on this item for a few years)
- He asks, “How do you cut partner compensation systematically and survive?” (I think – assuming this has to happen – that the answer depends on whether it happens all at once across the industry or piecemeal)
Agree with him or not, Bruce is smart and both a lawyer and an economist, a rare combination.
A Thought on Suicidal Pricing
I think there is an alternative option here, though it doesn’t seem to have picked up much momentum the past few years, and that is value pricing, a/k/a AFAs, a/k/a value-based billing. This is a place firms can learn from Apple. Do you know what an iPhone costs Apple to make? Do you care? People buy the package and don’t overly begrudge Apple their sizable profits.
As long as clients can “see the sausage being made,” they can complain about the ingredients and the process. They look inside the firms (via hourly-billing invoices) and kibbitz, or tell them in effect how to run their business. It’s like playing bridge. Kibbitzing is annoying in itself, but when the kibitzers tell you how to play the hand, it goes well south of annoying.
Your clients’ customers don’t tell the client how to run the business, because the client products are fixed-price/value-billed goods. That said, they comparison shop, and some industries have fallen prey to the dreaded race to the bottom – but many have not. So I’m not suggesting value billing is an easy or one-size-fits-all or guaranteed answer. Rather, I’m wondering whether it might offer an alternative to suicidal pricing.
If you’re looking at a ruinous RFP, one where to get the business you’ll have to price not just below market but below cost, consider countering with a fixed-price offer where – like the client themselves – your costs are opaque, not visible to the client. Will it work? Maybe. But will it work to keep offering suicidal pricing?
Error in the Bloomberg Text
The text accompanying the video (in the link, not the embedded video) misstates what Bruce says on average partner comp: I’ve corrected it below with strikethrough.
Twenty-five years ago, average partner pay at the AmLaw 100 law firms was 11 percent times3 higher than that of the average American worker. Today it is 23 times higher.