When you buy a red car you start to see them everywhere.

Maybe this explains why when you are focused on competitive legal services you start to see signs of competition in other markets. Even those that are more parochial than corporate law firm services. If that is possible.

One market that may fit this bill: the clubby world of private equity and the university endowments that are some of their biggest investors. These funds have historically fought to get into some of the new investment vehicles promoted by leading private equity firms. Even in this market, things are starting to change.

Bloomberg covered this well by reporting on remarks by Sandra Robertson, head of Oxford University’s endowment at a recent industry conference. Ms. Robertson mentioned private equity firm Carlyle Group by name, mainly because one of its co-founders, William Conway, was also a speaker at the event.

At issue were the substantial fees that the private equity firms charge, often a “2/20.” That’s 2% of the client’s investment annually until the money is deployed, and 20% of the profits of investments made by the fund. Because of lowering rates of return, private equity is awash in cash, and is having a more difficult time finding investments that meet hurdle rates of return.

So if you are doing the math in your head, yes, a $1 billion fund with a 2% carry would throw off $20 million a year to the managers. Not bad for a start.

Where this gets interesting from an alternative fee perspective is that customers like Ms. Robertson are focusing on the additional fees charged by private equity firms beyond their 2/20. She explains:

“The resources and expenses investing through limited partnership structures is a pain in the backside,” she said. “It is as if you make it deliberately hard for us, you make it hard to get in, the tedious fundraising process, the fight for allocations, the pain of partnership documents, the fees. And not just the headline figure, all the tricks we have to look out for such as transaction fees, monitoring fees, fees for paying the fees for your software licenses, fees for visiting limited partners. Come on guys, pay your own bills.”

Ouch. This is actually very similar to what I hear from some general counsel when they describe an AFA negotiation. They think they are getting a better deal than standard rates billed by the hour, but they are not sure.

And if we think the billable hour model is of long lineage, here’s something else. Ms. Robertson explained the history of the up-front charge and the “carried interest:”

She also questioned the logic of the two-and-twenty fee structure, which traces its origins to when traders paid ships’ captains to risk their lives to transport goods overseas.

“There’s no longer an alignment of interest,” Robertson said. “You are no longer just paying the captain to sail on a ship. You pay the captain to live quite a different lifestyle.”

This is almost exactly how I have heard a few CFOs characterize paying many lawyers over $500 per hour.

The challenge for private equity firms is that returns are very easy to calculate and compare against alternative investments, like a small basket of low-cost index mutual funds. As recently noted in the New York Times:

… large, medium and small endowments all underperformed a simple mix of 60 percent stocks and 40 percent bonds over one-, three- and five-year periods. The 91 percent of endowments with less than $1 billion in assets underperformed in every time period since records have been maintained.

For the time being, law firms have an easier time in dealing with fee discussions without the transparency facing private equity firms in benchmarking returns against passive investments.

That is changing however, as more data and analytical tools become available to general counsel. I think law firms that meet this increasing competition will start to see clients as investors of a sort. Most corporate clients have a lot of options lawyer-wise and expect more than the “smart lawyers; many offices” pitch.

General counsel see a lot of law firms. So many that they start to look like red cars. You don’t want to be just another red car.

(But maybe an alternative vehicle, streamlined and lightweight. Only one lawyer, maybe two can fit. Note clock in the background, to remind us of the old regime. Nice shoes.)

Fresh off the hugely successful launch of the iPhone 5, Apple is once again gearing up for another major product announcement. This time, it’s reportedly a smaller tablet, perhaps an iPad “Mini.” While there is some disagreement about the name, all signs point to an iPad with a smaller form factor.

But wait. A few astute commentators point out that the Mini-Me iPad will cost Apple sales of the iPad:

“We believe that the smaller iPad could cannibalize one million regular iPad units in December or a rate of cannibalization at 20 percent,” […] “[So] for every five million smaller iPads, you lose one million standard iPads.”

Now some old-school MBAs would be aghast at this. You don’t cut into your own sales, and kill (or maim) your golden goose. To which Apple replies:

Let’s do this before someone else does.

Now when we return to the corporate legal realm, pricing and product definitely combines art and science. Many savvy managing partners who hit their stride in the salad days of 1985-2005 are often adamant about one thing: we don’t leave money on the table.

This bromide is couched in many different forms: no discounts, no lower fees without true-ups, no fixed fees without completion bonuses, etc. They all boil down to a central precept of not cannibalizing the firm’s central product and pricing in the name of some alleged greater good.

And this makes business sense in the short run. And it would make strategic sense in the longer run if not for seven factors:

1. There are other large law firms out there.

2. They do identical work for many matters.

3. General Counsel know how to find them.

4. Some charge less.

5. Most General Counsel can do basic math.

6. This means more work will be done by efficient law firms.

7. Or by enterprises that aren’t law firms at all.

In other words, not “leaving money on the table” is fine, as long as you own the table.

So many large law firms are faced with the questions involved in “launching a Mini.” Do we offer some services for less? How do we balance that with what we see as our core services that (for now at least) garner premium prices? Who is brave enough to champion this without being voted off the equity island by skeptical colleagues?

(Note that I am not talking about the “Suicide Pricing” that Bruce MacEwen described on Bloomberg Law. Some of this is really low-balling responses to RFPs. That’s fine, but it is not “launching a Mini.”)

Apple never discounts current products; it offers different versions at distinct price points. In addition, some observers of Apple have said that the most daring strategic move by Steve Jobs was the iPhone itself. That product cannibalized the iPod to a huge extent (the music player was merely one app on the iPhone). And the iPod was the most popular consumer electronics product at the time.

So it’s not just that law firms don’t do this. Almost no other large company can do this, or will do it.

And that is why there is plenty of opportunity for new law firms, new legal service providers, or new-thinking partners with a book and a fresh mindset.

All because BigLaw won’t “launch a Mini.”

When the subject of the cost pressures facing in-house legal departments comes up, I can almost hear law firm colleagues saying this:

“Enough, already.”

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.