The Law of Supply and Demand
The law of supply and demand is a theory that explains the interaction between the sellers of a resource and the buyers for that resource. The theory defines what effect the relationship between the availability of a particular product and the desire (or demand) for that product has on its price. Generally, low supply and high demand increase price and vice versa.
Results published in Peer Monitor’s Q2 2020 Report last week suggest that the broader economy has a lot to learn from running a law firm.
Why would I say this?
Well, what would you think would be the logical outcome from:
- Average demand for legal services decreasing by 5.9%, and
- Productivity across all fee earners declining by 7.2%?
In normal circumstances you would be given credit for thinking that prices would come down, or at least hold firm. But as we know, running a law firm is anything but normal circumstances because as the Report goes on to state:
- Average worked rate charged across the market was 5.2% higher than at the same point last year.
That’s worth repeating: Higher! 5.2% Higher!
If you are wondering how that can even be possible, the answer is relatively simple: ‘partners [of law firms] have begun completing a higher proportion of [the] work by volume.‘
I would be the first to admit that one possible reason why this [partners doing more of the work in a leverage model – see my post here on leverage] can be the case is because the type of work being done by law firms has become far more complex since the onset of COVID-19 and this requires more grey-haired advice with a higher proportion of leverage at partner level. After all, none of us have lived through a pandemic of this nature and so there really isn’t much precedent for young lawyers to go looking for and so partners and senior lawyers are needing to be more hands on when it comes to file time.
But the cynic in me also thinks that’s a likely to be load of rubbish. Law firms (like many in the economy I will add) have been furloughing staff and making staff redundant during the pandemic. On the flip-side, budgeted number of billable hours for individual lawyers do not appear to have been reduced (other than pro-rata to the number of days lawyers may need to be taking off).
And so we find ourselves in this position where individual billable hour targets still need to be met, but overall demand for legal services is falling.
So what happens when this happens?
If we learnt anything from the data of Great Recession it is this:
In times of signifiant economic downturn, holding individuals to individual budgets results in an upstreaming of work.
- Partners will hoard work in an attempt met their budget first
- Special Counsel will hoard work in an attempt to met their budget second
- Senior Associates will hoard work in an attempt to met their budget third.
And if you are outside of the gold, silver or bronze medal positions you’re pretty stuffed!
So what can we do about this?
For those sitting around wondering what can be doe about this, the answer is appears to be pretty clear – do away with individual utlisation and budgetary targets. Even in the best of years these so-called budgets are arbitrary in determining law firm profitability (primarily because they work on an opportunity cost profit basis rather than a real in the bank profit analysis), but more importantly because they create silos – individuals in law firms with personal incentives that outweighs those of the group/society.
And, they sustain bad behaviour in firms – ‘me’ over ‘us’.
But critically, firms that work like this create ‘Motels for Lawyers’ – not law firms.
As always, the above just represent my own thoughts and would love to hear your thoughts.