Reading the business press, I am struck by how scale and experience can change the fate of companies and industries. Would that we could say the same for law firms.
Hardware Is Dead. Software Is Dead in Wednesday’s Wall Street Journal points out that “Scale matters more than ever before” and “The winner is the network”. This in the context of how Apple and Google have won over Microsoft, Nokia, BlackBerry, and HTC. More specifically, owning a very widespread platform (iOS and Android) provides a tremendous advantage. Technology may be a unique in some ways but scale matters in manufacturing, fast food, energy, and a host of industries.
Likewise, experience matters. When I was a management consultant years ago, we frequently talked about “experience curve” effects. In industry after industry, from the oldest to then-newest, the data across markets consistently showed that the cost per unit of production fell in a predictable pattern as the cumulative number of units produced increased.
Can we see the effects of scale or experience in Big Law? I can’t. My January 2012 post Law Firm Merger Mania: Does it Really Make Sense? questioned the scale benefits of mergers. I stand by that.
What of experience effects in law? The legal cost of certain transaction does seem to decline over time. That may be an experience effect or it just may reflect that documents standardize over time and that knowledge spreads.
To measure the experience effect systematically, we would need to define a unit of production, which is an output. An hour billed is an input so, tells us little. Perhaps if we see wide spread adoption of alternative fee arrangements, we will be able to define unit costs. I am not holding my breath.
I might be able to write the same about medicine but I don’t think it would be true. Some mainstream media articles about medicine suggest that unit prices – especially of common surgeries – have come down. We should not confuse huge increases in consumption of healthcare services with rising unit prices. With healthcare reform, measurements of output costs may become a reality.
Where does that leave law practice? I hope that someone can point out the flaws in my analysis and explain how legal practice has benefited from scale or experience effects.