[1]Mayson: the total cost-base of the law firm can be significantly inflated
At a time when “the cost of legal services has generally been allowed to rise to unsustainable levels”, lawyers and the clients need to reconnect the four key ingredients that go into the purchase of legal services – cost, price, value and relationship – Professor Stephen Mayson has argued.
A key element is that law firms must “constantly work and innovate to keep their costs as low as possible, consistent with their intended client-base and position in the market”.
This did not mean it was just about efficiency, he continued. “But it certainly all starts with efficiency: without it, a firm will not have kept its cost-base within reasonable bounds, or then its pricing within market expectations; and without cost-efficiency, there is little scope for client perceptions of value for money, or a sound basis for a continuing relationship.”
In a blog [2] based on his speech to yesterday’s Buying Legal Council conference on legal procurement and efficiency, Professor Mayson looked at the “potential disconnects” between each of those four ingredients.
The high cost of legal services “has been driven by a tendency to use qualified lawyers for just about everything, when other people or technology could have done just as good a job (or alternatively a good enough job)”, he said.
“This has discouraged effective resourcing and project management, as well dampening the need or opportunity for innovation. When this is combined with an ownership model and media culture that gives a distorting emphasis to profits per partner, the total cost-base of the law firm can be significantly inflated beyond sensible levels of cost-efficiency and market sustainability.”
As a result, a standard ‘cost-plus’ approach to pricing means that “the price can quickly run beyond the bounds of sensible – especially where the time spent is not managed for efficiency or utility to the client”.
Equally, he acknowledged, there can be a disconnect because the price the market is willing to pay is below the level that “even an efficiently structured business with a competitive cost-base can afford”.
The perception of value can work in various directions, Professor Mayson said, whether providers not understanding the market, or the market not understanding what the lawyer needs to do.
“So, when, for example, the value to the client of relatively straightforward documentation to effect the acquisition or disposal of real estate is low, but the cost to the provider is determined by mandatory registration processes and other regulatory burdens, it is not surprising that there is a disconnect between value and cost, and then between value and price. Pressure on prices from the market at that point is likely to drive even cost-efficient providers out of business.”
Value also goes to quality and utility. Technically correct and well-delivered advice that ignores the commercial realities of the matter has no utility and will not be seen as being of value. It can also work the other way, when the value to a client in achieving a particular outcome outweighs the cost of the law firm’s work.
If value to the client is to be truly understood, he continued, then it requires some degree of personal or institutional relationship that can fully inform the business or commercial context within which legal advice and services are given.
“But those relationships cannot be created by lawyers who focus only on billable hours and don’t invest in relationship-building because that is not chargeable time.”
Similarly, relationship and value-pricing was not possible “if procurement processes intervene to prevent lawyers who are bidding for work talking directly to the end-client”.
At the same time, Professor Mayson stressed that extra value does not need to be created in all circumstances.
Commoditised services, for example, are not concerned with relationship or creating extra value. “None of this undermines the business proposition of commoditised services. But ‘bet-the-company’ services do create value if they save the company; and value added elements [such as client seminars and hospitality] will be necessary in any sustainable long-term relationship.
“Value for money, on the hand, transcends all legal services: it must be perceived by all clients, for all services, if the firm is to remain in business.”