In almost all walks of life the customer has the upper hand when it comes to deciding the value of products and services. Think of art sales at top-end auction houses. Their experts always give a valuation, but very often the price achieved surprises them by being higher or lower. The customer defines the true value.
And this example isn’t an isolated one. Think of the housing market or even buying a second-hand car. The eventual price achieved is always based on the customer’s perception of what the item is worth.
So what does this mean for law firms?
For many years law has been a seller’s market. Lawyers set their fees and customers paid them - by the hour. There was little room for negotiation. However, like it or not, the recent recession has changed the legal market forever.
Customers have gained the upper hand and, whether or not the market returns to pre-crisis levels, they aren’t going to give up their new-found power. In fact, with costs under pressure everywhere, they will look to exploit it. So how will customer perceptions of value shape legal fees in the future? Here are a few thoughts.
With costs under pressure, if customers think there is a low chance of a successful outcome it seems unlikely that they will want to engage in potentially costly matters. We have already seen the rise of no win, no fee arrangements in the personal injury sector. Perhaps we will see a similar trend towards no-risk or shared-risk arrangements for certain matters in the corporate sector?
In high stakes areas, like patent or intellectual property protection, companies will always want the best possible expertise, so law firms who are specialists in the area will be able to command a premium. Doing so will depend on maintaining the best possible skills, knowledge and experience. However, technology is increasing in complexity and the Internet and mobile networks are blurring the boundaries regarding privacy and information ownership. Firms wanting to excel in this area will need to invest heavily to maintain their expertise
Rise of procurement
As law firms’ clients come under pressure to cut costs, more and more corporate counsels are turning to their procurement departments to help them negotiate better rates.
Contrary to what many people think, the objective of procurement departments is not necessarily to buy at the lowest cost. They understand the importance of having strategic relationships with suppliers for certain services. But, at the same time, they want to optimise the price that is paid for them and the value to the company.
One approach they adopt to achieve this goal is a cost-plus strategy, providing suppliers with a fair profit over and above the expense of service provision. However, buyers will want to satisfy themselves that the underlying costs are reasonable. So law firms can expect to be asked to supply detailed and comprehensive information about the cost of their operations.
In other cases, where a matter is a discrete piece of work that can be defined accurately in advance, purchasing departments are adopting classic quoting or invitation to tender techniques. With this approach, the market sets the value of the work. Working together buyers and corporate counsel award the matter based on a combination of price and reputation.
Where law work is commoditised, such as conveyancing, recoveries or legal advice helplines, e-auctions are becoming popular. In this situation the entire bidding process is automated online and done over a relatively short time period. Once again the market sets the value of the service to be provided. To participate successfully law firms must have a thorough understanding of their costs and margins.
New legal order
So what is law worth? In today’s buyers’ market the answer is ‘only what the customer is prepared to pay’. What will that mean for law firms? To succeed they must firstly comprehensively understand their cost base and, secondly, look for areas where efficiency can be improved. Only then can they maintain their competitiveness in the new legal order that is being established.