Legal pricing: stop using the ‘C’ word

Posted by Richard Burcher, managing director of Legal Futures Associate Validatum

In a jam: what kind are you?

“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.

    Readers Comments

  • Kaizad says:

    Very well said Richard. It complements an article I read earlier today on another ‘c’ word – ‘confidence’ of partners to charge a premium for the value they are creating for clients.

  • Every patent attorney in the Australian patent attorney profession needs to read this article and take notice. We will only become commoditized if we permit ourselves to be. Wake up and value yourselves and what you do!

  • Its a good read. One problem (major) is the definition of ‘commodity’ you use. Its essentially correct but the mistake you have made is that commodification of legal services arose not out of a market transformation from unique goods to undifferentiated goods – it largely came about from the transformation of a market of monopoly to a market of perfect competition.

    Increasing the attributes of a legal service to charge a premium is very difficult:

    a) Inexperienced purchasers are usually ‘stumped’ beforehand due to their lack of knowledge, low level of engagement and of course the assymetry of information between the parties. ‘Why do I need 6 varying levels of service when I barely understand the 1st?’.

    Where you get a ‘price premium’ in this area is often due to interception techniques (building society refers clients to particular conveyancer) which consumers often pay more – but this is often acceptable to the consumer because of the convenience, they have no information ‘search’ costs prior to purchase (trawling the web, asking friends etc).

    b) Experienced purchasers such as GCs are usually more interested in the ‘technical dimensions’ ie outcomes and results as opposed to the experiential functional attributes – varying service levels etc.

    You justify your answer by using a ‘search good’ (jam) as an example which is completely irrelevant as the features and characteristics are easily evaluated prior to purchase. Higher priced jams are usually marketed with value expressive appeals as opposed to utilitarian and functional appeals of lower price counterparts.

    Im not wetting on your chips Richard but lower prices are here to stay, they will continue to fall for many years. Its essentially a natural market process which can only be overcome by a) complete innovation (which will never happen), b) charge a premium for total convenience (already happening, conveyancing example above) or c) segmenting the mature market and look for less price sensitive client segments (already done).

  • BCReed says:

    Having actually studied economics and research innovation I tend to agree most with Graham. Commoditization cannot not be avoided in an industry with economic profits. Where there is little to no innovation products/services become commoditized much quicker. You can slow it down through branding, market segmentation, and asymmetrical information, but it always comes. Asymmetry of information has been the major force in the legal sector preventing commoditization but with the innovation of branded networks online that help consumer select the reputable attorneys for their legal needs and the emergence of the GC’s office as legal procurement this is asymmetry is decreasing dramatically.

    The only real way to avoid commoditization is to exit areas that are commoditized or close to being very commoditized. Continue going upmarket in a specialized legal niche and become the best at it. Also market yourself as much as possible. You will continually need to do this again and again, because business and money don’t sleep. As much as the legal industry would like to remain independent they can’t escape market forces, no matter how great they are at the practice of law.

  • Thanks Graham, I won’t bore readers with a point by point response. Suffice it to say that there are UK firms large and small who don’t buy in to the inevitability of reduced profits.

    The profession has ceased to be homogenous and those that understand very clearly which part of the market they are serving, do so exceptionally well and charge for it, are still doing very nicely thank you.

    The MP of a UK firm I worked with at the beginning of the year has just emailed me to report a 20% increase in turnover for the first 3 months of the financial year compared to the same period last year with a profound impact on PEP.

  • I would add that as a former 30 year partner in private practice (7 as managing partner), I speak from experience. I refused to allow the firm to buy into the commoditisation paradigm and our results consistently vindicated that strategic decision.

  • Yes I am very sure there are many if not all firms who dont buy into the inevitability of reduced profits – But there is an element of ‘land of the blind’ in that.

    The fact is its happening. Near enough every firm in the Top 30 has shed staff to break even or post marginal turnover increases.

    As the above poster rightly suggests – its just text book economics and there is a text book approach to slowing it down. The problem is – there is no innovation within the legal profession. Innovation being key – as we see in product and consumer markets.

    I dont agree on the homogenous point. At all. If anything the profession is becoming more homogenous. Largely because there is little scope for service quality in the legal profession to operate as a key differentiators – because of many things, take your pick: the inseparability and variability of services, the intangibility, little guidance on what service quality actually is, the perception of quality in the eyes of an subjective, irrational client base, high level of executional latitude and divergence, the stack em high low divergence services.

    The list is endless. Every firm says ‘we offer a quality service’. The fact is – its almost impossible to do so. Read my blog ‘Service Quality in law firms: Sympathy for the Devil’ for more:

    The answer for firms is NOT to come up with obscure pricing strategies that are based on some notion of end ‘value’ to the client.

    Most firms DONT have the level of understanding that the impact their services have on clients utility or profits. Firms dont have even utilise the most basic research methods that unearth client insights during any pricing process. And its for this reason why I suggest firms dont attempt – because value-based pricing often leaves clients with a feeling of being exploited at a time when firms need to develop deeper relationships. Its a pricing concept that was born out of shortage or lock-in relationships.

    My advice is for firms to invest in relationships. Creating partnerships of convenience and trust. Not in methods to extrapolate the income levels of yesteryear.

    Clients want more for less Richard. Not less for more. I also speak from a vast experience Richard. Pricing is a pillar of marketing.

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