The twenty-first century version of loss leaders, big-law style, is nothing more than old fashioned price cutting wars, observes Toby Brown at Three Geeks and a Law Blog. A loss leader refers to a pricing strategy whereby a product is advertised below cost to lure customers in the hopes of selling them more profitable, big ticket items. As Brown points out, biglaw’s so called loss leaders – deeply discounted M&A deals and large dollar, complex litigation cases — are in fact, nothing more than big-ticket items being passed off at bargain basement prices. Rather than stimulate clients to spend more money as is the case with a true loss leader, discounting big ticket items only gives client a continued expectation of lower prices. As Brown puts it:
This is akin to the car dealer selling Escalades at a loss, hoping you’ll buy … maybe some nicer wheels? Law firms using this technique are expecting the customer to be so happy they come back next year and buy another Escalade – at full price. The likelihood of this: Zero.
Of course, some big firm lawyers are abandoning the loss leader. How so? By leaving the land of the loss leader entirely and starting their own boutique practices, as described at Law.com’s Small Firm Business. Many of these lawyers want to provide better value to clients – not just in the form of superior service, but also at lower, more flexible rates. And they aren’t able to do so in the confines of biglaw. From the article:
If the lawyers who started their own firms had different personal reasons for leaving their old firms, their business rationales are nearly identical: It’s all about value. The recession has increased clients’ price sensitivity, creating an opening for smaller firms with lower, more flexible costs. Boutiques cater to cost-conscious clients by lowering overhead expenses, slashing rates and offering alternative fee arrangements, while providing the same legal services that their founders offered at their old firms.
Once free of biglaw’s overhead, bureaucracy and love affair with the billable hour, these lawyers are free to come up with pricing mechanisms that are at once more creative and lucrative than the loss leader. In fact, matters like litigation, which many lawyers believe are toughest to “flat fee” – are actually the easiest to price, according to former Shearman partner, Steven Molo, now principal at Molo Lamken had this to say:
“Trials are the easiest things to budget for,” Molo says. “If it’s an eight-week trial, you can charge a client a flat fee per week.” Clients then make bonus payments depending on the trial result or the amount of settlement. “From the client’s perspective, it makes all the sense in the world, because they know going into something what it’s going to cost,” says Molo. He used alternative fee arrangements occasionally at his former firms, Molo says, although it was more difficult because the larger firms were more dependent upon the billable hour.
Not all boutique lawyers save costs through flat fees. Some of the lawyers mentioned in the article have cut their billable rates by as much as 40 percent, moved to cheaper office space in the suburbs and rely on contract lawyers instead of full time, high cost associates. Other lawyers have changed the way they practice; for example, culling arguments to streamline litigation instead of adopting a scorched earth, no holds bar approach for every matter.
As these new boutiques thrive, many other large firm lawyers may decide to take the same approach. After all, why work for a loss at someone else’s firm, when you can win big on your own?
One cautionary note: biglaw attorneys considering this approach may want to act sooner rather than later. After all, you never know when the bar might change the rules of the game.