A Market Approach to Law Firm Economics: A New Model for Pricing, Billing, Compensation and Ownership in Corporate Legal Services

Monday, January 1st, 1996 at 12:00 am by William Kummel
William Kummel, A Market Approach to Law Firm Economics: A New Model for Pricing, Billing, Compensation and Ownership in Corporate Legal Services, 1996 Colum. Bus. L. Rev. 379

Things change. Many attorneys and clients can recall the not so distant “Golden Age of the Big Law Firm” when corporate law was prosperous, stable and untroubled. Law firms enjoyed steady growth in revenue and profit, long-term client relationships and loyal attorneys. While this view of corporate legal services was, and is attractive, in retrospect the structure it relied upon was flawed in many respects. As any managing partner can attest, the economics of corporate legal services has changed in the past decade. Bargaining power has shifted from law firms to clients and attorneys. Corporate clients, seeking to control the cost of legal services, regularly challenge the decisions of their law firms as to the requisite volume, quality and cost of legal resources. Attorneys, seeking to secure fair value for their services, increasingly demand changes in the organization and compensation of law firms. Consequently, profit margins have eroded. The legal profession’s response, on the whole, has been reaction and lament. This Note recommends that corporate law firms critically evaluate their current economic model and consider replacing it with a new economic model for pricing, billing, compensation and ownership. The Note advocates that corporate law firms replace rule-based mechanisms which promote internal firm needs with market-based mechanisms which promote the external market for quality legal services and effective project management. To establish a vibrant market for legal services and project management, the resulting design should rationally allocate risk and reward between corporate clients, law firms and attorneys. This Note analyzes the basic economic model of corporate law firms and advocates that they rationally allocate external reward, external risk, internal reward and internal risk through, respectively, the mechanisms of external pricing, external billing, internal compensation and internal ownership. Finally, the Note reviews the underlying principles of law firm ownership and proposes a risk management ownership mechanism. Through this analytical process, the Note answers three fundamental questions: How has the market for corporate legal services changed? Why does the predominant economic model not work in the changed market and what model will work? Which mechanisms for pricing, billing, compensation and ownership foster efficient and effective corporate legal services? By answering these three questions, this Note seeks to provide an alternative perspective on and approach to the changed market for corporate legal services.

Author Information

B.A. Yale University, 1986; M.B.A. Georgetown University, 1990; J.D. candidate Georgetown University Law Center, 1996.