“The formulation of the problem is often more essential than its solution.”
The Loss of Pricing Power?
It seems to have become commonly accepted that law firms lost their pricing power during the last recession. Up until around 2009 law firms could set their fees as they saw fit, with few clients having the audacity to pushback. Annual rate increases above CPI were the norm. And while estimates might be provided for defined matters, they were generally ballpark indications rather than capped fees to which we were willing to be held accountable. Ah, the good old days.
If we accept the proposition that we have lost pricing power, then how should we respond? First, we need to accept the price proposed (or demanded) by the client for a particular matter or package of matters. We have no option. If we don’t accept the client’s desired price, then we will lose the opportunity and the revenue from it. Having accepted the price, we then need to find a way to deliver the service more efficiently or alternatively be willing to take a hit to our firm’s profit margin for the work. While this may be the “right solution”, we believe it is focused on the “wrong problem”.
Focusing on the Right Problem
All prices, whether for legal services, consumer services, or fast moving consumer goods are an agreement between buyer and seller. If the buyer does not see value they will choose not to buy. But if the seller is uncomfortable with the price, they can choose not to sell. In this sense, both buyer and seller always have pricing power. So if law firms haven’t lost pricing power, what’s a better definition of the problem we should be trying to solve?
Perhaps the real issue is that we would like to sell our services for more. We may even believe our services are worth more, but unfortunately some of our clients don’t agree. Clients know they have options and often find it difficult to justify paying more, particularly when they are under increasing budget pressures from various constituents within their organizations (procurement, legal operations, etc.). And clients can always find a less expensive firm. Perhaps the real issue is our inability to justify our fee to our clients.
It’s not a Market Problem
Reframing the problem from “a loss of pricing power” to “our inability to justify our fee” has a significant impact. The problem is no longer external (a market challenge), but rather is internal (a capability or differentiation issue). While we generally have little influence over market issues, the good news is that we can address capability and differentiation issues. We are suddenly in control of the solution.
We often hear partners complain that clients struggle to identify – and value – high quality legal advice. But this is not the client’s responsibility. In all markets, it’s the responsibility of the seller to help the client understand the value of their offering. It’s not inappropriate for the client’s starting point to be that they don’t see a difference between two firms. It’s the firm’s responsibility to not only help the client see the difference between firms, but also to understand why these differences matter. It’s our role to convince clients of the superior value of our offering.
The term ‘value’ is used in a broad range of ways in the legal profession. To some a “value offering” means cheap. To others a “high value offer” means expensive. The term “value-based pricing” is often (falsely) believed to be any pricing that is not based on hourly rates. Firms also talk about “value-adds” which generally means providing benefits without charging for them. These may add value to the client, but they also diminish value to the firm. If our goal is to convince clients of the superior value of our offering, we need to be clear on what value is.
Value = Benefits / Price
When clients look at the value of our offering, they are assessing the benefits provided, relative to the price sought. Usually they will look at the value of our offering relative to the value offered by competing firms. It’s often said that all clients care about is price, but the only time clients focus on price alone is if they see no difference between the benefits you offer and those offered by competitors. All clients aim to obtain the best value, not necessarily the cheapest. If we wish to succeed, we need to demonstrate we can deliver superior value.
Delivering Superior Value
This then focuses the discussion on the core issue. We need to be clear on how we can deliver superior value to our clients. If we do not understand the value we deliver, we will have no chance of convincing clients. In simple terms, it is about delivering superior benefits or a lower price. However, a brief exploration of these options highlights a broad range of opportunities available.
Deliver Superior Benefits – Leading Expertise
When clients are asked why they were willing to pay more for one firm than another, a common response is that they went with the experts. Firms who were able to demonstrate that they have a strong track record, reputation, relationships and/or connections in the area or who offer the most valuable insights in relation to the matter at hand. As one client described it, we want a firm who has recently dealt with the same matter, in the same court, in front of the same judge and obtained an outstanding outcome. Ideally completed in the last week. If no firm offered exactly that, then who was “nearest the pin”. In many instances, clients are trying to identify which firm can demonstrate experience that most closely approximates their specific needs.
