Feature

posted 22 Jun 2010 in Volume 12 Issue 12

Masterclass: Adding Real Value

What should law firms do to ensure their value-added services are competitive and support retention of key clients? Lance Sapsford, head of business development at Addleshaw Goddard, provides some pointers.

Four things you will learn from this Masterclass:

1. How to assess the value of a law firm to a client

2. How to decide whether a trophy client is worth having

3. How to create differentiated value-added services

4. How to ensure long-term returns on investments in clients

The balance of power has swung towards the client in procuring legal services. Panels, discounts, demands for secondees, value added services – these are all elements which corporate counsel will consider, and indeed demand, when choosing from a large number of undifferentiated firms in an unconsolidated marketplace. Add a recession, and a significant oversupply of lawyers leading to a crash in prices as law firms compete over volumes of work, and it’s easy to see why that balance has swung.

The situation is even starker when you consider the sophistication with which general counsel at large corporations, in particular, have applied commercial sense to how they buy legal services. This has not, however, been matched by many law firms, which often play catch-up when faced with externally driven-changes to their market.

Compared with other industries, client relationship and account management is in its infancy in the legal sector. A major part of this work involves law firms understanding the nature of their two-way relationships with clients, the lifecycle of those relationships and the level of investment required to deliver medium to long-term growth and profitability.

So how can value-added services be managed to redress the imbalance that so often exists in client/law firm relationships? Certainly, understanding the value you believe your overall package brings to the individual client goes a long way towards a mutually beneficial and profitable client relationship – but not all the way. Understanding how your offering is valued by the client is the key to a balanced relationship.

Case Study: Assessing Value

A mid-tier law firm had a coveted panel place with a FTSE 100 client. The firm invested heavily in the relationship through a long list of value-added services – secondments, training, updates, seminars and joint creative ideas sessions. This investment sat alongside heavy discounts demanded by the client at panel assessment time. In effect, the firm put a price on having a ‘trophy’ client.

The client took the law firm up on all of its offers and had a seemingly insatiable appetite. Sometimes sessions were hosted, and the attendance from the client side was disappointingly poor – they were too busy!

In general, however, this situation was perceived as a good thing by the law firm in offering engagement, exposure and the opportunity to network. Overall profitability of this ‘full service’ client was not measured.

On analysing the client for relative attractiveness (scoring the clearly identified and weighted characteristics that make a client attractive to a firm, adding them up and comparing the total with other clients), this one was up there with the best. So far so good. It wasn’t until the client was measured in terms of the firm’s competitive advantage in relation to other law firms (see Figure 1) that a nagging suspicion began to form.

It took some introspection and a look at a simple procurement model (Figure 2) to come to the conclusion that the work given to the firm was relatively low risk and low cost, and that the client saw it as a commodity in the context of its other legal service suppliers. The firm came to the conclusion that, as mid-tier law firms are numerous and what the firm itself offered was pretty standardised, the client took everything the firm offered because it would ultimately be replaced.

In reality the panel was small. It contained distinct types of firms doing different types of work, and even magic-circle firms had been known to be unceremoniously dumped at panel review time.

Lessons learned

Value has different meanings for different clients and suppliers. In this situation, there was a mismatch between the client and the supplier’s views on the value provided by the law firm. The hard reality was that the client was willing to let the law firm work this out all by itself. In the meantime, it would take all of the ‘freebies’ on offer.

When analysed, the law firm saw that the client sat in the top right hand box of the client portfolio matrix shown in Figure 1. It was a highly attractive client for the law firm, but one that did not show the firm as having any particular competitive advantage, either over other panel firms, or, more worryingly, over other mid-tier firms.

The investment in the client did nothing to move the client towards the left (increasing competitive advantage), but rather was at the level of a client already in there. In other words, it was inappropriately high and the investment would have been better made elsewhere. Smaller-scale selective investment, driven by short to medium-term goals and factoring in the risk of losing the panel place, might have driven better profitability, taken less resources and allowed investment in a new client.

The management infrastructure, analytical grasp of the client base, or even the courage to tell a client that the investment approach needs to change, can often be lacking in law firms.

