Price wars

Around the time I started my recent survey on alternative fees, I had heard many accounts that a price war had broken out among large law firms, with some racing to the bottom to offer ever better deals.  So I decided to include this question in the first few surveys:

There is a lot of price pressure these days, and some say it is leading firms to bid on projects as loss leaders in a way that is not sustainable.  Have you seen any examples of this?

I asked the question of 15 large firms, and all 15 said yes.  I have never heard 15 lawyers agree on anything else before this.  Here are a few examples of what people said:

Some of our competitors across the country are doing work on an hourly rate that is drastically less than what they would ordinarily charge. Some firms will do all of the discovery in a case for free, and then take the case on a fee basis from there, or will charge half of their hourly rate for the first phase of the case. We’ve also heard about some firms that have actually said that they will do these motions that will probably occur during the course of the case for free, or they will do the motion work at 30%, or some other drastically discounted rate like that, because they’re really hungry to get work.

We have heard stories about well-established New York firms who have [told] clients that they will not be underbid. They will do [a case] for nothing [just so that they can] get in the door and show [the client] what they can do.

Some brand-name firms [are making] low-cost proposals that are very surprising.

In the last 18 months, there has been a fall off in patent filings, [so] some firms have a lot of excess capacity in this area.  With all those people sitting around, some [firms] are bidding in ways that are totally insane.

There were differences of opinion about why firms were bidding so aggressively.  The most common explanation was too much capacity:

Many firms are willing to discount their fees in order to keep people busy.  People do what they have to do; it’s a jungle out there.

[Some] firms have been doing private equity [but] there isn’t any [of that work] right now, so it’s either fire people or work for any money they can bring in at all.

There is something to be said about recovering 50 cents on the dollar when the alternative is to have idle people.

Some participants thought that other factors were behind the low bids, including lack of experience:

I have seen some dramatic underbidding, but I think it’s by people who do not know what they’re getting into.

Some firms are bidding alternative fee projects at very low costs.  These are loss leaders which cannot survive in the long term, but it’s not certain whether the firms are doing it on purpose or not.

Some firms may simply be treating the bid as a loss leader in the sense that they realize they may lose money.  Others are simply on a learning curve, trying to be responsive to the client's request.  Since many firms have not established the database that they need for truly rational alternative fees, people are taking risks that are not going to be sustainable.

[In one recent competition] another law firm bid a price which quite frankly we thought was not sustainable. And there are really only two or three answers as to why they did that. One is a loss leader. The second is sheer stupidity. And the third is a willingness to take an extraordinary risk.

There were mixed opinions about “loss leader” bids as a strategy for getting started with new clients:

They’re getting in with the client [and] the strategy may be effective.

I have never seen loss leader work lead to higher end work, and I have been at this a long time. Loss leaders just cause people to expect lower rates, rather than focusing on fair pricing for the value provided.

On a similar note, one participant said that low bidding firms may be creating some long-term problems for themselves:

There are some law firms that are pricing in a way that will make it difficult for them to sustain their [past] market position.  It is difficult to explain to an existing client who’s been very loyal to you why you would offer dramatically different pricing to new clients.

For more about The LegalBizDev Survey of Alternative Fees, see www.legalbizdev.com/survey.

Comments

[China Law]

Doesn't this just confirm how wildly overpriced some of these firms had become?