I just finished an arbitration (on the heels of a trial), so I’ve been catching up on some reading. So with apologies for being some “out of date” in getting these thoughts on paper….
In the January issue of American Lawyer, there is a terrific article by Mark Roellig, General Counsel at Massachusetts Life Insurance Company, addressing the issue of firms failing to mine their data on cost of handling certain kinds of legal work. Here is Roellig’s thesis:
What businesses don’t have is much success in establishing fixed fee arrangements with their outside counsel, despite years of discussions, conferences and articles. I believe the greatest obstacle to such arrangements has been an asymmetry of information between the buyer and seller—the disparity between what firms know about the true cost of legal services they provide and what clients know.
My reaction? Spot on—almost. It is true that firms do have data to determine the price they have charged for services. It is not true that they know what it cost to generate their work product. Far from it. But the general idea that the marketplace does not provide ready access to pricing data is exactly right, and it clearly operates to the client’s detriment.
I believe don’t accept the idea that if firms mined their data and shared it with their clients, there would be enough data to really create an efficient marketplace. For example, a firm that is inefficient could mine its data and share that information with its clients and come to agreement on fixed fees. But clients sharing data, which is Mr. Roellig’s suggestion as to what is starting to happen, is a far superior solution. Client data sharing does three things. First, it provides a better sense of average cost for certain kinds of work. Second, it allows inside lawyers to know that their agreement to a fixed price is reasonable. But perhaps most important, it provides a basis for price and a reason for competition. And frankly, given the inefficiencies in production occasioned by hourly billing, one would expect to see prices decline for a while as firms figure out how to drive inefficiencies out of their “cost of goods sold.”
I know that many lawyers (at least many outside lawyers) tend to rail against these notions because their work is, well, special. My only comment on that is that if your work is so special, letting the world see what you’ve charged for it should not result in any loss of work. It is, in my mind at least, hard to argue with the concept that an informed client making decisions based on all relevant information (cost and “special-ness” among them) is a bad thing. I hope businesses seeking to share price data are successful.