Responding to Client Calls for Value

For many years, corporate counsel and other executive-level buyers of legal services have been alerting law firms to their growing concern over the gap between rising law firm fees and the value of services delivered. Despite mounting client frustration, the law firm value proposition in the legal industry has remained relatively unchanged, with most firms continuing to bill clients by the hour and raising rates annually. These trends largely supported paying associates' ever-increasing salaries and drove higher partner profits ' neither of which served to improve the value of services delivered to clients. Client concerns about rising fees and the “value” of services have been previously overshadowed by years of enormous demand for legal services, enabling firms to avoid undergoing significant change to the traditional service delivery model. However, over the past year, market dynamics have aligned, creating an opportunity to transform services provided by law firms in order to better meet or exceed client demands.

Legal services purchasing power has shifted to a highly sophisticated, business savvy, and now frustrated client group, heralding the possibility of groundbreaking changes in the way that law firms and their clients interact. Today, clients appear to be gaining ground in calling upon law firms to step-up and deliver “value.” Three demand-related factors are driving this market shift. First, corporate boards (and for private companies, CFOs and other executive leaders) recognize that legal costs far outweigh any other expense of the business, and are placing growing emphasis on reducing legal spend; second, increased competition is driving down costs; and third, technological advances now provide tools that enable improved service delivery. The buyer is well educated and readily expecting law firms to respond with efficient, high-quality, cost-effective services.

One clear example of this client-driven call for change is provided by the Association of Corporate Counsel's (“ACC”) Value Challenge, a growing resource base and source of dialogue for corporate clients and law firms. [ACC is a 25,000-member strong constituency of in-house counsel (5,000 of whom are the highest-ranking legal officer of their companies.)] The focus of the ACC Value Challenge surrounds the concept of “reconnecting costs with value” by supporting improved relationships and service delivery between corporate clients and their legal service providers. Support for and involvement in the Value Challenge appears to be increasing, as the current buyer's market forces firms to take client concerns more seriously than ever before.

To address client demands, a number of market-leading firms are feverishly investigating new, different, and better ways to deliver services to clients and provide the value being demanded. This flurry of activity is generating new interest in defining what value means, identifying new and creative tools for delivering value, and finding more effective methods for communicating with clients about services and value provided.

What Does 'Value' Really Mean?

A significant hurdle for law firms seeking new ways to deliver services to clients and better meet the value challenge is the lack of consensus on the definition of value. The definition and meaning of value varies depending on the unique business requirements, corporate and legal strategy, regulatory requirements, resource availability, and appetite for risk specific to a given client.

While major themes in the definition of value do exist (e.g., results orientation, costs that equate with value, or reduced fees), the true mandate for a law firm seeking to redefine its client service model and respond to the value challenge is to develop a dialogue with each of the firm's most important or highest potential clients. Including the voice of the client in the firm's planning process will help the firm to better understand clients' unique requirements and related definitions of value as the concepts pertain to their business strategies.

Abundant opportunities exist for law firms opting to pursue a dialogue with clients about value and service delivery. Such conversations may take on a variety of forms ' a client service interview, a client team meeting, or a case post-mortem. By inviting clients to speak openly about their business and legal requirements, the quality and nature of services provided by the firm, methods for better achieving their specific goals, and what value means to them, law firms position themselves as receptive and participatory team members and trusted advisers. When handled appropriately, such conversations can frequently lead to business expansion, often in areas of work previously unavailable to the firm. Direct communication with clients enables firms to more effectively identify the appropriate tools and methodologies required to best serve clients and compete most effectively in the market.

New and Creative Tools for Delivering Client Value

In response to dramatically weakened client demand for services, proactive and market-leading law firms are investing significant resources in the identification and development of new tools and approaches to better deliver client value. As clients call for leaner staffing, better training and mentoring, improved efficiency, innovative approaches to billing, and true partnering/shared risk, front runners in the industry are shaking up the traditional law firm business model ' contemplating an array of changes, starting with a closer examination of staffing, associate compensation, and pricing.

Staffing and Compensation

A hot-button issue among general counsel ' years of skyrocketing associate compensation and correspondingly high hourly rates for untrained and untested junior lawyers have created increased pressure on the traditional law firm staffing and associate compensation model.

