This article explores a number of key factors that drive clients’ purchasing decisions and looks at what law firms might consider when assessing how they can most successfully compete in this buyers’ market.
Three key factors are driving clients’ purchasing decisions. First, the perceived strategic value of legal matters; second, the clients’ own cost pressures and third, levels of competition and choice between law firms.
Perceived strategic value of legal matters
Clients today have strong perceptions on the value of any matter and hence its market rate. Purchasing decisions will therefore first be dependent on how matters are categorised by clients (if they are of high, mid or low value) and who is driving the purchasing decision (is it the board, a specialist, the general counsel or the procurement department?).
Clients’ purchasing and pricing expectations for matters of critical business importance (high-value matters) will be very different from expectations for the type of work that clients see as more routine. For the business, critical or high-value work clients are looking for law firms that can provide outstanding expertise, a clear track record for delivering on very demanding and complex issues, excellent relationship management and high standards of service and support — with price a relatively lower consideration. By contrast, at the other end of the spectrum, for lower-value work, predictable costs (often a fixed price), efficiency and a high degree of systematisation are the key factors.
Virtually all products and services devalue over time. Increasing levels of work that in the past might have commanded premium prices, are today considered low value or commodity. New, innovative legal services may command a premium to begin with, but over time this erodes as other competitors are seen as credible providers and, as a result, perceived value declines — for example, structured finance or euro bonds.
The clients’ own cost pressures
Even in a buoyant economy, clients are seeking to drive down legal costs. Inevitably, in more challenging economic times, the focus on lowering external legal costs increases and panel places for firms that do not meet these expectations are at serious risk.
There has never been such an intense focus on the selection of legal advisers. Panels are being rigidly enforced and law firms are increasingly subject to tough and rigorous pitches and evaluations to win and maintain their places. Panel firms are now being subjected to regular reviews based on a number of criteria that most commonly include price, quality and efficiency. As part of this, clients are increasingly looking to streamline their legal panels to a size that can be managed more easily and where closer relationships can be built. According to Sweet & Maxwell’s in-house lawyer directory, more than a third of leading
Some companies have not only dramatically reduced the number of law firms on their panels, but in addition — following the lead of many banks — are introducing restrictions on which of the firms on their panel may be instructed for different types of matters. Typically, companies are reducing their panel firms by 50%-75%.
In parallel, clients are continuing to push for alternative approaches to hourly charging, which is often perceived to ‘reward inefficiency’. Many clients are now seeking fixed or capped fees, but there is a focus on a number of other alternative pricing approaches as well including volume discount arrangements, discounts with a client-selected bonus at the conclusion of the matter, contingency fees, value billing and so on. ITV, for example, as part of its panel review, was recently reported to have written to its 40-member panel asking them to provide a more appropriate fee structure to the chargeable hour. Another high-profile example of alternative approaches to pricing is the Eversheds-Tyco relationship, where there are reportedly five elements to the agreed fee structure, based on a mixture of fixed fees, value billing and bonus.
To support this, technology is increasingly providing companies with greater ability to scrutinise law firm performance and billing so that they can monitor more effectively the exact composition of law firm bills, including measuring the hours recorded by every fee earner assigned to a particular matter. Technology is also being used by some companies to facilitate competitive bidding and, in turn, it is being used as a mechanism to push down prices. ‘E-auctions’ can allow participating law firms to see where they are ranked against other firms in terms of price and then subsequently allows them a chance to change their bids.
Competition and choice between law firms
Clients have increasingly clear perceptions of what competitor law firms are charging and, even for much higher-value work, clients perceive there ought to be a reasonable choice of law firms and will use this competition to keep fees under tighter control. For the mid- to lower-value work, there is even more significant competition, which is driving fees down further. As an example, during economic downtimes,
Looking further ahead, the forthcoming Legal Services Act will only intensify price competition, with organisations such as banks, human resources consultancies, estate agents, retailers, insurers and other service companies offering legal services at potentially lower prices. The danger is that too many perceive this as just impacting on ‘high street’ work, but the implications will be more far-reaching, influencing commercial work such as employment, pensions, tax and real estate.
Flight to quality
For most law firms, the current economic climate leads to a reduction in the level of work and sees clients exercise greater power and demand in terms of service and price. In such times, however, there is a flight to quality as clients are more discerning and seek even greater value — this favours those with the strongest brands, which are able to demonstrate their strength of capabilities and are willing to invest to meet ever-increasing expectations.
The ‘double whammy’ of lower volumes of work and softer prices naturally inclines law firms to focus on very careful cost control — the classic ‘battening down of the hatches’. While this is an appropriate response, the danger is that firms develop a myopic focus on cost control, which stifles entrepreneurialism and risk taking, and in turn prevents law firms from exploiting opportunities that arise in any downturn.
In these challenging times, three areas of law firm operation deserve particular focus:
be certain to understand precisely where your firm is competing in the market and the associated client expectations. If a matter is perceived by the client to be business critical/high value, a law firm will need to meet very different expectations than if a matter is perceived as routine; in light of the above, consider the way services are being provided and ensure the firm has the appropriate structures, processes and systems in place to undertake work to an optimum efficiency — for example, better use of technology, improved project management, enhanced service delivery, appropriately structured teams; and ensure the firm can produce and deliver the legal service in a way that meets clients’ quality, service and price expectations while ensuring an acceptable profit margin is achieved.
A number of simple but effective approaches can assist in addressing each of these areas of focus. They tend to be exceptionally good investments with immediate feedback and we remain surprised at how little focus there is on these in many law firms. These include:
undertaking client research to gather ‘intelligence’ on clients’ expectations, needs and preferences; their perceptions of the firm’s performance against these, how the firm compares to competitors and where improvements can be made. In addition, undertaking interviews demonstrates a firm’s commitment to its clients and this in turn helps strengthen the relationship;
undertaking analysis of profitability and performance at a practice and client/work type level provides valuable information on the financial and operational performance of the firm. Is the practice operating the appropriate business model given the work it is undertaking? Are prices being appropriately set given strategic value and market conditions? Are costs being managed to achieve the appropriate profit margin? (In particular staff costs — does the practice have the right mix and seniority of people?). Successful organisations do not operate without knowing the profitability of their different offerings. When overall law firm profit margins were high, this was less important. Now it should be considered an absolute necessity. However, despite the intense pressure, underperforming firms seem to be surprisingly slow at putting profitability at the centre of their priorities; and
ensuring partner role and performance expectations are aligned with the firm’s financial and organisational needs. What is the role of partners, given the type of work being undertaken? For example, commodity matters will require far less partner input than higher-value matters. Are partners focusing their time appropriately? (When times are tough, are partners focusing too much time on their individual hours rather than delegating and focusing on business development?)
Clients are experiencing the effects of a tightening economy and these pressures are inevitably being passed on to law firms. In addition, competition across all types of work is intense and, at these times, there will be an increasing willingness by some firms to adopt aggressive pricing (and even predatory pricing in extreme circumstances) to win work. The partners of more successful law firms are increasingly focused and professional in targeting and tendering for work. In parallel, these firms are ensuring their cost structure and capabilities are appropriate, adopting new approaches and investing in technology, systems and processes.
Emma Kaye is a consultant at Hildebrandt International.
FinancialManagementJuly2008
