Imperfections in the Market for Legal Services?
In my prior posting, I discussed some interesting comments I heard at a Legal Tech keynote conference. I also had an interesting private conversation with a general counsel of a mid-sized company.
This GC said that the company’s outside counsel provided good legal advice but did not always offer the best service. For example, the outside lawyers rarely, if ever, provide budgets and even partners doing a lot of work for the company often bill their time to the wrong matter. I replied, “you’re the customer – why not just switch outside counsel?” The answer was that one had to pick one’s fights and that where the legal advice was good and the outside counsel understood the business, it was not worth the struggle.
It seems to me that this illustrates a larger problem – a possible market imperfection. In essence, the “switching costs” are high and so the customer will and can tolerate a certain amount of “bad service” if the overall “bundle of service” meets important needs. Putting on my hat as an economist (granted, the hat is a bit old – from my college days), this reminds me of “monopolistic competition.” In monopolistic competition, many suppliers exist but they are somewhat differentiated and can therefore charge “monopoly prices” or, in this instance, provide less than optimal service. While there are many law firms from which to choose, once a relationship is established and a lawyer understands his or her client’s business, then that relationship and knowledge differentiates the firm from competitors who are potential substitutes.
If this analysis is correct, what are the implications for lawyers and clients? For law firms, it’s a “good news bad news” story for investing in legal technology. The bad news is that clients tolerate less than ideal service from established relationships. Firms that under-invest in technology are not necessarily penalized by the market. So firms that do invest may conclude they are not getting a good return. The good news, however, is that strategically deploying technology can help. First, it can provide better service than the client might otherwise receive and therefore further “lock in” clients by making the switching costs even higher. And second, in those situations where, for whatever reason clients are willing to incur switching costs, strategic legal technology investments that visibly provide better service can increase the odds of winning new business.
For clients, it means that when they select a new lawyer, they should be sure to examine carefully all aspects of the services provided. Most of the time, a GC will be able to find two or more lawyers or firms with the requisite skills. It makes sense for the GC to screen carefully for other service elements since once the relationship is established, the switching cost is high. I would, of course, advise GCs to look particularly carefully at the level of tech investment a firm makes and how the lawyers who will service the corporation actually use that technology.
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