Sun 12 Feb 2006

Phil Jepson weighs up the cost of providing good value services
Insurance lawyers would have read the recent press about Ford’s aim to reduce legal spend with a wry smile. Insurers have inflicted years of price slashing, cut throat competition and panel ‘reviews’ on their lawyers resulting in law firm mergers, firms being forced out of insurance work and the dumbing down of most insurance work.

The problem was that insurers could not see the value in the services they got from lawyers, so they felt they were being charged too much. This was partly due to the shortsighted stupidity of some insurers and partly due to the failure of lawyers to make clients see and feel the value.

Ford on the other hand, appears to recognise that lawyers provide some value and has invited its own law firms to be more flexible in the way in which they charge for their services. The company wants to cut its overall legal spend from £10m to £7m per annum in the UK and more importantly to pay according to the value of the service it receives. It is inviting its law firms to make ‘it feel happy’ with the service they provide.

The value of a service to a client cannot be measured in absolute terms because it is only the client who knows how much they value it.

Idea

Firms could be radical and ask their clients to rate the value of the services provided to them. What would they value more?

Just because value is difficult to measure that does not mean firms should ignore it. On the contrary they should concentrate on making the client feel that they are receiving value.

Facts

Some people are prepared to pay more than others for exactly the same product or service.
Popcorn, drinks and sweets are very expensive at a cinema. Why? To allow those who want to pay more for the experience of going to the cinema to do so. Are the people who spend the extra money as happy with their trip to the cinema as those who choose to take their own sweets with them? Of course they are.

Some people are prepared to pay a lot more money for a product or service, which appears to be enhanced or bespoke, even if the basic service would be perfectly adequate.
Virgin Trains first class return from London to Manchester £265. Standard class return £172.

There are times when a client is willing to pay more than at other times, for the same product or service.
A 24-hour call out plumber will be expensive. If you have a burst pipe flooding the kitchen you are probably prepared to pay extra to get a plumber immediately.

A client will be happy to buy a service, which is expensive, if they feel the benefit obtained will justify the cost.
Charging a client for time spent on a matter at an hourly rate (produced by taking overhead cost plus a fixed profit margin) bears no resemblance to value delivered.

Bills get reduced where ‘the job will not stand it’. It does not allow bills to be enhanced where small amounts of time have provided huge value to the client. Clients become aggrieved because the longer it takes the lawyer to solve the problem and the longer they can drag out the job, the more they can charge. This is the direct opposite of value in the eyes of the client.

Most lawyers and most law firms do not think about using value to make more profit. Value is not just about providing a good service. It is about providing a good service at the highest price the client is prepared to pay but all the while still feeling that their money has been well spent.

A business that prices its products or services according to the value perceived by its clients would make more profit than one that does not.
The client’s view of what they are willing to pay for a service will be shaped by what they think the lawyer is doing for them and its significance. If you charge a client more than they are willing to pay the client will be unhappy. They will either try to avoid using a lawyer next time or they will go to a competitor that they perceive to be cheaper or who gives better value for money.

There are plenty of competitors out there who would be happy to tell your clients that they can do it better and cheaper. Whether it is true or not, it can cost you business.

A Parable
A friend of mine is a property lawyer. He met a potential client at a drinks evening. My friend telephoned the potential client a few
days later and it soon transpired that he was about to buy some land for development. He offered my friend the chance to pitch for the work and my friend said he would be happy to do so.

My friend spoke at length to the potential client explaining to him the work that would be required to enable the purchase and development to go ahead. He explained that often in this type of situation lawyers under quote, partly to try and win the work and partly because they often overlook complexities that are likely to arise.

My friend told the potential client that:
· His fee estimate would be an accurate one to encompass the work that would be required and the complexities that he could foresee.
· Because of this, his estimate would be the highest the potential client would receive.


What happened?
The potential client’s existing solicitor quoted a fee 50 per cent less than the quote from my friend.
· My friend won the work.
· My friend delivered the work on time and in accordance with the fee estimate he had given.
· The lawyers instructed by the client’s bank overran their fee estimate by 300 per cent because they had under quoted and overlooked some of the work required.


The Result
My friend has a new client who was very happy with the work done and what he paid for it.

The bank’s solicitors have a fee dispute on their hands, notwithstanding that their fee is less than one third than that of my friend’s.

Remember
Value is not absolute. It is a concept that exists in the mind of your client. This presents both an opportunity and a threat.

It is possible to increase a client’s perception of the value of what you do by educating them.

It is possible to extract higher payment from some clients in some circumstances, as long as they see your service as providing value.

Conclusion
In order to make the most of the services you can sell, you need to understand the value placed on them by the client.

Without that understanding it is impossible to extract premium payment for highly valued services, but you will have to cut prices to keep clients where they see value in what you do for them.

If plumbers, cinemas and rail companies can extract premium prices but provide value, so can lawyers.

This article by Phil Jepson was originally published by In Brief magazine in late 2002.