Posted by Richard Burcher, managing director of Legal Futures Associate Validatum
“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 managing partner but those of a misguided Wall Street analyst making a comment about the losses at US Steel during the first quarter 2013.
This analyst continues, promoting cost cutting as the only thing that can be done to improve profitability and the only thing you can control in a commodity business. This is hard to read and digest. How can you make it on Wall Street as an analyst, and get away with irrational and unfounded statements like these?
This analyst’s view, sadly, has much in common with countless lawyers, their clients and more than a few commentators and consultants; the belief that the delivery of legal services is becoming increasingly commoditised is a development that is intended to and has the effect of reducing prices. This error of judgment is having a profoundly damaging effect on law firms’ strategic objectives and in particular, their whole approach to pricing and profitability.
Nor is this delusion confined to work like will drafting and residential conveyancing. I have heard clients describe everything from an AIM listing of a substantial corporate to complex bank financing described as ‘commoditised legal work’. The worst of it is that partners often agree, albeit reluctantly.
From the client perspective, it is a notion that they are understandably very happy to cultivate and 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, low value, filling in a few standard forms and therefore low price. For all lawyers and their clients, commoditisation is synonymous with heavy discounting.
The problem has its origins in the conflation of two completely different concepts; efficiency/effectiveness on the one hand and genuine commoditisation on the other hand.
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. This recognition has seen increased interest in process improvement such as Lean, Six Sigma and legal project management initiatives.
The object of these initiatives is, amongst other things, to identify waste and duplication in the production process, thereby reducing production cost for the benefit of the firm in improved margins, the client in terms of reduced fees, or both.
Law firms must do 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’s a necessary and valuable strategy but a short-term one.
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 for example, think Skadden, Arps, Slate, Meagher & Flom that 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 wills and powers of attorney, divorce, pre-nuptial agreements and residential conveyancing.
One of dozens of examples include the option of a ‘premium-priced’ residential conveyancing package that includes up to two home/hospital/rest home visits by a legal executive/paralegal – one to take instructions and one to get documents signed. This is a proven 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.
Almost anything is capable of differentiation. If this were not true, how is it that Fortnum & Mason can charge £5.25 for a pot of strawberry jam compared to £0.29 for substantially the same thing at Tesco? Answer – maybe the name – ‘Tesco Everyday Value Strawberry Jam’ doesn’t have quite the gravitas of ‘Coronation Royal Sovereign Strawberry Preserve’?
Who would know if there is much 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 Fortnum & Mason 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 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 don’t give them reason to do so, you will never command anything other that ‘Everyday Value’ prices.