The Sustainable Profits Rule Page 3

Part of the lpc series The New Economic Rules

An example are those legal businesses in the last fifteen years who had substantial positions in volume markets; by employing innovative techniques they could attract super-profits even though unit charges were, by historical terms, low. However the clients or work providers in these areas – quickly sought to claw back some or all of the super profits through lower fees and other methods. 

But this rule does not just apply to volume services. It applies in commercial work and indeed legal aid. In commercial work as any service effectively becomes more commoditised, the fee levels reduce as the people paying the fees realise that they no longer require to rely on the originators of the legal documentation or those who profess specialised (expensive) skills. It applies in legal aid - the paymasters here are the government. They have a monopoly. If the government feels that lawyers are getting rich on the public purse they will naturally try to reclaim what they see as a super profit element.

Unfortunately, similar to gyrations in financial markets, there tends to be an over-reaction to the perception of super-profits by those paying fees. This results in the return not being reduced to reasonable profits but generally to sub-profits.

This naturally occurring pressure on fees is part of lpc's The Sustainable Profits Rule. Importantly the rule is not static. It changes with time and the economic environment. In good times clients may be more interested in expanding their business than squeezing the pips from their legal suppliers. In poor times the reverse is true. But for some years page 1 of the "Management Consultants Guide on services procurement" was simply to reduce the fees paid to professional suppliers - they would invariably bear it and if they didn't there are plenty more who would.



The fan chart above graphically describes this; the green area represents complex pieces of work, the purple area more common types of work generally carried out by qualified practitioners and the yellow area, volume work. The upper edge of each coloured area represents good economic times, the lower edge the converse.

So what does this tell us?

There is an inevitable destruction of profitability without change and the application of innovation. The cushion of fifteen years of “good times” means that for many it is more than profit destruction – it may well be survival. Cost of time surveys show the constant increase in average remuneration and, perhaps more pertinent to this article, an even larger increase in the cost of running offices. Remember that these trends existed before the onset of the current economic problems.

Lawyers with traditional high street practices may feel that they are less affected by the Sustainable Profits Rule (although not the outflow of the economic crisis) than larger firms. But few areas of practice will be immune.

Look at the experience of the traditional High Street insurance brokers over the last fifteen years. Much of their business has been wiped out by telephone and internet insurance services. Then consider the future of estate agency which is a staple business for many legal firms in Scotland. It is doubtful that the estate agency market will recover from this property recession. Platforms such as Rightmove and the Solicitors Property Centres, which enable traditional estate agencies to trade virtually, will not be able to resist the rise of totally virtual arrangements where most of the work is done by the owner of the property tapping into the network effect of the internet - a greatly reduced cost for the consumer, a loss of fees for estate agents and solicitors.