Adam Smith, Esq. hosts a high-level discussion on competition in the legal market and whether general counsels really want change.

I am, obviously, neither a general counsel of a large company nor an attorney at a large corporate firm, so I won’t speak to that. Some comments (not necessarily by Bruce, he quotes others liberally there) bear comment. If you care, continue on…


Alarmed at large law firm recalcitrance, I consulted my economist friend Madam Smythe, who told me: “On first glance, the legal market looks competitive. The scores of large, global law firms with good reputations should not fool you. Once a company retains a firm, a mini-monopoly ensues; just one bite at the apple – then switching costs skyrocket. It’s diabolical. I’ve run the numbers: law firms are natural monopolies. They have too much market power, which they use artificially to raise rates and corner the market on talent.”

And here’s one reply:

Here I think the problem is the regulatory structure of legal markets–which are among the most heavily regulated in the economy. It’s just that the regulation is supplied by lawyers themselves through bar associations and the judiciary. The complexity of law is attributable, I think, to the closed nature of the markets here: without the ability to form corporations, seek venture capital, attract innovators who have not been through the training process of lawyers, it is very hard for the market to spur the only real type of change that can reduce complexity and cost and that is innovation in the underlying dimensions of legal inputs.

And another:

But I actually have a more subversive suggestion, which falls under "E. Other" in Paul’s schema: I don’t believe GC’s really want things to change, for all their trashmouth game talk. GC’s want their backsides protected by the imprimatur of the Magic Circle, the New York Elite, or the Skadden/Latham brand name. GC’s don’t want "good enough" quality; they want top-drawer quality.

And I submit this is not irrational. Legal fees as a percent of deal value (unless you’re smaller than the attendees at the Portugal event) are typically not material compared to the i-bankers’ fees or the opportunity and other costs of corporate personnel assigned to the deal. Do I think Gillian is wrong that 100 pages of appellate opinion interpreting a garden variety contract clause is idiotic? No, of course it is. But the answer is to eliminate regulation of the bar by the bar and watch a thousand flowers bloom.

I really agree with the underlined comment. No one was ever fired from an international bank because they hired the most expensive and well-known law firm. Not once, not ever, despite hundreds of stories of large firms completely botching major cases by missing appeal deadlines, walking clients into obstruction of justice, and filing inadequate patents. Note that all of the preceding have not simply been described as "good," but as the best in the business.

Plenty of people, however, have gotten themselves into trouble by hiring "cheap" professionals and then having things go wrong. Why didn’t you hire the best? Are you in on the deal? Do you know someone who works there? Are you an idiot? It doesn’t matter if the lawyer had nothing to do with the outcome.

In some sense, the persistence of reputation (and the relationship of size to reputation) is completely understandable. Have you ever bought a brand name medication instead of the generic? Why? Do you actually know if Tylenol is really any safer or more effective than mere acetominophen? It could be far less safe, it could be processed in a worse factory. But you presume otherwise, for a variety of reasons. It’s silly to think the same thought processes won’t affect major companies and banks just because they’re big and dealing with a lot of money.

I don’t think the ‘regulation’ aspect of the law is really the problem. I think the problem is that it is impossible to evaluate and compare legal services with any accuracy or precision, because the work is by and large kept confidential and is largely invisible even to the client.

How could a client possibly know that the preparation I did prior to a hearing (or negotiation, or trial, or whatever) made the difference between winning and losing, and that the other lawyers they were considering would not have done that? I don’t even know if that’s true. I don’t think anyone can know if that’s true.

Which leaves lawyers and clients, unfortunately, subject to amorphous customer satisfaction. I know many truly terrible lawyers who have repeatedly prejudiced their clients’ interests through their poor performance who nonetheless maintain an uncanny rapport with their clients. Much of this problem is inherent to other professions, like medicine, where it’s a lot easier to discern negligence than excellence, and much of it has no easy solution.

I think the core point for businesses to take home is that, in the big scheme of things, they actually have a lot less to lose than most clients in any given situation, since they spend a lot more time around lawyers. A personal injury plaintiff really only has one shot at trial, and if they ended up with a bad trial lawyer — a fact that would not be apparent to them until it was too late — then too bad.

Businesses, however, can generally spread work around and see what they think of the results. More importantly, they can take the time to come up with concrete definitions of customer satisfaction. If I could only give one piece of advice to business, it would be: you should be able to figure out what your lawyers are doing. If it means reading a brief, evaluating a contract (including with the other side proposed), attending a hearing, or listening in on a phone call, the law should not be a mystery to you. Your lawyer should be able to explain what they are doing and why they chose that route over other possibilities. Don’t get just updates — get explanations.

The big problem with that proposal is that it adds yet another layer of bureaucracy, with businesses spending time reviewing the work of another who, at the end of the day, has nothing to do with their actual business.  But that’s a question for each individual business, and I bet a number of businesses could do far more to reexamine the actual work performed (and not just the hours or results) by outside counsel.

My suspicion is that, in the not too distant future, the legal profession will reach a point where, like the financial sector, there exists businesses that do nothing but rate the other businesses. Avvo is a step in that direction, though it’s closer to personal services like, say, LinkedIn, rather than business services like, say, a bond rating agency or the securities review wing of an investment bank.

Perhaps that’s the way Bruce’s LegalOnRamp is going…