Wiley- supply or demand.jpeg

This discussion on Quora triggered a similarly-titled article in Forbes. I'm not a lawyer, but I've served as sales coach to thousands of BigLaw partners over the past 20 years, and watched the 20-year boom, i.e., seller's market, from up close and personal. 

This question really should be broken into two parts:

  1. Why did lawyers become so expensive?
  2. Why, despite oversupply, have they remained so expensive? 

The first question is easy. The perceived high cost of lawyers, at least in the AmLaw 200, has reflected supply/demand economics. From roughly 1998-2008, a number of factors conspired to create a perfect storm of demand for law firms:

  • Companies got larger, with greater geographic and jurisdictional reach, 
  • Larger employee populations whose workplace rights increased in number and type
  • Product/service complexity
  • Supply chain- and marketing complexity
  • Higher economic stakes associated with corporate decisions and behavior
  • Intellectual assets began to overtake physical ones in value

All of this meant that a client who previously needed fairly simple advice now needed complex expertise beyond what their lawyer could reasonably offer, so that lawyer had two choices: hire that additional expertise, or give a competitor an entry point into his client.  That's why law firms grew so rapidly over the past 20 years, in response to an explosion in legal service demand.  

Such optimal conditions granted law firms tremendous pricing power because, as another poster pointed out, the risk of not having a lawyer whose pedigree provided the requisite skill (and CYA protection) was unacceptable to line executives and in-house counsel.  There's no other way to explain an entire industry imposing rate increases of 6-10% every year for 20 years.

Question #2 is a bit more complex. Lawyers' demand and pricing power has bifurcated. Some economists have described it as a vertical barbell, i.e., a big fat segment of demand at the very top, little demand and pricing power through the middle, and a cluster of demand at the very bottom of the price range. Unfortunately, at the bottom, the heaviest demand for legal service is unmet because it's from the poorest segment of the society, who can't afford lawyers.

There are wizard lawyers at the absolute top of their respective food chains who still have tremendous pricing power ($1200/hr or more, according to a recent WSJ article), clients refuse to pay $600/hr for all the other lawyers below who are doing mature, relatively low-risk work implementing the wizards' grand wisdom.  Those are the lawyers now swelling the ranks of the newly-solo. Clients have become more sophisticated buyers, and are growing more comfortable with cheaper alternatives. According to a Chambers article, London's Magic Circle firms appear to be feeling the shift.

Enter offshore LPO to fill in the legal labor gap at prices the buyers find attractive and within an acceptable risk profile.  At first, BigLaw pooh-poohed them as little more than glorified paralegals, seen as no threat the their lofty franchises.  Inexorably, though, LPO firms are moving up the service value food chain, taking on increasingly more complex work as xenophobia wanes and clients gain experience with their work-product.  (This same thing happened in the consumer goods business when LG, Lenovo and other Asian manufacturers moved up the value chain from OEMs supplying cheap components and sub-assemblies to consumer brands that now compete directly with their former customers.)  Those who doubt this trend should consider that more than one Magic Circle firm has moved senior partners to LPO centers to manage offshore work.

In the face of all this, why so many lawyers still can charge as much as they do seems to be the product of it taking time for markets to correct. When demand drops, it's a downward trend, not a precipitous cessation. Over time, prices will steadily decline overall. The luminaries at the top will still be able to charge $1200, or $1500 per hour. They'll continue to capture the headlines, allowing some to infer that lawyer rates remain high. However, in absolute dollars, in a $160 billion industry of 800,000 lawyers, there are so few of them that their economic impact is not even a rounding error. 

The real point is that the 20-year seller's market is over, permanently.  It's time for lawyers to put on their big-boy pants and play by the big-boy competitive rules their clients have wrestled with for decades. The good news is that most lawyers will delay as long as possible, so those who act fast and decisively will be welcomed with open arms by clients eager for a more rationally-priced legal industry.

Mike O'Horo

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