Value > Price > Cost, duh?!

Do you feel a bit lost in the “value of legal services” discussion?  Welcome to the club.  But it should not be.  It should be fairly simple.  Let’s take a look at its core, shall we?

The value received by the client has to be greater than the price he/she has to pay for it. And the price has to be greater than the cost to service provider.

Obvious, no?  But how often is it the starting point for pricing or valuing or even costing professional services?  Rarely, I find. In fact, most lawyers I speak to are mesmerized by the concept. From their reaction, it becomes obvious they never thought about it that way. In fact, they think it’s revolutionary. Go figure!

Let’s examine this concept in more detail:

Suppose a client needs some legal services (so purchasing is not optional).  When she has to pay a higher price than her perceived value, she is prepared to switch providers as soon as one becomes available that can deliver similar value at a lower price.

Just that statement alone will tell you a lot about why “client loyalty” has dropped in the last two decades.  If you’re one of those lawyers complaining about it, ask yourself what value of your work is relative to its price.

On the other end we have the opposite problem: when I as a lawyer can only charge a price that’s below my cost. I may choose to provide that service as a “loss leader” (which is what many firms and lawyers like to call it), but I have to figure out how to get out of that business. It is not viable.

Now let’s use an example.  Not least due to current media hype, let’s use legal due diligence.

Clients’ perception of its value has decreased over time for many reasons, which I will not detail here.  And yet, the price charged by law firms has steadily increased in the last 15 years, even more than before.  Why?  Because law firms conduct a DD in the same manner as 20 and 30 years ago, but now with exponentially more intensity.  (Don’t start to argue that using “contract lawyers” rather than associates makes any significant difference - it does not.)  The cost of a due diligence is baffling; often it’s 30% and up of the total legal costs for the transaction.

Clients are very unhappy.  They pay for it, but they don’t want to.  They’ll do it until they find an alternative.

Enter AI-enabled due diligence automation solutions, i.e. Kira, Diligen, eBrevia, Seal, etc.  They can reduce the DD costs.  At first by a bit, but as the solutions get better, by a significant factor.  So clients want it.  And they’ll demand it, not because it’s cheaper than lawyers doing it the old way, but because the price of the traditional way far exceeds the value they receive from it.

Of course, law firms rush to get the tools and parade them off to the clients, especially the serial transactionalists among them.  If the client demands it, they can offer it.  If there’s a competitive bid for the transaction work, the lower cost may help them to win that work. I leave you to decide what the firms do when the client does not demand it and does not get fee quotes from several firms...  But those situations will happen less with time.

What does that mean for law firms in the long-haul?

Warren Buffett said about his original textile business (I am paraphrasing here):  When a guy comes around to sell you new technology you have to figure out who will benefit from it.  If he can go around and sell it to your competitors right after you bought it, it will be your customers who benefit.  That is good for them but not good for your business.

Is that the case with AI-enabled DD?  Yes, which you really have to bear in mind when reading about law firms suddenly making bold press statements about their ability to use this system or that system.  I’ll comment in a later post about what to make of a law firm’s claim that they “customized” whatever AI-solution they subscribed to.  Just be inquisitive whether such a claim has legs, or not.  It seems like a bunch of sandbags thrown up as the swell is gaining relentlessly.

It is hopefully evident that legal DD is a battle which law firms will be losing.  At best, they can hold some (much diminished) ground.  And that scenario is the same for a lot of legal services.  Once someone figures out how to do it cheaper, clients will gravitate towards that solution.  Today, the mathematical symbols that describe the relationships between value, price and cost are inverted from what they need to be for law firms to fight for their ground.  That doesn’t have to be the case though.  Always start with this:  

Value > Price > Cost

The lawyer(s) who figure out how to drop the cost of a legal service so much that the price they can charge is below what the client is happy to pay, they can win.  Big time.  At the cost of other lawyers.  And that is the game of the future for much of legal services. 

Friedrich Blase