In response, leading firms are seeking ways to improve associate skill sets in order to better provide the value for services that clients demand. In the past year, a handful of firms have announced the adoption of “apprenticeship” models, whereby associates shadow (at no cost to the client) experienced lawyers during the initial months of their careers as a form of on-the-job training. In many of these models, associates are also paid less during this period, a leading indicator of a longer-term shift away from premium associate pay.

Alongside the adoption of intense junior lawyer training programs, firms are also pursuing changes to the traditional lock-step associate compensation model. The recent shift toward merit-based systems requires a more robust evaluation process, competency or skills-based career progression, and supportive training programs ' all of which drive improved management and enhanced skill sets of junior lawyers and serve to better align law firms with corporate clients' desire for cost-effectiveness, knowledge management, and expertise.

Another evolving trend in law firm staffing approaches involves the hiring of contract lawyers. Increasingly, contract lawyers represent a viable alternative for firms seeking to better meet client demands for cost-effective and expertise-appropriate service. Contract lawyers offer firms the opportunity to scale services based on demand, to adapt resources based on expertise required, and to take on routine, volume-oriented work at a lower cost to the firm and to the client.

Pricing

For some, but not all firms, devising new approaches to pricing represents both a significant opportunity as well as a significant challenge. Already, a number of mid-size and large law firms complete a major percentage of their work based on alternative fee agreements. Some major firms indicate that more than 40% of their practice is billed based on alternative fee agreements. However, it is important to note that alternative pricing is not a fit for every practice area, and crafting new pricing strategies still holds risks and challenges for firms. Addressing alternative pricing requires dealing with concerns related to increased commoditization and price-based competition, and effective implementation of alternative pricing requires intensive investment of resources and careful management. Yet, ultimately, firms successful at improving efficiencies and reflecting those improvements in the pricing of services will gain competitive advantage, improve client loyalty, and realize greater profitability.

Communicating with Clients About New Value Tools

Having defined client-specific value requirements and investigated and adopted relevant tools and methods for better delivering value, firms must next focus on the best way to continue to communicate with clients about changes made and the ongoing benefits clients will realize from such changes.

• Talk it up: All relationships prosper with communication. All too often, law firms implement important and value-adding changes to their practice to better service clients. And yet, clients remain unaware of the firms' efforts. Firms are best served to capitalize on improvements to client relationships and open new lines of communication. Before embarking on change programs, talk to your clients. Get their input, and incorporate the feedback into the firm's process.
• Be diligent: Strengthen the firm's response to the client value challenge by building support internally and taking advantage of current market conditions. By responding to client calls for value, the firm will more effectively build momentum to develop an ongoing program for continuous improvement in service delivery. In doing so, firm leaders will effectively prevent client-value initiatives from becoming single, one-time efforts.
• Evaluate and communicate progress: Assess your efforts regularly by evaluating the improvement in value delivered over time. Communicate frequently with clients about progress on specific value-adding initiatives and projects. And in particular, celebrate the firm's successes with clients. Communicate with them about great results and value added. Remember to also communicate internally to underscore the firm's continuing success with clients and its importance to the firm's market position.

Conclusion

The legal industry is changing. Recent economic events and shrinking demand for legal services have driven the industry toward a new buyers' market, leading law firms to confront challenges associated with client demands for value and more cost-effective service delivery. In response, pace-setter firms are nimbly moving to better define value for individual clients, identifying new and creative tools to deliver value, and effectively communicate with clients. Firms seeking to compete effectively and avoid displacement must proactively and objectively evaluate their approach to client service and ability to deliver superior value. Doing so ' or not ' may be a key determinant of long-run success and sustainable competitive advantage. Is your firm up to the challenge?

Kristin K. Stark, a member of this newsletter's Board of Editors, is a consultant in Hildebrandt International's Strategy group. She advises clients on strategy development, organizational management and structure, and talent development and retention. She is based in the company's San Francisco office. Silvia L. Coulter, a Vice President at Hildebrandt International, chairs the Client Development and Growth Practice. She is a frequent speaker in the legal industry on the topic of connecting value to costs, and focuses her practice on client retention, growth, and new business development. She may be reached at [email protected].

