In a recent video from Bloomberg Law, Bruce MacEwen (of Adam Smith, Esq.) described a growing trend of firms engaging in suicide pricing. (tl;dr follows)
If you didn't watch the video, or didn't follow what excess capacity is, just think of Priceline. You've got a hotel, only half the rooms for next week are booked. You do what many hotels do and offer a steep discount. Better to rent the room at half price than to let it go vacant.
Same thing is going on with some law firms. Your junior associates are averaging only 20-30 hours of work per week. Rather than letting them sit around playing Brick Breaker, you drum up some extra business by offering discount prices.
These rates are called "suicide prices" because if all your rates fell to that level the firm would go belly up. But, if only 25% of your hours are billed at that rate? Some firms can survive that. And, since few firms have a large rainy day fund to fall back on (that money's already distributed as partner profits), there's a lot of pressure to keep associates billing at whatever rates they can.
And I think that's just silly.
Sure, it's more money, but you have to think long term. As more firms offer discounted rates more clients will abandon their attorneys and go for the discounts. Firms that have just lost their clients now have too much time on their hands and they'll engage in discounting, and before long discounting becomes the norm. When was the last time you went to a department store and everything wasn't on sale?
I'm going to suggest two other things firms could be doing with their excess time rather than working for peanuts:
Large institutional clients are becoming reluctant to have first and second year associates staffed on their matters. A first year billing $300/hr may take 20 hours to complete a task; a fourth year billing $450/hr and requiring only 10 hours (due to experience) is a much better deal. Especially when you consider that your first year isn't just 20 hours at $300/hr, but 3 additional fourth year hours spent supervising and correcting mistakes.
If your associates have extra time on their hands use it to get your juniors up to speed. Hold in-house CLEs, give them old memos to review, let them work on white papers and the firm's practice blog. If there are interesting new developments in an area, have them write on an article for publication.
Yes, you are giving up some immediate income. But in a couple years all those first and second year associates who aren't getting enough experience will be midlevel associates. Taking on whatever work you can at discount pricing won't be good training for them; it's Whatever Walks in the Door practice, not your firm's focus. They'll have patchwork experience, and no expertise. You'll end up with fifth year associates operating at the skill level of third years, and you'll lose even more business. Instead, by engaging in training on the exact knowledge you want your associates to have, you can end up with third and fourth years operating maybe a year above their level. Learn how to market your expertise (write, write, write, publish, publish, publish) and you're going to ride high on the wave once work starts to pick up.
When you've got too little work and too many people, one option is always to reduce headcount. Normally that means layoffs, but a kinder way to do it is offering flextime.
You've got 3 associates each billing 30 hours a week and each earning $160,000 for a total price of $480,000. You can let one go to half-time at $80,000, and split up 10 of his hours among the other two. Now you've got two associates working at 35 hours a week, one at 20 hours, and your total expenses are now $400,000, without reducing your revenue.
Most firms do go straight to layoffs though. Fire one associate, have the others work 45 hour weeks, and your total costs are just $320,000. And yeah, you could do that. But, I'm suggesting flextime on the assumption that you'd prefer to avoid layoffs.
The tricky part here is assuring your workers that this won't be viewed negatively in the future. Many associates will presume that jumping at the offer will show they're not committed to the firm and they'll be first on the chopping block if layoffs become necessary. The best thing to do is to address this concern directly. Nip the rumor mill in the bud.
Wait... no. Really the best thing to do is create a culture at your firm where partners are trusted by associates and where everyone feels part of a profession rather than a business. The kind of place where people actually care about the work they're doing and the reputation of the firm. Where without being prompted they spend their spare time reading up on their practice area and training themselves, because they're happy and engaged in their work.
Oh, sorry, right. These are law firms I'm talking about. I forgot that for a moment. Yeah, forget everything I wrote. The best thing to do is whore your employees out for pennies on the dollar.