Where are you: part of the opportunity or part of the cost?
Next month, my new book ‘Data & Dialogue, a relationship redefined’ will be published. The book is about new developments in the relationship between law firms and their clients and vice versa. The book describes what is today already going on at the frontiers of that relationship and how industry pioneers are working towards data supported relationships. In highlighting the challenges and the opportunities the book will outline what the relationship will look like in the future.
In doing research for the book and speaking with law firms, in-house teams and leading academics, it turned out that there was need for a viable model for calculating ‘value’. That is why we at TGO Consulting have developed the TGO Value Matrix©. We have tested and evaluated the TGO Value Matrix© with in-house teams and it turned out to be robust. It provides for the first time a usable tool to establish what is value to the client in different markets and for different practice areas.
As the model shows, there are two main factors that determine which price will be perceived as ‘good value’ to the client. On the vertical axis we have ‘return on investment’. ROI is how much money the client can potentially make (or save) by spending money on external legal counsel. When a company has to spend money in order to make money, this is seen as an investment. This is equally true for legal. Spending money on a lawyer is no problem as long as it helps me make more money. This explains why companies do not mind spending money on M&A lawyers. The acquisition or the merger represent a potentially good business opportunity. This equally holds true as it comes to limiting damages. Spending money on a lawyer in order to prevent or reduce a potentially huge fine or penalty, is seen as a good return on the investment (investment in a star lawyer handling the case).
The horizontal axis of the TGO Value Matrix© represents what we call ‘commoditization’ of legal services. Commoditization happens when the client can easily choose between multiple lawyers and multiple law firms that can handle the matter equally well. This has nothing to do with the complexity of the case. Especially in the more mature legal markets like London or New York, there will be plenty of qualified and experienced lawyers that can handle complicated matters and as a result the value perception and thus the price, will go down. The more readily available a certain expertise becomes, the less surcharge it can command. Interestingly what is considered a commodity will depend on the market. For example in project finance, all but the most complex work will be considered a commodity in London, while in Nigeria you might struggle to find one or two lawyers who have knowledge and experience in the field. Commoditization is to be distinguished from ‘bespoke’ as the two are often mixed up. Almost all legal advice will be bespoke as it will be tailor made for a single client and a specific matter. So commoditized work is almost always bespoke. There are just too many experienced lawyers to make it ‘special’ to the client. Many lawyers can handle the job equally well.
While doing our research leading up to the development of the TGO Value Matrix© we found two other factors that have a significant influence on the client’s value perception: relationship and brand power. Analyzing data, we discovered that there is a 0,9 – 1,1 correction factor for relationship and a 1 – 1,1 correction factor for reputation. This means that clients are prepared to pay up to 10% more for lawyers with whom they have prior outstanding experience as where lawyers who have no previous relationship with the client will need a 10% discount to be perceived as equal value. Lawyers and law firms who have a exceptionally strong reputation can command a price that is up to 10% higher than their peers that have equal quality but not the stellar reputation in the market. Please be aware that both factors can not be added: existing strong relationship and a strong brand reputation will still only allow for a 10% higher price (and not 20%) when compared with other lawyers who from an objective point of view have exactly the same experience, quality and skills.
Now having explained the factors that determine what represents value to the client, it is time to explain how to read the TGO Value Matrix©. Value is represented by the diagonal line that runs form top left to bottom right. All points that are on the same line at 90 degrees on the diagonal represent equal value to the client. This is in part represented by the red color. All points in the graph that have the same intensity of red are equal value.
Here is an example for the New York market that will help explain:
Top left you see multi-billion-dollar M&A, IPO, and Litigation. These have a very high return on investment for the client and there are even in New York only a hand full of lawyers that have extensive experience whit this type of matters. So we have a very high return on investment and a limited number of lawyers qualified for the job. Also, on the left, but more towards the bottom we have complicated competition issues. Here we have again a limited number of lawyers capable of successfully handling the matter, but there might not be a high monetary return on investment to the client. So even though the number of qualified lawyers is limited, the price perceived as good value will be significantly lower that with the high value M&A. Simply because there is only little of no monetary return on the investment.
Towards the bottom right segment of the TGO Value Matrix© we see matters that can be handled equally well by many lawyers and that provide little or no return on the investment for the client at all. Spending money on external counsel to handle this type of mandates will be seen mainly as costs to the client and thus the client will only want to spend as little as possible. Please keep in mind that this type of advice will still be bespoke. Bespoke does not protect from commoditization. It will be in this segment of the market where legal technology and market disruptors will have their biggest impact. Matters that are in the lower right part of the TGO Value Matrix© will soon be under tremendous price pressure as clients are determined to get better value.
In order to develop a strategy for your law firm or your practice you need to ask yourself the question where you are: are you part of the opportunity or part of the cost? We are happy to help with answering that question and defining how to move forward. So please share your thoughts and let us know what you think!