For many years, corporate counsel and other executive-level buyers of legal services have been alerting law firms to their growing concern over the gap between rising law firm fees and the value of services delivered. Despite mounting client frustration, the law firm value proposition in the legal industry has remained relatively unchanged, with most firms continuing to bill clients by the hour and raising rates annually. These trends largely supported paying associates' ever-increasing salaries and drove higher partner profits ' neither of which served to improve the value of services delivered to clients. Client concerns about rising fees and the “value” of services have been previously overshadowed by years of enormous demand for legal services, enabling firms to avoid undergoing significant change to the traditional service delivery model. However, over the past year, market dynamics have aligned, creating an opportunity to transform services provided by law firms in order to better meet or exceed client demands.

Legal services purchasing power has shifted to a highly sophisticated, business savvy, and now frustrated client group, heralding the possibility of groundbreaking changes in the way that law firms and their clients interact. Today, clients appear to be gaining ground in calling upon law firms to step-up and deliver “value.” Three demand-related factors are driving this market shift. First, corporate boards (and for private companies, CFOs and other executive leaders) recognize that legal costs far outweigh any other expense of the business, and are placing growing emphasis on reducing legal spend; second, increased competition is driving down costs; and third, technological advances now provide tools that enable improved service delivery. The buyer is well educated and readily expecting law firms to respond with efficient, high-quality, cost-effective services.

One clear example of this client-driven call for change is provided by the Association of Corporate Counsel's (“ACC”) Value Challenge, a growing resource base and source of dialogue for corporate clients and law firms. [ACC is a 25,000-member strong constituency of in-house counsel (5,000 of whom are the highest-ranking legal officer of their companies.)] The focus of the ACC Value Challenge surrounds the concept of “reconnecting costs with value” by supporting improved relationships and service delivery between corporate clients and their legal service providers. Support for and involvement in the Value Challenge appears to be increasing, as the current buyer's market forces firms to take client concerns more seriously than ever before.

To address client demands, a number of market-leading firms are feverishly investigating new, different, and better ways to deliver services to clients and provide the value being demanded. This flurry of activity is generating new interest in defining what value means, identifying new and creative tools for delivering value, and finding more effective methods for communicating with clients about services and value provided.

What Does 'Value' Really Mean?

A significant hurdle for law firms seeking new ways to deliver services to clients and better meet the value challenge is the lack of consensus on the definition of value. The definition and meaning of value varies depending on the unique business requirements, corporate and legal strategy, regulatory requirements, resource availability, and appetite for risk specific to a given client.

While major themes in the definition of value do exist (e.g., results orientation, costs that equate with value, or reduced fees), the true mandate for a law firm seeking to redefine its client service model and respond to the value challenge is to develop a dialogue with each of the firm's most important or highest potential clients. Including the voice of the client in the firm's planning process will help the firm to better understand clients' unique requirements and related definitions of value as the concepts pertain to their business strategies.

Abundant opportunities exist for law firms opting to pursue a dialogue with clients about value and service delivery. Such conversations may take on a variety of forms ' a client service interview, a client team meeting, or a case post-mortem. By inviting clients to speak openly about their business and legal requirements, the quality and nature of services provided by the firm, methods for better achieving their specific goals, and what value means to them, law firms position themselves as receptive and participatory team members and trusted advisers. When handled appropriately, such conversations can frequently lead to business expansion, often in areas of work previously unavailable to the firm. Direct communication with clients enables firms to more effectively identify the appropriate tools and methodologies required to best serve clients and compete most effectively in the market.

New and Creative Tools for Delivering Client Value

In response to dramatically weakened client demand for services, proactive and market-leading law firms are investing significant resources in the identification and development of new tools and approaches to better deliver client value. As clients call for leaner staffing, better training and mentoring, improved efficiency, innovative approaches to billing, and true partnering/shared risk, front runners in the industry are shaking up the traditional law firm business model ' contemplating an array of changes, starting with a closer examination of staffing, associate compensation, and pricing.

Staffing and Compensation

A hot-button issue among general counsel ' years of skyrocketing associate compensation and correspondingly high hourly rates for untrained and untested junior lawyers have created increased pressure on the traditional law firm staffing and associate compensation model.

