I rarely read newsletters on weekdays. But I could not resist reading the June 10 edition of Rain Today when I saw the headline: “What to Say When Your Clients Ask for Lower Fees.”
Rain Today is written for lawyers and other professional service providers, and the lead article -- “You Can't Back Down When Your Back Is Against the Wall” -- began with these words: “One of the most consistent questions I'm asked... is, ‘What do I say when they want a reduction in fee?’... You say, ‘No.’”
The author -- consultant Alan Weiss -- goes on to explain that reducing fees is usually a mistake and that people who consider doing this often suffer from underlying doubts, including: “Poor self-esteem: who am I to ask for this much?”
When it comes to lawyers, I think this is bad advice. If you asked a thousand people who work inside law firms to list their employers’ personality flaws, I don’t think a single one would accuse the average attorney of poor self-esteem. And we are talking about a profession that has shown little reluctance to ask for more. Last December, with the economy deep underwater, the American Lawyer reported in its annual survey of law firm leaders that 97% of AmLaw 200 firms planned to increase their rates in 2009.
Generally speaking, I try to follow Dale Carnegie’s advice in How to Win Friends and Influence People: “The only way to get the best of an argument is to avoid it.” And I certainly don’t want to pick a fight with Alan. I’ve respected his work for many years, and often consult his website for its excellent advice. I even think the concept of standing firm on price is often right. But for lawyers in this economy, it can be downright dangerous. This is the wrong time for lawyers to take a hard line on fees.
Many lawyers recognize how serious the price pressure is, and are already cutting their rates. But some don’t, and this advice could cause them to lose business.
The underlying economics remind me of the housing market. A few years ago, I loved tracking the price of my home, as it went up and up, and then up some more. But if I tried to sell it today for the peak price, no one would buy.
Price pressure has been building on law firms for a long time. In 1992, DuPont established a “convergence process” to increase efficiency and reduce cost by using fewer law firms. In the first four years, they reduced the number of law firms they used from 350 to 42.
When I started this blog four years ago, my very first post was about Tyco reducing the number of law firms it used in product liability matters from 167 to 1. 166 law firms lost Tyco as a client because they were unable to meet its needs, largely on price.
Since then, other large clients have substantially reduced the number of law firms they use including The Linde Group, Brady Corporation, Pfizer, and Honeywell. Hundreds of law firms have lost millions of dollars of business with these clients, largely because they were unwilling or unable to offer lower fees, and alternative fees.
And then there is the economy. As Forbes noted a few months ago, “The sudden lack of liquidity has led to a dearth of transactions, killing demand for many legal services. At the same time, clients facing their own financial pressures are increasingly scrutinizing budgets and demanding more value for their legal expenses.”
Another recent article summed up the result, “GCs [are].. dropping law firms, and demanding lower bills and fixed fees from the ones they keep.”
Over the past few years, AT&T asked all of its outside law firms to accept across-the-board cuts. According to Patricia Diaz Dennis, senior vice president and general counsel, only the ones who “agreed to share our pain ... are still with us today.”
And if refusing to lower prices costs you the wrong client in this challenging economy, it will take a long time to recover. As Steve Barrett, a legal consultant and former CMO, put it: “Once you lose the trusted advisor role, you are on the outside, and it could take five years to get back in.”
The world is a complicated place, and broad generalizations don’t apply to everyone. The idea of holding the line on prices is actually good advice for the small number of lawyers who are in a strong bargaining position due to their expertise and reputation.
The problem is that there is a very large number of lawyers who THINK they fall in that category, but don’t. The world has changed, and they haven’t.
So my general advice to lawyers is simple: listen to your clients and provide more value, even if it means cutting your rates. As Mary Ellen DeWinter, Director of Practice Development at K&L Gates put it: “By being open to a conversation about fees and demonstrating your value as a trusted advisor, you can retain clients and provide a ‘win-win’ opportunity for you both."
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