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Previously I wrote about an emerging philosophy guiding law firm leadership through our Great Recession; namely that the supply of lawyers now outnumbers the demand for them, and that the legal industry is undergoing a permanent transformation. This is the second entry of a three-part blog, focusing on how legal services are becoming a commodity.
We should begin by explaining what we mean by “commodity.” Wikipedia defines “commodification” as “when a market for goods or services loses differentiation across its supply base,” often driven by an excessive supply that has flooded the market. Economists often differentiate between goods and services, suggesting that it is theoretically possible for goods produced to be identical, but services will almost always have some degree of variation. In light of this analysis, it is becoming recognized and accepted that business legal services fall under one of three categories, each carrying a different degree of commodification.
At one extreme is the high-stakes, high-profile, high-priced legal cataclysm facing a client for which only the very best and most sophisticated legal team can be retained. Economists view this as the least commodified category of legal services, and accept the notion that business under this scenario are at the mercy of their legal counsel when trying to determine a budget for these services. For obvious reasons, this is the category of legal services that has suffered most under the Great Recession, as businesses now define these “open billing” arrangements with much more scrutiny and increasingly limited scope. Unfortunately, medium and small law firms that once enjoyed a percentage of this business can no longer compete for it, as the large mega-firms with their seemingly endless budget reserves have devoted significant resources to obtaining and securing what little is left, and pricing their competition out of the market.
At the other extreme is the most commodified legal service, otherwise known as “the generic document.” These services typically involve simple contracts, leases, Wills, or form letters that can be obtained on-line, often from non-lawyers, for nominal fees. These services have been repeated attacked by the legal industry for the unauthorized practice of law, but so far they have withstood every challenge and we must assume they are here to stay. To compete in this category, lawyers must be prepared either to dramatically reduce their pricing structure, or focus on differentiating, or “de-commodifying” their services.
The final category is the massive grey area between the two extremes where most law firms exist. This category involves legal services that are not so sophisticated that outrageous fees will be tolerated, but also not so simple that the client believes any generic legal form will suffice. Businesses recognize that differences may exist between lawyers in their experience, sophistication, efficiency, and track record for success, and therefore appropriate adjustments in fees may be justified. Because the supply of these services exceeds demand, these services are still viewed with eye toward commodification and excessive price differences may very well eliminate a firm from consideration. The trick, of course, is for law firms to recognize the economic realities facing our industry and price their services accordingly.
The third and final blog entry on this topic will focus on the future of law firm pricing.
Welcome to our new website & to our legal blawg Poetic Justis! Formerly known as Peoria Legal Blawg, we have re-launched our website to better focus on our new blawg and the artwork of Mr. VanFleet’s children, which will be featured and periodically rotated as the background theme of our entire website. Please join us each month to follow our legal based blawg posts and a special poem written by Mr. VanFleet himself!