“Every client wants lower fees; no client wants lower value.” Ten simple words encapsulate a law firm’s true business objective: offering value. To be successful, law firms must look past marketing campaigns, business development initiative, and even pricing strategies to get at the heart of their business model: value.
TWO VALUES, ONE FORMULA
If “value is in the eye of the beholder,” then it should be no surprise to law firms that there are two values in the legal industry: the value law firms believe they provide, and the value clients believe they receive. For clients, value is what a firm provides to a client over-and-above the client’s expenses. By agreeing to hire you, your client believes that your services (their benefits) will be worth more than your billings (their cost). For law firms, value encompasses all the expertise and experience the firm’s lawyers provide to clients which always exceeds its hourly rates. Here is a simple formula for both parties to calculate value:
Value = Benefits – Cost (V=B-C)
Clients focus on maximizing their benefits and minimizing their cost; both are essential in hiring and retaining outside counsel. Law firms need to appreciate both halves of the equation to have strong client relationships.
Most importantly, law firms must understand that value is the basis of competitive advantage. According to Harvard Business School professor Michael Porter, it is the reason value is so critical to a firm’s revenue and profit: “Competitive advantage grows fundamentally out of value a firm is able to create for its buyers that exceeds the firm’s cost of creating it.”
The remainder of this article focuses on how law firms approach value.
To maximize value, a firm must focus on four unique–and interrelated–elements: cost, differentiation, competitive intelligence and client expectations.
Cost is one-half of the value formula; it is critical to determining value. How much it costs a firm to provide its services ties directly to how much it charges clients. To improve (i.e., reduce) the cost of providing services, firms are exploring issues of efficiency, legal project management (LPM) and legal process outsourcing (LPO), which improve pricing strategies.
Differentiation is identifying and communicating ‘value activities’ which are valued by your clients and cannot be matched by your competitors. These can be related to services or relationships. Either helps to raise the ‘Benefits’ score.
Understanding the marketplace is critical to validating your unique offerings (‘differentiation’) and your pricing strategy. Gathering competitive intelligence allows firms to conduct SWOT analyses to improve services pricing strategies.
As a former chairman of Ford Motor Co. once said, “If we aren’t customer-driven, our cars won’t be either.” Just like the auto industry, the legal industry’s value rests with clients. Therefore, firms must seek ‘voice of the client’ feedback.
The following three questions are critical to understanding a client’s perceived value:
• what is the value of the firm to the client?
• what benefits do clients gain by working with the firm?
• are the firm’s fees reasonable?*
(*In case you are hesitant to ask about fees, remember this: clients are not price-sensitive; they are value-conscious. So, if a client is critical of your fees, you have a value problem.)
McKinsey & Co. developed the concept of the value proposition in the 1980s. A value proposition helps articulate the firm’s Benefits, with the goal of Benefits outweighing the Cost (remember the formula: V=B-C). Here is a simple definition: a value proposition is a reason why a client will benefit from engaging the firm.
Value propositions are built on the value elements above: Differentiation offers firms the largest number of options, as well as the most focused. Competitive Intelligence provides the context for knowing which propositions are truly unique, which are shared by only a few competitors, and which are too common to pursue. Client expectations—voice of the client—tell you which are the most important for client retention.
Once a firm understands its value, it can drop the 90-year-old model of cost-based pricing (aka billable hour) in favor of value-based pricing (VBP), a strategy focused on maximizing client value and firm profit.
VBP starts by understanding what the client values, which helps a firm determine if it currently offers similar ‘benefits.’ Therefore, step one needs to be a direct conversation with as many clients as possible. After those conversations, a firm needs to ensure its firm value propositions communicate the match between its benefits and each client’s objectives. and support the price offering. Additionally, these conversations help firms determine market trends, which force firm leaders to discuss whether to develop new services.
Once engaged with a client, the firm must monitor the delivery of services to ensure client happiness and firm profitability.
One final note: without disregarding market trends, firms should assess their own strengths to understand what it could take to market as unique offerings. These require their own value propositions.
Value-based pricing returns law firms to the core of their profession: offering value to clients. To be successful, firms must understand both external (client objectives) and internal (firm services) factors that contribute to a value relationship.