When law departments cut costs, do firms deserve any minimum level of profitability?

Managers of law firms undoubtedly feel pressure to keep their firms profitable, enjoying juicy and increasing profits per partner. Realistically, large firms are “publicly traded” in the sense that their comparative profits-per-partner are splashed all over the trade journals. If the collective cost-cutting of corporate clients threatens that take-home, should it matter to law departments?

Some, but not much. If any purchaser drives too hard a bargain, the supplier will fold or flee. General counsel, however, highly value law firms they trust and who know them, so the market, in fact, is often price inelastic (See my posts on Oct. 4, 2005 about loyalty and July 30, 2005 about fear of losing the department’s favored firms.)

In the era of deflating product prices, it might just be the tough love rules of the game for a company’s law department to allow its law firms to change billing rates only in line with cost of living indexes (perhaps the Consumer Price Index), or at the percentage of revenue growth (or decline) of the company, or the company’s increase (or decrease) in profitability for the year.

I suspect a law firm would make a dramatic marketing splash if it committed holding its increases to one of those exogenous setters of rates.

Costs are cut incessantly in the corporate world, and law firms need to either adjust themselves to keeping clients happy, such as by linking fee increases to proven productivity gains (See my post of Nov. 16, 2005 about experience sampling and productivity.) or external measures, or seek other clients who will support them in the style to which they have become accustomed or feel they deserve.