In this week's Law Firm Disrupted, we look at how Big Law firms are like a Hermès bag. That is to say, how they benefit from so-called prestige pricing.

I'm Roy Strom, the author of this weekly Law.com briefing on the changing nature of the legal services market. You'll be dipped in prestige if you reach out to me here or sign up for this newsletter here.

In so-called rational markets, the price of a product is determined by how much of it there is and how much of it consumers want. It's hard to look at the pricing of Big Law partners' hours and always see a rational market.

Law firm rates are often dependent upon prestige. And when prestige is a factor in pricing, it can create what might seem like an irrational situation. The higher the price, the higher the value customers associate with it. Luxury brands are a classic example of prestige pricing.

This $20,400 Hermes bag wouldn't be appealing (or, at least not for the same reasons) if it cost $24. Hermès isn't Hermès if it's for everyone. That logic is also probably supposed to apply to items like Paul Manafort Jr.'s infamous $15,000 ostrich coat. But I digress.

Even the most forward-thinking general counsel are well-aware of the prestige element in the price they pay for the best-known law firms handling the biggest deals. Here is an excerpt from a conversation I recently had with a general counsel who asked not to be named, but who is otherwise well-known for aggressively controlling costs:

“There will always be a place for the Am Law 20, Am Law 25, because of Wall Street. There will always be big financings and mergers. And that demand drives a lot of that ultra-sophisticated work where they can charge $1,500 an hour. It's not real money. It's part of the transaction. Do I worry a lot about their hourly rates? No. I can't control it. It is what it is. You just pay it. These are global transactions. Investors are putting in hundreds of millions of dollars. You cannot afford to have a mistake.”

I was thinking about this comment as I read my colleague Rhys Dipshan's story about an Australian tech startup called Persuit that wants to create “true market pricing” for law firm services.

Persuit is one of a list of companies that offer technology-based platforms to coordinate RFPs. Legal departments put the jobs out; law firms come back with their plan of attack and the cost associated with it. The company, founded about a year ago by a former partner at DLA Piper, has racked up some big-name clients—a group that includes 3M Co., Gilead Sciences Inc., Microsoft Corp., Royal Dutch Shell plc and Walmart Inc.—all of whom are high-functioning legal departments that are ahead of the curve when it comes to managing outside counsel.

One example a corporate representative for Persuit provided was a pharmaceutical company that put out to bid its annual workload of roughly 20 medical investigation matters. Six law firms provided RFPs, and then the company conducted a reverse auction. The law firms knew what the others were charging—although, crucially, they didn't know what firms were involved in the auction—and were allowed to revise their price based upon that information.

Over the course of an hour, the firms made 142 price revisions. The spread between the highest-price provider and the lowest fell from $85,000 to $3,500. A market price was, more or less, discovered.

“Our platform takes firms from the price they want to get paid to the price they're willing to get paid,” said Nicholas Bye, a business development manager for North America at Persuit. “But it ultimately takes price out of the equation.”

Data is the way in which Persuit would bring about “true market pricing.” The company reserves the right to collect data on the types of deals that are pitched on its platform and the corresponding prices. Persuit could share that anonymized data down the line to show what the market is paying for, say, a labor and employment case of medium complexity in Silicon Valley. The platform could also provide results-based data, which could create a more quantitative way to select lawyers who have proven results.

(So long, Chambers and Partners? We'll see.)

Labor and employment is one thing. But there is an open question about what would happen if a similar reverse auction was put in play for those high-priced prestige hours for a major M&A deal or corporate financing.

Traditional Wall Street firms probably know they charge within a reasonable range compared to one another. But what if a sneaky GC invited a firm—or two or three!—from outside that club into the auction? How should the prestige firms react?

I would argue the prestige firms shouldn't bite. Keep your prices high. Hermès doesn't do sales! If I was running the auction for a prestige firm, I'd make the general counsel prove they're willing to choose a firm based on price and not prestige. And if the GC does that? Then maybe the ostrich coat isn't worth $15,000 after all. Something for GCs of all stripes to consider.

Come See Me Speak!

One more reminder: I'm bringing this column to real life! I'll be speaking at a conference at Suffolk University Law School in Boston on Nov. 7. My presentation is called “Big Law Disruption: Parsing the Truth from the Tales,” and it might include some more discussion of the above. If you want to attend, email me. They actually gave me a discount code!

Roy's Reading Corner

On Paying for Prestige: A key part of law firm's prestige game is the talent they court. You gotta pay these smart young associates big money if you want them to represent your brand. It's all part of the game.

For The American Lawyer, Hugh Simons argues that firms should be doubling the bonuses they plan to pay associates rather than waiting for another round of raises he predicts will come next year. The story recounts how the last wave of raises happened, which is a good insight into which firms think they are prestigious; which firms want to look prestigious (an unhealthy self-image); and which ones have realized they are not (a healthy self-image).

On Predictions: This week, I spoke with Ralph Baxter, once labeled by The American Lawyer the “iconoclastic leader” of Orrick, Herrington & Sutcliffe. Baxter is back to counseling law firms following his unsuccessful campaign for a seat in the U.S. House of Representatives. He has a vision for law firms to help themselves: Respond to client demands for more efficient services. If law firms adopt technology to help them become more efficient and move away from the billable hour, Baxter said that will be a win-win for everyone.

“As you start down that path, everybody wins. The client will win. The law firm will win. There is a day ahead when you progress down all these paths where the law firms remain very profitable; the associates and partners are happier and more rewarded; the clients pay less; and they are happier with their law firms. Everyone benefits, but you do need to make some changes to get to that better day.”

That's it for this week! Thanks again for reading, and please feel free to reach out to me at [email protected]. Sign up here to receive The Law Firm Disrupted as a weekly email.