Richard Burcher pushes back against the perception that property work has become commoditised, and explains how the approach taken to communicating with clients about the cost of legal services can make all the difference in how a firm’s services are valued
“This is a commodity business. In a commodity business, you have little or no control over pricing. The only thing you can control is your costs.”
No, these are not the words of a besieged law firm property partner, but those of a misguided Wall Street analyst making a comment about the losses at U.S. Steel during the first quarter of 2013. Unfortunately, the analyst’s view has much in common with countless property lawyers (particularly residential), their clients, and more than a few commentators and consultants. There is a shared belief that the delivery of property legal services has become commoditised, and that this means prices must be reduced. This error of judgement is having a profoundly damaging effect on law firms’ property work, and, in particular, on their whole approach to pricing and profitability.
From the client’s perspective, commoditisation is a notion that they are understandably very happy to cultivate, and indeed reinforce at every opportunity. The ‘C’ word strikes fear into the heart of every partner trying to negotiate a decent fee. It comes with connotations of ready accessibility from other providers, all of whom will do it as well as you; low barriers to entry; and low value – filling in a few standard forms – and therefore low price. For all lawyers and their clients, commoditisation is synonymous with heavy discounting.
Pricing and service level options can be used very effectively, in isolation or combination, to create significant visible differentiation
The problem has its origins in the conflation of two completely different concepts: efficiency or effectiveness on the one hand; and genuine commoditisation on the other.
On the issue of efficiency and effectiveness, there is no doubt that there is a very real need for the profession to address its production and delivery methods. A recognition of this has led to more interest in various process improvement methodologies, such as ‘Lean’, ‘Six Sigma’, and legal project management. These initiatives can, among other things, identify waste and duplication in the production process. This can benefit the firm by cutting production cost and improving margins; or it can benefit the client through lower fees; or it can do both.
Law firms must address this for their own sake and that of clients. The benefits are numerous, and the profession – which frankly had little incentive to do anything about it prior to 2008 – has a lot of catching up to do. So, cost-cutting has been the default setting for the last five years, but no business can cost-cut its way to prosperity. It has been a necessary strategy to survive, but it is not a long-term one.
Differentiation is key
So, if commoditisation is not synonymous with cost- cutting, process improvement and legal project management, what is it?
In business literature, commoditisation is defined as the process by which goods and services that were distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market or consumers. Critically, it is the movement of a market from differentiated to undifferentiated price competition.
With an eye to resisting undifferentiated offerings and the resultant commoditisation of their services, some firms have focused relentlessly on becoming known for certain practice areas. In the US, a good example is Skadden, Arps, Slate, Meagher & Flom, which ranked first in BTI Consulting’s Client Perceptions of the Best Branded Law Firms report for successfully branding itself as “the transactions firm”.
Other firms have chosen to spotlight their business models. Jones Day, which ranked second in BTI’s survey, is recognised for client service, value and experience.
But differentiation is not confined to large firms or high-value matters. Pricing and service level options can be used very effectively, in isolation or combination, to create significant visible differentiation around residential conveyancing, wills and powers of attorney, divorce and pre-nuptial agreements.
I despair at the number of high street and other small firms that genuinely feel that they are at the bottom of the food chain, and completely powerless to offer something that is differentiated and that their clients and potential clients will pay for.
As a starter for 10, here are just two examples.
a) The option of a ‘premium-priced’ residential conveyancing package that includes up to two home / hospital / rest home visits by a legal executive or paralegal – one to take instructions and one to get documents signed. This is a proven and very popular option with the elderly, the immobile, the unwell and those without easy transport options. It is this kind of differentiated offering that helps you stand out from the crowd.
b) Abort / success fee packages that can allay a great deal of the clients’ concern about the possibility of paying full tariff for deals that collapse. If structured correctly (and there is certainly a right and a wrong way to do it), this can add considerably to the firms’ residential conveyancing turnover and margins.
Almost anything is capable of differentiation. If this were not true, how could Fortnum & Mason charge £5.25 for a pot of strawberry jam, compared to £0.29 for substantially the same thing at Tesco? Perhaps the answer lies in the name – ‘Tesco Everyday Value Strawberry Jam’ does not have quite the gravitas of ‘Coronation Royal Sovereign Strawberry Preserve’. Who would know if there is anything to differentiate the two products (although one would suspect so)? More obviously, would anyone seriously suggest that the shopping experience is the same at both? And yet F&M is as busy and as profitable as it has ever been.