Deliver Superior Benefits – Stronger Relationships
Other clients have a preference for strong, trusting relationships. They continue to allocate work to firms who have served them well in the past, provided they demonstrate a capability to do the work. Often these clients will not even seek competitive bids, provided they are comfortable with the proposed fees. These clients are often focused on the importance of firm’s understanding their business intimately. They believe that value is created by collaboration within a tight trusting relationship, rather than an arms’ length one. At the very least, they believe the process of retaining these firms for the next matter is more efficient because the firms already have a deep understanding of their organization.
Deliver Superior Benefits – Better Service
It’s true that for many matters, expertise and relationships do not differentiate. They may be important and used to create a short-list of firms who have both relevant experience and strong knowledge of the client. However this may leave a range of many fine firms that all have the ability to successfully conduct the work. In such circumstances, it is tempting to assume the decision will be made based on price, however this is not always the case. One client described exactly this situation – a belief that a range of firms could undertake their work and the outcomes would be the same. When probed further as to how they decided on which firm to use – expecting the answer to be price – we learned an important lesson. The client indicated that because the business outcomes would not be any different, they just went with the firm they found easiest to work with, who aligned with their processes – and as a result, delivered the better service.
Superior benefits are not simply derived from expertise; they can also be derived from relationships and service.
Improve the Pricing – Efficiency
Having focused on maximizing the benefits that matter to a given client, it’s also the firm’s role to deliver the service in the most efficient manner. Many clients are asking in their RFPs about law firms’ use of project management, process improvement and other efficiency efforts because they believe that – if the expertise and relationships are comparable with a number of firms – the basis for selection can be done based on who will manage the work most effectively and efficiently.
We have heard some GC’s articulate a particularly incensed view about law firms that feel they don’t have to focus on doing the work the most efficient way possible that will still achieve the client’s objectives, unless the client “makes them”. It should be part of our professional responsibility as lawyers to not only provide good quality legal work but also do it at a price that is not excessive or inefficient for the objectives desired. Particularly in more commoditized areas, a rigorous focus on continual improvement is essential to success. While most firms focus on ensuring matters are resourced in a cost effective manner (e.g. teams not too large, appropriate work passed down to juniors, clear delegation and communication), significant additional steps are being taken by leading firms to ensure the cost-effectiveness of their offering. The applications of Legal Project Management techniques, a focus on Legal Process Improvement, appropriate use of precedents and alternative business models (e.g. contract lawyers, LPOs, artificial intelligence) are all strategies being adopted by progressive firms.
Improve the Pricing – Appropriate Fee Structures
Pricing can be made more attractive to clients, not only by reducing the price but also through the selection of an appropriate fee structure. While some clients are comfortable with hourly rates, others prefer fee arrangements that provide greater certainty and/or transparency, align firm-client objectives or share risks. Increasingly over recent years, we have heard clients say that the fee structure offered by a firm was the differentiator that determined which firm was allocated the work.
The above options focus on either increasing the benefits or improving the pricing. The final option focuses on trade-offs. While reducing the price or increasing the benefits both increase value, they are not the only options. Value can also be increased by reducing benefits, provided price decreases by more. Alternatively, value can be increased by increasing the price, provided the benefits increase by more. If we are truly focused on our clients, there are times we should reframe the proposal to either undertake more work, or reduce it if we believe this delivers superior value.
Value is in the Eye of the Beholder
While the above list is not intended to be comprehensive, it highlights that a broad range of strategies exist for firms to deliver superior value to clients. Ultimately which strategies are appropriate will depend both on the matter and the client. Some clients do buy on price. If these are the clients we wish to serve then we need to structure our business model to have the lowest cost structure (possibly including lower partner compensation). Alternatively we can choose to target clients who are willing to pay for a higher fee for superior benefits.
If targeting clients based on superior benefits, we need to be able to credibly demonstrate superior value. This requires not only demonstrating that we can deliver superior benefits, but also showing that for this matter it is worth paying more. We should not forget that it’s our role to justify why we should be chosen, even if we are more expensive.
By reframing the problem from having “lost pricing power” to “our inability to justify our fee”, we focus the issue on what’s in our control. In doing so we can identify strategies to help increase the value delivered to clients and effectively communicate this value. It creates a formula for success in a market that expects “more for less”.