Two hard questions about law firms’ fee strategies
23 April, 2014
When sorrows come, they come not single spies
But in battalions.
—King Claudius, Hamlet: Act 4, Scene 5
When an industry reaches life cycle maturity, it seems to many of the incumbent firms that their sorrows do indeed come in battalions. Recent Beaton research sheds fresh light on the underlying causes and provides cogent reasons for boards to ask two hard questions of their management about law firms’ fee strategies.
Question 1: Are we doing the right things to mitigate the impact on our profits of clients’ perceptions of steadily falling fee levels?
Question 2: Are we sure our overall value proposition is right for our clients?
For the last seven years the Beaton Benchmarks in professional services have gathered unique evidence on a wide range of strategic issues, including clients’ perceptions of fee levels. This findings in this post are the first to authoritatively document the fact that fee levels of law firms at the big end of town have been steadily falling for the last five years – at least insofar as their clients are concerned.
Steadily falling fee levels
Examine the chart. It shows the average rating of fee levels by about 5,000 buyers and users of commercial and corporate legal services each year from 2008 to 2014.
The respondents in the independent online survey conducted by Beaton Research + Consulting are answering this question: How would you rate the fees charged by [Firm] over the last 12 months, where 0 = ‘extremely low fees’ and 10 = ‘extremely high fees’?. The firms referred to as [Firm] are the 35 largest in Australia, excluding Slater & Gordon because it does not compete for commercial and corporate clients.
The year-on-year falls in perceived price are statistically significant. As I have explained elsewhere (see for example here and here), a sustained fall in price – whether actual (on which there is regrettably no reliable time series data) or perceived by clients – is one of the surest indicators of a structural trend and life cycle maturity. In plain English this means when price is falling, the market is hyper-competitive, the war is for market share, and a (too often ‘the’) major weapon used by firms is price discounting.
The consequences for those firms that don’t realise this – and that don’t act now – are predictable and dire. Falling profitability. That’s why Question 1 is cogent – and hard. And the Board should not rest until it receives convincing answers and sees demonstrable, sustained strategic actions producing measurable outcomes.
Hard questions about law firms’ fee strategies
From a client’s perspective, a value proposition comprises what the firm offers clients and what price (i.e. the client’s perception of fees) it asks for the delivery of the benefits in its offer (i.e. clients’ perception of overall client service).
The second chart maps clients’ perception of fees (reported in the same way as in the first chart) and their perception of the overall client service they received in the last 12 months. The diagonal line has been statistically fitted and the R2 number of 0.69 explains how much any change in perception of overall client service can be explained by changes in perceived fee levels, and vice versa.
When Firm 3, represented by the red dot, and Firm 11, represented by the green dot, are removed from the analysis and the R2 is re-calculated it rises to 0.89. This observation suggests Firms numbered 1, 2, 4, 5, 6, 7, 8, 9 and 10 have their overall price pretty much in line with the overall client service, as their clients perceive both.
The red Firm (3) is over-charging for what it delivers. And the opposite applies to the green Firm (11), it is leaving partners’ money on the clients’ table.
Conclusion: Two hard questions about law firms’ fee strategies
The Board of every firm should ask itself: “Do we really know enough about the future?”, ” Is our firm’s current position sustainable?” and “What do we have to do to create continuing value for our clients and ourselves?”
If your Board is not asking hard questions about fees and your firm’s strategy for managing in a future where fees fall further, then now is the time to start.
We invite you to study these posts – and let us know how you found them helpful.
- Be prepared for the possibility that Chicken Little was right
- The Ides of March for professional services: do nothing, and profit per equity partner could halve within a decade
- More evidence why cost consciousness is valued by clients
- “We lost on price. We have to discount.” 5 reasons to still be sceptical
- Tough times call for tough measurement
Elements of this post first appeared in BRW on April 14, 2014. The BRW article and this post were written by George Beaton, a director of Beaton Capital and Beaton Research + Consulting. George is also at Google+ as +George Beaton,
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