The firms that differentiate themselves most effectively are those that have identified aspects of their culture that make them superior service providers in their area, and then communicate those advantages to the market in a consistent, compelling and memorable way.
Firms must resist the temptation to buy into the inane and demonstrably wrong assertion that legal services are all becoming commoditised – and that therefore you have no option but to slash your prices to preserve market share. There will always be people willing to pay for the ‘Coronation Royal Sovereign Strawberry Preserve’, provided you give them good reason to do so. If you do not give them good reasons, you will never command anything other than ‘Everyday Value’ prices.
There is a further factor at play here. The great majority of practitioners have not discovered ‘cost consciousness’. Yet, of all the client service attributes, it stands out head and shoulders in importance – and neglect by solicitors.
Cost consciousness is a ‘missing link’. Improvements in cost consciousness have the potential to offer solicitors – and their clients – more than anything else in the overall client service experience. Yet cost consciousness is poorly understood, and receives little attention – with the result that both clients and law firms are deprived of the benefits.
What is cost consciousness?
Cost consciousness was uncovered in research for a Melbourne Business School doctoral thesis at The University of Melbourne in the mid-1990s. Dr Margaret Beaton was researching how members of the Australian Corporate Lawyers Association and Chartered Secretaries Australia perceive the value of solicitors’ services. Her work revealed a large ‘black hole’ – something large and important, but not explained by knowledge at that time. The ‘black hole’ was key in explaining what drives perceived value in clients’ minds, yet it had no name. It was nicknamed cost consciousness, and the phrase has stuck.
What does cost consciousness mean to clients? In their own words, this is how clients of law firms and solicitors described those that score high on cost consciousness:
- “We are always kept up-to-date on costs and notified if extra costs or variations are envisaged so that we, as the client, are always fully aware of the cost position.”
- “The firm is aware of the budget available for any matter, and suggests options based on different budgets.”
- “They always quote first and explain the cost estimates.”
I despair at the number of high street and other small firms that genuinely feel that they are at the bottom of the food chain
In other words, cost conscious firms are mindful at all times of the costs incurred on a matter. They provide accurate cost estimates upfront, and again when any additional charges are incurred. The provision of low or fixed cost solutions and diligent care of clients with modest budgets is also important.
On the other hand, clients of firms and solicitors that score low for cost consciousness say things like this:
- “Way too expensive for simple matters and tend to over-service.”
- “We only ever get the Rolls-Royce version, but we don’t want or need that.”
- “Their invoices for a particular deal were far higher than anticipated.”
- “They failed to provide realistic cost estimates.”
These disaffected clients most often feel that the fee charged is too high for the quality and/or value to the client of the service. These perceptions may be the result of an undue focus on making money, an excessive reliance on junior staff, not accurately identifying the likely costs upfront, and/or a lack of care in containing costs or working within a budget.
Research shows that clients regard price and value as positively related, particularly for premium providers. That is, higher fees signal higher quality. Price is social proof of a firm’s market position and quality. Yet this does not mean a firm can charge as much as it likes; there is another factor in the mix. This factor is cost consciousness.
Yet research consistently shows that the weakest link in managing clients’ perceptions of value is poor cost consciousness.
In the bundle of attributes, cost consciousness is the one that has increased the most in importance since the 2008 economic downturn. Crucially, the importance of the ‘sticker price’, that is the quantum of fees, has shown no increase in relative importance. But cost consciousness, which clients describe as their solicitors ‘spending our money as carefully as if it were their own’ has increased.
Research shows that if a solicitor demonstrates cost consciousness (as explained above), then the quantum of fees will have relatively little impact on clients’ perception of the value they receive. This is particularly true if the solicitor also provides high levels of client service, for example by being responsive, reliable and easy to do business with.
A call to action
Property solicitors with a cavalier attitude to spending their client’s money can expect clients to push back on every single invoice, no matter what the amount. Those that communicate with their clients openly and regularly about fees, show concern when costs are mounting, and display an eagerness (yes, eagerness!) to discuss their budget constraints and how they can work within them, will find that their clients will more readily accept their prices.
Property lawyers need to retake the moral high ground, take pride in the skills and knowledge they bring to their clients’ property affairs, and be more imaginative and bold about capturing the value they deliver.