There is no market as fiercely competitive as that of legal services.
Worse still, the tide has turned against the elite law-firms in the wake of the economic downturn. Even as markets they serve recover, their clients' legal budgets are not rising with the tide. Being really smart is no longer a guarantee of success. Less prestigious law firms have gained a foothold in the kinds of work usually reserved for the elite firms, and clients are demanding different terms from their panel of legal advisors.
In response to this new environment, the industry has taken a logical step: they reduced prices, discounted their rate cards and approached the problem as though the world of professional services was a retailer's end-of-year sale. However, there was an unintended consequence. In retail, consumers don't judge the prestige of a brand by its profitability. So while Hermes can lose profit margin without losing brand value but in law, profitability is cache. The problem is that in focusing on turnover rather than profitability as they discounted rates, law firms in all the major markets have been weakening their brand and scuppering their chances of commanding premium prices in the future. They've effectively eroded the value of elite legal counsel.
And therein lies the fundamental misconception of the legal industry: premium law firms cannot work on the same principles as discount retailers. Their clients are asking for value, and a year-long sale price throws into doubt the value offered at full-price.
These premium law firms had the right idea in trying to keep their clients happy, but they were adopting an impossible strategy for their industry.
Fortunately, this is a challenge faced by professional service firms the world over. By simply applying tested innovations from other professional services - instead of acting like discount retailers - we can welcome an era of lower prices with higher PPP.
The opportunity is to move beyond the discounted rate card and decouple the relationship between price and profitability. The future of the highly profitable law firm rests not on blunt discounts, but on leveraging new service models to deliver value.
Law firms need to adapt their product - and not just their pricing - to the 'new normal' marketplace.