Biglaw, Billable Hours, In-House Counsel, Money, Partner Issues

Buying In: Suicide Pricing

Desperation breeds heavy discounting. How bad has it gotten?

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on

Biglaw competition is getting intense. Everyone is chasing the same clients, while also deploying rearguard actions to protect institutional clients from being poached. Forget about lateral partners taking clients for a moment. I am talking about overt approaches from competing firms regarding existing matters, bearing promises of handling things more cheaply and more efficiently. In-house lawyers, under pressure to contain costs, almost have to listen. They may not act right away, but with each such approach another dent has been made in the Biglaw client-maintenance bumper.

It is no secret that in the face of declining overall demand (especially for the profit-pumping activities like mega-document reviews that were Biglaw’s joy to perform in the past), firms need to aggressively protect market share. While also seeking to grow market share. In an environment where more and more large clients are either (1) reducing the number of firms that they are willing to assign work to or (2) embracing an approach that finds no beauty contest too distasteful to engage in. So partners, at least those tasked with finding work for everyone to do, are falling back on a tried-and-true “sales approach” — putting things on sale.

How bad has it gotten?

Pretty bad. I have heard reports of work being offered for free. As in no charge. I have never gone down that road and would find another line of work if I felt I needed to. But it is happening, and it is insidious. No self-respecting client should ever want to have their lawyers working for free, and no self-respecting lawyer should ever feel forced to provide their services at no charge. (Interestingly, Biglaw associates may actually be the only class of lawyers for whom an assignment of working for free on a matter cannot be challenged.) Of course, there may be some exceptions, where handling an assignment gratis is not that big of an issue. Perhaps as a small favor for an institutional client, or as a limited opportunity to demonstrate proficiency in another discipline for an existing client. But as a strategy for attracting new clients? Count me out. Pro bono is for the indigent, not the in-house counsel power-tripping on their “market power.”

Offers to work for free are unusual, yet frequent enough to be of concern. More prevalent are the growing examples of “suicide pricing,” or offering rates so low that they are almost certain to result in massive write-downs or an unprofitable engagement. Here I have personal experience. Such as being invited to pitch for a multi-defendant litigation, and learning that more than one rival firm had come in with bids that even the prospective clients found laughably low. But even though the clients rejected the lowest bids as “too low,” the winning bid was not far off. And represented a number that five years ago would have been considered irresponsible. A sign of the times, and worth considering for anyone concerned about Biglaw’s future.

Apologetics first. Perhaps firms have truly gotten better at managing timekeepers and handling their matters with ruthless efficiency. And maybe the partners putting in the lowball bids are masters at settling cases early. Firms have been hiring “pricing gurus” and focusing more on their historical data in order to tease out at what price point matters become profitable. These kinds of steps are necessary, especially when the menu of services on any given matter that will be the primary responsibility of the firm, as opposed to a third-party vendor, is getting smaller. Combine efficiency efforts and a competitive environment and it is no surprise that firms are taking chances with aggressive pricing.

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In my opinion, the evidence of true efficiency gains in Biglaw remains scant. A better explanation for the proliferation of “suicide pricing” offers is more likely tied to incentives. Think about it. It is safe to assume that the most egregious examples of “suicide pricing” arise in the context of beauty contests — where the work is up for grabs, and clients have quickly learned that it is to their advantage to keep quiet. Quiet about what they value the assignment at, and what kinds of bids they have already solicited. Or even if their current firm will be given a chance to match the lowest bid. So the lucky firms in the contest are forced to go low, in the hopes that their bids would be low enough to convince the client that they are getting a deal not be missed. It truly becomes a race to the bottom. But certain parties benefit from the system and thereby perpetuate it.

Chief among the culprits are clients themselves. The realization that many Biglaw firms will willingly offer clearance-rack prices for the opportunity to provide routine or at least non-mission critical services can be a heady one for clients. Especially long-suffering ones who have paid through the nose for years to get the “Biglaw insurance policy” in the first place. Couple the obvious savings with the fact that most Biglaw firms are so happy with new business that they will do their absolute best to provide excellent service (and hopefully avoid being “beauty-contested” on the next matter), no matter what price tag the matter carries, and clients make out like bandits.

And it would be a mistake to ignore who gets to offer these “competitive bids” in the first place. Very often they are senior partners. As in, not the lawyers who will work on the matter — nor the ones that will see massive write-offs of their time. It is always easy to offer a steep discount on someone else’s time. Especially if you view those other lawyers as expensive overhead at best — or “walking dead-weight” at worst. Double especially if you are one of the many Biglaw partners who gorge on what they kill, and will be rewarded on the revenue brought in. At the end of the year, you can be sure that the partner will point to the million dollars of revenue from the “new and prestigious” client. And will gloss over the fact that some poor associates who actually worked on the matter saw half of their time written off. Because the firm had to stay within the “aggressive budget” that our brilliant partner constructed to get the client to sign the engagement letter.

So some partners win, and the most cost-conscious of clients may win. But who loses when firms engage in “suicide pricing”? Everyone else, from support staff to the working attorneys to everyone concerned with searching for sustainable business practices that are a win-win for Biglaw and clients. Just offering to sell services for cheaper is not much of a strategy for firms. Especially when everyone agrees that we are in a changing industry and need to do a better job of communicating and delivering value. I am not optimistic — unless clients and firms start focusing on improving communication with each other. Until then, it is anything goes in the Biglaw bazaar. Watch out for pickpockets.

What are your thoughts and experiences with “suicide pricing” by Biglaw firms? Let me know by email or in the comments.

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Anonymous Partner is a partner at a major law firm. You can reach him by email at atlpartnercolumn@gmail.com.

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