When the subject of the cost pressures facing in-house legal departments comes up, I can almost hear law firm colleagues saying this:
As if not talking about it will help it go away. Edvard Munch offered his perspective on this:
So sometimes it’s helpful to look at a concrete example of global competition, particularly if it involves a major company that has historically enjoyed consistent growth and strong margins. The link to what many large law firms are similarly experiencing is purely intentional.
This case study today starts with Intel. As noted in a great Reuters article, its processors have powered most desktop and laptop computers for decades. Laptops, just two years ago, would sell for $1,500 or more. Intel would have a processor inside almost all of them, and see margins peaking at 68%.
We all know what happened. A company called Apple started selling phones that were really computers, and doubled down by selling tablets that were quite functional for most tasks as well. Now look at the world Intel is facing:
“We believe the post-PC era has arrived,” Piper Jaffray analyst Gus Richard wrote in a recent note to investors. “Moreover, $120 Intel CPUs are being replaced by $25 ARM-based CPUs as PCs are being cannibalized by tablets.”
Intel still sells a lot of processors at good margins and has major product lines that power the servers that are the “Cloud” everyone talks about. But look at that double-whammy above. It’s not just that Intel isn’t making many of the processors that power smartphones and tablets. It’s really this: those companies that are making them are selling them for 20% of a full-powered Intel processor. You really have to read the prior sentence twice, since the first time you might think we are talking about 20% off, not one-fifth of the price.
And this is happening in many markets, not just to Intel and computer processors. Let’s step a few slots down the supply chain from Intel to a major seller of computers: Best Buy. It just so happens that I was in the market for a laptop yesterday.
I did some searching online (this is transparency), and found a well-reviewed “Daily Deal” at Best Buy (this we call analytics). It was sold out in all nearby stores except one, so I hopped into the car and drove about 20 minutes to the store that allegedly had it in inventory. The helpful “Associate” first said they didn’t have it, that their website was often wrong, and would I like this one here (at twice the price of the Daily Deal). I persistent, and they found it in a locked cage high on the wall at the back of the store. I swear it was hidden under a stack of $1,000+ laptops, all gathering dust.
Only this laptop, with a 15.4 inch screen, Intel processor, 4 MB RAM, 320 GB hard-drive and DVD/CD combo drive wasn’t the regular $459. And it wasn’t the Daily Deal price of $349. For some reason, it showed up on the store inventory screen at $279. I said “I’ll take it,” and after enduring about five attempted upsells and service plans, I was out of the store. I felt like running to my car before someone called security.
I see seven lessons from this case study for anyone still reading:
Lesson #1: When competition affects one market player, it has a ripple effect downstream for all parties to the supply chain and the sales process.
Lesson #2: Law firms are part of the supply chain. Many law firms just don’t know it yet. And no law firm is as strong, on any metric, as Intel.
Lesson #3: To understand the challenges of law firms, look at the business reality facing their clients.
Lesson #4: In markets with true competition, pricing absent innovation or differentiation goes one way. Down.
Lesson #5: New pricing methods do not equal innovation.
Lesson #6: Even the fanciest pricing models cannot mask excess costs.
Lesson #7: Law firms that think a 5-15% discount off normal hourly pricing is going to meet competitive challenges for most work are not even in the ballpark (or the area code).
Intel is still strong right now; Best Buy somewhat less so. It’s having a tough year: removed its CEO; rejected a takeover proposal from a co-founder; and named a “turnaround specialist” as its new CEO.
I suppose some law firms could try a “Daily Deal” to sell excess capacity and gin up interest with once and future clients. Those clients need to be persistent, and not bite right away at the “Law Squad” support option or the three-year “Compliance Monitoring” service plan.