Recent research provides a cogent reason for law firm boards to ask cogent questions about their fee-setting strategies along the lines of “Are we doing the right things to mitigate the impact on our profits of clients’ perceptions of steadily falling fee levels?”
For the last seven years the Beaton Benchmarks in professional services have gathered unique evidence on clients’ perceptions of fee levels. At the big end of town law firms’ fees are steadily falling as far their clients are concerned.
FEE LEVELS ARE STEADILY FALLING
The chart shows the average rating of fee levels by about 5,000 buyers and users of commercial and corporate legal services each year from 2008 to 2014.
The respondents in the independent online survey conducted by Beaton Research + Consulting are answering this question: How would you rate the fees charged by [Firm] over the last 12 months, where 0 = ‘extremely low fees’ and 10 = ‘extremely high fees’?. The firms referred to as [Firm] are the 35 largest in Australia, excluding Slater & Gordon because it does not compete for corporate clients.
The year-on-year falls in perceived price are statistically significant. As I have explained previously in BRW, a sustained fall in price – whether actual (on which there is regrettably no reliable times series data) or perceived by clients – is one of the surest indicators of a structural trend and life cycle maturity.
In plain English this means the market is hyper-competitive, the war is for market share, and the major weapon used is discounting by law firms.
The consequences for those firms that don’t realise this – and that don’t act now – are predictable and dire. Falling profitability. That’s why the question is cogent.
And no board should rest until it receives convincing answers and sees demonstrable, sustained strategic action. Questions include “Do we really know enough about the future of the legal services industry?”, “Is our firm’s current position sustainable in that future?” and “What we have to do to continue to create continuing value for our clients and ourselves?”
If a board is not asking these and other hard questions about fees and its firm’s strategy for managing in a future where fees fall further, then now is the time to start.
George Beaton is a director of Beaton Capital and Beaton Research + Consulting, firms dedicated to professional services.