In response, leading firms are seeking ways to improve associate skill sets in order to better provide the value for services that clients demand. In the past year, a handful of firms have announced the adoption of “apprenticeship” models, whereby associates shadow (at no cost to the client) experienced lawyers during the initial months of their careers as a form of on-the-job training. In many of these models, associates are also paid less during this period, a leading indicator of a longer-term shift away from premium associate pay.

Alongside the adoption of intense junior lawyer training programs, firms are also pursuing changes to the traditional lock-step associate compensation model. The recent shift toward merit-based systems requires a more robust evaluation process, competency or skills-based career progression, and supportive training programs ' all of which drive improved management and enhanced skill sets of junior lawyers and serve to better align law firms with corporate clients' desire for cost-effectiveness, knowledge management, and expertise.

Another evolving trend in law firm staffing approaches involves the hiring of contract lawyers. Increasingly, contract lawyers represent a viable alternative for firms seeking to better meet client demands for cost-effective and expertise-appropriate service. Contract lawyers offer firms the opportunity to scale services based on demand, to adapt resources based on expertise required, and to take on routine, volume-oriented work at a lower cost to the firm and to the client.

Pricing

For some, but not all firms, devising new approaches to pricing represents both a significant opportunity as well as a significant challenge. Already, a number of mid-size and large law firms complete a major percentage of their work based on alternative fee agreements. Some major firms indicate that more than 40% of their practice is billed based on alternative fee agreements. However, it is important to note that alternative pricing is not a fit for every practice area, and crafting new pricing strategies still holds risks and challenges for firms. Addressing alternative pricing requires dealing with concerns related to increased commoditization and price-based competition, and effective implementation of alternative pricing requires intensive investment of resources and careful management. Yet, ultimately, firms successful at improving efficiencies and reflecting those improvements in the pricing of services will gain competitive advantage, improve client loyalty, and realize greater profitability.

Communicating with Clients About New Value Tools

Having defined client-specific value requirements and investigated and adopted relevant tools and methods for better delivering value, firms must next focus on the best way to continue to communicate with clients about changes made and the ongoing benefits clients will realize from such changes.

• Talk it up: All relationships prosper with communication. All too often, law firms implement important and value-adding changes to their practice to better service clients. And yet, clients remain unaware of the firms' efforts. Firms are best served to capitalize on improvements to client relationships and open new lines of communication. Before embarking on change programs, talk to your clients. Get their input, and incorporate the feedback into the firm's process.
• Be diligent: Strengthen the firm's response to the client value challenge by building support internally and taking advantage of current market conditions. By responding to client calls for value, the firm will more effectively build momentum to develop an ongoing program for continuous improvement in service delivery. In doing so, firm leaders will effectively prevent client-value initiatives from becoming single, one-time efforts.
• Evaluate and communicate progress: Assess your efforts regularly by evaluating the improvement in value delivered over time. Communicate frequently with clients about progress on specific value-adding initiatives and projects. And in particular, celebrate the firm's successes with clients. Communicate with them about great results and value added. Remember to also communicate internally to underscore the firm's continuing success with clients and its importance to the firm's market position.

Conclusion

The legal industry is changing. Recent economic events and shrinking demand for legal services have driven the industry toward a new buyers' market, leading law firms to confront challenges associated with client demands for value and more cost-effective service delivery. In response, pace-setter firms are nimbly moving to better define value for individual clients, identifying new and creative tools to deliver value, and effectively communicate with clients. Firms seeking to compete effectively and avoid displacement must proactively and objectively evaluate their approach to client service and ability to deliver superior value. Doing so ' or not ' may be a key determinant of long-run success and sustainable competitive advantage. Is your firm up to the challenge?

Kristin K. Stark, a member of this newsletter's Board of Editors, is a consultant in Hildebrandt International's Strategy group. She advises clients on strategy development, organizational management and structure, and talent development and retention. She is based in the company's San Francisco office. Silvia L. Coulter, a Vice President at Hildebrandt International, chairs the Client Development and Growth Practice. She is a frequent speaker in the legal industry on the topic of connecting value to costs, and focuses her practice on client retention, growth, and new business development. She may be reached at [email protected].