Fee cutting is no way to emerge from recession | Analysis - print | Property Week

Fee cutting is no way to emerge from recession Analysis - print Property Week

Giles Barrie, in his editorial this week, raises some interesting points regarding the effects of fee cutting in the agency world.  The same phenomenon can be seen in the legal world for the same reasons and with the same fundamental risks to buyers of legal services.

Cutting fees is bascially an attempt to grab market share by low balling now with the hope that the client will continue to instruct you when times are better and you charge more for the same service.  Understandably many buyers are attracted by the low rates on offer but before rushing to buy the cheapest service they do need to consider what they are getting at such a cheap price.

Some issues include:

• Many of the problems that are being identified now with properties should have been spotted previously but due to time, cost and deal pressures they were not.  Taking the cheapest quote is simply repeating the mistakes of the past.  Now is the time to ensure you are getting the best advice for your circumstances as a mistake now could cost a lot more than the few pounds saved in fees.
• In order to remain profitable a firm offering a cheap quote will be forced to push the work down to the lowest level possible.  I have heard of one firm hoping to put in place data capture systems which would enable all leases reviews to be carried out by trainees.  No disrespect to trainees but no matter what technical systems you have an inexperienced trainee is unlikely to spot where a rent review clause is defective or whether there might be a Good Harvest issue in the drafting.

From the suppliers' side such low balling also creates issues:

• It creates the impression that little or no skills are required for the work - if this was the case then law firm's indemnity insurance would clearly not be as high as it is!
• It demoralises staff who know that they are effectively providing a service for which the clients are not paying.  They constantly feel under pressure to cut corners to improve profitability further increasing the risk of negligence and resent the fact that they cannot do a proper job as the fees do not allow it.
• Do you honestly believe that a client having instructed you because you were cheap will stick with you when you hike your prices on the basis that you are going to offer the same service?

Therefore, as Giles notes in the agency world, fee cutting in the legal world is damaging for both customer and supplier in the long run although I suspect will continue to be the case as many fail to recognise the risks.

Am I about to be outsourced to South Africa?

I awoke this morning to read in The Lawyer that Pinsent Masons is the first firm to send real legal work (i.e. work that qualified associates would do) to a company in South Africa. Outsourcing is not new to law firms and nor is outsourcing off-shore. However this is a first as it means real legal work going off-shore and judging by some of the comments made by my peers on TheLawyer.com they are not happy about it!

This is a fascinating development in the provision of legal services. I think that there is little argument that to a large extent geographical location is no longer an important factor in the provision of any services apart from those requiring you to be in a specific place (e.g. a plumber). So why did lawyers possibly consider themselves different? Afterall, in some ways our jobs are even more easily transferable across the globe. I could be writing this blog, reviewing and drafting documents and reports and generally conducting my work life from anywhere on the planet (and, I suspect, from the International Space Station as well) - my clients do not care where I am as long as they can get hold of me when they need to!

So what is the big issue?

Well I think that there is a difference between a firm based in another country with limited or no office in the UK providing legal advice from a cheaper base and a firm existing properly in the UK and outsourcing legal work to another company in another country to cut costs. In the first case, from trainee up there is the potential to get exposure to all parts of transactions. The only thing that might be partially lacking is client contact although this would increase as you became more senior and your skills would develop accordingly.

However, in the second form, which Pinsent Masons has adopted, there is a whole chunk of work experience that is now being removed from trainees and junior lawyers. One cannot play down the importance of that kind of experience in developing a well-rounded lawyer. The ability to run a transaction well can only come from the experience of being a tiny part of a similar transaction and seeing the effect that decisions made at the higher level have further down the chain.

Am I surprised?

Of course not. The increasing dichotomy between partners' needs to keep profits growing and clients' needs to see fees fall meant that something had to give. Law firms have to find a cheaper way of conducting business especially in the current climate and this is one way to go.

Will it affect quality?

This is an impossible question to answer as often quality is dependent on the individual as much as the company employed. However, the fear of failing to impress a given supervisor will be lost as will concern regarding damage to brand. Again, these are not tangible things which can be measured.

Is this the end (or at least the beginning of the end)?

Who knows. I do not see it as being possible to remove the human touch, certainly at the higher value end of the spectrum. Clients want specific lawyers for specific deals. The problem is, as pointed out by a number of comments on TheLawyer.com, what effect will the outsourcing of the low value work to cheaper locales have on the experience required for the next generation of lawyers just starting out? Could it ever be positive?

Don't the partners and clients know this?

I think they do but at the end of the day we now live in a short-term view society. This has been highlighted as one of the main causes of the financial crisis. Partners and managers are not worrying about the effects of something in 10 years' time but rather the benefits that will be achieved in 2-4 years' time. Some may also suspect that the whole fees issue is a short term one and once the economy recovers it will disappear.

The problem is that whilst it might be true that law firms will not be expected to further cut fees it is highly improbable that they will be able to significantly increase them either. Further, if you were a partner in a firm who had outsourced work to South Africa and you could now increase your fees and either (i) bring more work back on-shore at a higher recoverable cost or (ii) keep it off-shore and make more profit, which would you opt for?