In the case above, the client ultimately made up its own mind and the relationship ended with the next panel review.

Ensuring Effectiveness

The following rules are designed to give guidance on the role value-added services play in the make-up of the client/law firm relationship, and how they fit into a portfolio of key accounts. They can also be used to help prioritise which clients get what services.

Rule 1. Value-added services become a commodity unless they differentiate. Value-added services should be one of the main ways in which you differentiate your firm. Running a seminar to explain a new piece of legislation won’t set you or your firm apart. Running a workshop with different parties in related industries on how to gain commercial advantage by acting on a new piece of legislation just might.

For example, we run business simulation events designed to put in-house lawyers in the shoes of their colleagues (managing director, finance director, commercial director) over a four-year business cycle. Clients love the practical application of their work in a fun environment, often with lawyers from other businesses. The feedback we’ve received often notes that the sessions have been different, innovative and useful.

Use caution when thinking about how to stand out from the crowd, however. An offering must be easy to understand and its application should be obvious. Differentiation for its own sake doesn’t usually deliver something that clients will readily take up. Something tricky to grasp will turn off a busy in-house lawyer.

Rule 2. Understand the impact on profitability that value-added services can have at an individual client level. Many law firms have key client programmes, client relationship management systems to support them, and packages of value-added services that are usually supplied on a reactive basis. Evaluating the profitability of a client, including every lunch, seminar, football match, secondment and newsletter is not easy, and may be going too far. But not understanding it at all is the reality for many law firms.

Prices have been under extreme pressure due to oversupply, and law firms are recognising that they’re not actually making money on clients for whom they do multiple streams of work – particularly because they’ve traditionally measured profitability at a divisional or service line, rather than at a client level.

You can’t begin to understand the value you place on your value-added services unless you know what they’re costing and the financial impact they have on your client profitability. If you can’t do this, you can’t prioritise what you provide, who you provide it for or even why you provide it.

Rule 3. Treat your value-added services as an investment – one which will have current or future returns. The matrix in Figure 1 is one way of understanding your key client base. It can also help you decide where to invest, particularly if you know your budget.

Once you’ve plotted your clients on the chart and know the size of the opportunity, the value-added services you offer should form part of the overall investment your firm makes in the portfolio of clients prioritised according to their likely return.

Rule 4. Decide which value-added services to offer based on dialogue with clients and what you know your firm is good at doing. Most law firms talk about listening and really understanding their clients, but this is rarely evident from the similar lists of standard value-added services which law firms offer to virtually any client that asks.

Talking to clients about what suits them is important. A good example is the information clients receive from firms as part of their value-added package – legal or industry updates.

I recently received some feedback from a general counsel who said that he sifts through the piles of updates he regularly receives from a plethora of panel and non-panel firms for the one or two items he needs and actually rates. The rest go straight into the bin.

Asking what might make a difference, understanding what keeps clients awake, and confirming what information might help, and in what format, is a good starting place. Writing an update and sending it out to a firm-wide mailing list, is not. In this case less is definitely more.

Rule 5. Consider the competition. If the industry guru works for a different firm, and you know that he or she supplies the authoritative publication in their sector, don’t set yourself up to be second best by doing one yourself. Pick another topic.

The logical extension of this is a coordinated approach to information provided by competing firms on a panel. From the client’s point of view, panel firms are complimentary and make up a balanced set of providers. Seeing them coordinate their efforts where value-add is concerned would undoubtedly deliver a better overall service.

Getting started

Applying strategic thought to using value-added services to your advantage is, of course, easier said than done.
The cultural changes required to implement new ideas in law firms should not be underestimated.

As with most good business development, beginning with the client in mind – whether from a profit, service level, relevance, or any other point of view – will lead towards getting it right.

Generally speaking, if the client would benefit and you can foresee a return on your investment, it’s worth delivering value-added services. But, be different. Think about costs, look for returns, make it interesting and relevant and don’t simply copy the competition.

Acknowledgements

The author would like to acknowledge the assistance of Clare Quinn-Waters, principal of Bear Consulting, with researching and writing this article.

– lance.sapsford@addleshawgoddard.com