Client power: A lesson in the harsh realities of life

Law firms rarely receive much sympathy during recession where cut-backs and an image of money-hungry lawyers appear an incongruous match. Michael Simmons, a partner at Finers Stephens Innocent and a consultant on professional practice problems, argues that legal spend is often the first casualty in an economic downturn where clients are eager to cut costs to sustain their own profitability. With firms left out in the cold, how can lawyers hope to survive the hard times?

Solicitors are currently faced with the nightmare scenario of sophisticated clients, who understand only too well the niceties of the legal marketplace. Any market is based on supply and demand and lawyers who think themselves immune are the victims of delusion.

The truth is, that there are far too many lawyers chasing far too little work. Law schools expanded to meet what was thought to be an ever-increasing demand, but recessionary forces are now at work. It has always been far cheaper for universities to expand their law schools rather than their science departments; the former only need a few text books, while the latter require expensive equipment. Then again, students are creatures of fashion, and the law seemed not only a lucrative, but also a fashionable profession. Unlike those poor scientists, you did not have to get your hands dirty.

Law firms are shedding staff and new firms are being created, whose partners are those recently made redundant. The fact that the start-up costs are horrendous, professional indemnity insurance especially, is treated as irrelevant.

The imperative is to be able to practise one’s expensively acquired profession, when the availability of jobs as assistant solicitors in law firms has become a thing of the past, at least for those lawyers in question.

Not being burdened by classically heavy overheads, they are only too happy to compete on price with their former employers, and they often have close links with their firm’s clients, having worked on their previous cases.

Large companies in general are large employers of outside legal services. In the general rush to become more profitable and cut costs, legal spend is an obvious target.

Businesses with buying power are not only reducing the number of outside legal advisers but also putting those remaining to the test. Is it quality or merely price that is in issue? The story will differ from company to company, but the classic segmentation of legal work is being made by those responsible for the choice of lawyers.

If it classifies as commodity work, any lawyer is considered suitable for the job, but the test then is clearly that of price. Whether the law firm makes a profit out of the work is of little or no interest to the client. If the firm does the work negligently, it is sued, and insurers bear most of the damage. It is a no-win situation for law firms, and the premiums that they are paying for indemnity insurance clearly reflect that fact.

At the higher levels of legal work, where genuine expertise is required, those choosing the outside law firms will be looking for the requisite quality of work and service. The higher the level of work required, the more fee insensitive it becomes.

Where do we find the particularly guilty men and women responsible for this state of affairs? The answer is not difficult: in-house lawyers are being hired by businesses with the specific brief of bringing legal costs under control. Directors reason rightly that the poacher turned gamekeeper, is the best person to know the legal industry and tame it for the benefit of the employer.

In extreme cases, law firms, who rarely have much idea as to how much the job costs, are persuaded recklessly to quote for the work on a loss-leader basis. The theory is that what you lose on the swings, you make on the roundabouts. The truth is that there are no roundabouts, as the client will be busily segmenting the work and giving the cream elsewhere.

If this policy is pursued to the extreme, I take the view that it becomes detrimental to the client. Clients must have a vested interest in the economic success of their law firms, even those dealing with the lowest end of the commodity jungle. If the law firm fails, then the client will be left with a messy situation. The parallel is that of one’s builder going bankrupt in mid-job. It will always cost more to find another firm to pick up the pieces. An economically successful law firm is an efficient one, and it is important that the client pays sufficient for the job to relieve the law firm from economic paralysis. If the partners are worried about the financial viability of their firm, as well as their own ability to provide a decent living for their families, they will be distracted from the job in hand and will not be able to perform the work adequately. This must be detrimental to the clients.

Then again, there is always a learning curve in taking on a new client. Every client has its own idiosyncrasies and culture. If a law firm has dealt regularly with that particular client, it will know what is required of it, and will not have to waste a great deal of time in learning the basics. In other words, in-house lawyers are finding that it is often better to stay with the tried and trusted than swapping around for lower prices, or even for kicks.

The beauty parade, or request for proposal, is becoming more of a minefield. So many are merely an attempt to sharpen up the act of the incumbent law firm. There is not really much intention of changing, although the reality will be carefully disguised to get the appropriate firms to tender. It is so helpful to have someone on the inside track, who can identify the real issues, if indeed, there are any. Goodwill of this nature is of great value.

To waste time and resources in seeking the impossible is demoralising. How many of us realise halfway through the tender process that we are engaged in a charade with a no-win result for our firms? It is an unacceptable form of cruelty to law firms, but it will continue, unless and until we become sufficiently sophisticated to smell out in advance these timewasters, and give them the short shrift that they deserve.

If your costs are such that you cannot reduce your prices below a certain point, and the client’s only issue is that of cheapness, it is better not to enter the lists at all. You would do well to point out this fact in advance to potential clients, and perhaps even send them in the direction of firms whose overheads are that much lower than your own. You may not be doing those firms much of a favour, but it will certainly be better than the disservice that you do yourself by wasting time tendering for unprofitable work.

Fools rush in to tender, while wise men ask the appropriate questions beforehand. If the answers are not satisfactory, they stay at home. You may soon develop a reputation for discrimination and your aloofness may be interpreted by the market in a manner beneficial to your future prospects of well-paid work from ever-improving clients.

The 21st century begins with the age of client power. Will it continue? The world economy will no doubt improve in the course of time, and then once again, there will be an imbalance of too much work as against too few lawyers. At that stage, law firms will flex their muscles and seek to put up their prices. Clients will once again say “thank you” for being taken on the client lists.

At that stage, law schools will once more start to expand their entry, and the whole giddy merry-go-round will begin all over again. As usual, by the time that the newly trained lawyers are ready to enter the market, we will be back in its recessionary phase, and they will be looking for jobs elsewhere. Sadly, most petrol pumps are now automated, so the opportunity to work in that particular service industry may have gone.

We may not like it, but we are economic playthings, and the situation will never truly change.

Michael Simmons is a partner at Finers Stephens Innocent and a consultant on professional practice problems. He can be contacted at: msimmons@fsilaw.co.uk.