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Why are Legal Services So Expensive?!?

money-expensiveAt some point, each and every one of us is sure to need legal services of some kind. Whether you get in trouble as a teenager, start a business in your 20’s, get married (and hopefully not divorced) in your 30’s, plan your estate in your 40’s and 50’s, or some combination of all of the above, there is pretty much no escaping it.

The problem is, with an average household income in the US of just above $52,000 annually, the majority of people have a hard time coming up with the cash for many expenses outside the basic necessities – food, shelter, clothing, healthcare, etc. Despite the importance of legal services for protecting ourselves and our assets, they end up falling by the wayside for many people who can’t justify the $300-$1000 per hour that most attorneys charge for their work.

Generally, when a product or service is in high demand, someone comes along and offers to sell it cheaper than the competition, driving down prices Wal-Mart-style. But for some reason, the cost of legal services seems to elude these otherwise abundant and inevitable market forces. So, one can’t help but question…why are legal services so expensive? Here are a few of my theories on it:

High Tuition for Law School

The first reason can be simplified with a single word – debt. Law school tuition is typically anywhere from $20,000 – $40,000 per year, depending whether the school is public or private. As a result, the average law student graduates with $108,293 in debt. Starting off your career with that much debt inevitably puts a lot of pressure on you to pay it back. So even for the small law firms and solo practitioners that normally offer the lowest rates, paying off debt is often a consideration that probably leads to price inflation.

Professional Nature of the Services

Most professional services are expensive. Legal services are no exception, and they are generally needed for very serious matters in our lives. So lawyers feel justified charging lofty prices because they’re professionals with years of training and their services are mostly needed during very important situations – not just anyone can provide such a service.

However, unlike healthcare where overhead is extremely high due to the need for specialized equipment, providing legal services doesn’t require much more than a computer these days.  So it seems as though there should be a greater number of affordably priced service providers in the legal industry compared to some of the other professional services sectors. But that’s just not the case.

Pride

Excelling in undergrad, getting into a good law school, going through years of difficult schooling, and taking the bar exam can give you a certain sense of accomplishment and worthiness. This feeling of pride, in turn, probably makes lawyers feel deserving of a high salary – anything less than a few hundred dollar hourly rate would be shortchanging themselves and discounting all the hard work they put in, right?

But taking a look at the numbers, it becomes clear that the average lawyer isn’t billing very many hours at his/her lofty hourly rate. According to law.com, the average small law firm generated revenue of about $300,000 per lawyer in 2012, with an average hourly rate of about $300. Seems like a lot of money, but that means the average small firm lawyer only billed clients for 1000 hours, which equates to billing for only 25 standard 40-hour workweeks in the year.

So does that mean lawyers are just half-assing it and taking vacations the other half of the year? Not likely. It means they are spending a great deal of their time not getting paid. Maybe they’d be better off swallowing their pride, billing at $150/hour, and increasing client volume? But, with that approach comes another problem, which in my opinion is the ultimate driving factor for the excessive price of legal services: inefficiency in the market

Market Inefficiency

Given the point above, that on average, lawyers only seem to be billing clients for about half the time they spend working, it’s clear that something is wrong. How can it be possible that prices remain so high when hours billed are so low? The answer comes down to market inefficiency.

Law firms and legal services providers are not efficient enough at marketing, acquiring new customers, bringing them in the door, serving them, getting paid, and sending them on their way. There are efficiency breakdowns in every step of this process, but the most significant area that suffers from inefficiency is in client acquisition.

It’s a vicious cycle: lawyers charge high prices > people can’t find an affordable lawyer > people turn to alternatives (ie LegalZoom) > lawyers lose clients > costs to acquire new clients increase > lawyers raise their prices to compensate…and on and on. The only thing that can break the cycle is adding efficiency. But until that happens, looks like we’re stuck with inflated prices for legal services. Better hope you’ve got a lawyer in the family.

Maybe technology is the answer?