A simple question: should a law firm design its business model to best serve the clients it already has or should it select a business model and then go out and find clients who benefit from it?  It’s sort of the old “chicken and egg” question because one can argue either side.  Since it is easier to serve the clients you already have, it would seem logical that a firm should build its business model around clients’ desires.  However, it can be equally argued that if the firm is going to lead the market, it must create a model that the firm believes in and use it to attract clients who see value in the business model.

This long debated management paradox comes squarely to mind as we watch U.S. law firms react to the most recent round of associate salary wars.  Indeed, conversations among law firm managing partners and executive directors seem to have raised associate compensation to almost an obsession level and I half expected a mob with torches to storm Simpson Thatcher’s waiting room (although I suspect the lobby security, elevators and the New York City fire code might be a little daunting to large group activity) .  The view expressed in these conversations seems to be along the lines of “How can we afford to match the salaries paid by Wall Street Firms?”  The real question however should be “Why you would want to?”.

The Existing Business Model
Every business has a recipe that it uses to make money.  It is the mix of processes, services, quality, image, convenience and pricing that defines who the company is, differentiates it from competitors and presents the reason why a client or customer would buy its goods or services.  In the hotel industry, a Red Roof Inn’s business model is to provide a clean, safe, low amenity room, convenient to interstate highways, consistently at a price that is among the lowest available in the marketplace. Four Seasons Hotels, on the other hand, provide high amenity rooms in business centers for guests seeking a top quality lodging experience.  Two very different business models providing a similar core service to a very different clientele.

For many law firms the quality of their lawyers is a basis of their business model.  Often, the senior members of the firms graduated well up in their classes at top law schools and constantly bemoan their inability to attract their equals today.   In their eyes, putting forth lawyers with the highest academic background is sine qua non to the law firm’s being and, accordingly, is integral to the firm’s self-image as well as its business model.  Since legal recruiting is a highly efficient free market economy, the law firms that pay the highest salaries will get the top law school graduates.

But many firms who feel it is necessary to hire the top graduates complain that their clients are not willing to pay the rates necessary to permit the law firm to afford the top salaries.  That is, these firms do not have a client base that supports their business model.  At one time, these firms often had clients who were willing to pay for having the very best lawyers that society has to offer staffing their cases.  But, over time, these firms’ client bases changed or, perhaps, the clients changed their attitude on what creates value.  Whatever the reason, for many firms, their business model does not support their client base or visa versa.

Obviously, if a law firm wishes to maintain a business model of providing the brightest and best lawyers from the very best law schools, it must be prepared to pay market (or maybe even above market) salaries.  Therefore, firms must either keep their business model and find clients to serve who are willing to pay for the very best lawyers or adjust the business model to the client base.

The Diamond and Water Paradox
If you managed to stay awake in college for any portion of Economics 101, you probably remember Adam Smith’s Diamond and Water Paradox in The Wealth of Nations.  Traditional economics preached that value followed utility, i.e., the more useful something was, the more value people placed on it.  Smith questioned this presumption pointing out that water is among the most useful items in the world, considering that a human can’t sustain life for very long without it.  Diamonds, on the other hand, aren’t much good for anything other than being useless baubles. Yet, water is essentially free and diamonds are the most expensive commodity on earth (obviously Smith never purchased a bottle of Evian in a convenience store).  The Wealth of Nations spends about 60 pages talking about “value in use” and “value in exchange” but the gist of the matter is that there is no standard reason why some things cost what they do.  It is a complex combination of supply and demand, usefulness, personal preference, etc., that make up what has come to be called the value proposition.  And the make up of the value proposition may be completely unique to an individual buyer.

Clearly a law firm’s business model must be aligned with the value proposition that attracts its clients.  Too often firms get sucked into the price/quality vortex.  It is easy to assume that price and value are two sides of the same coin and changing one while making a comparable change to the other will meet a clients value proposition, e.g. if the Red Roof Inn increases its service level, it can raise its prices accordingly or, conversely, if the Four Seasons lowers it prices it can lower its service level and maintain its customers.  Unfortunately, the tie between business model and value proposition is far more complex than that and, if one gets one small part of it wrong (the Fours Seasons puts up a tall neon sign advertising its room rates or the Red Roof gets a doorman) the business does not succeed.

Understanding a Client’s Value Proposition
Matching the business model to the value proposition for a hotel is easy compared to a law firm.  The value proposition of a corporate client is the collection of the individual members of its management.  And, to make it just a bit more complex, all this is adjusted by changes in strategy, business conditions and industry trends.  Witness General Electric which recently dumped long time law firm relationships that were heavily based on pricing and service, opting instead for specialized practice and global capability.

Recognizing that there are a wide variety of issues that go into the selection of legal counsel that transcend value, we can identify certain characteristics that clients seem to routinely take into consideration in creating a value proposition.  In large measure, they can be summarized into a law firms’ overall quality.  For purposes of understanding a client’s value proposition, I believe that overall quality is made up of four factors: the quality of legal work performed, the quality of service provided, the quality of the relationship that has been established and the ability to achieve the client’s business objectives.

Diamonds Figure 1

Quality Legal Work
It is difficult for clients to make absolute judgments on the quality of legal work.  If the client happens to be a lawyer, he or she may recognize superior document drafting or the clarity of legal thought.

But, in large measure, for both lawyer and layman client alike, the quality of legal work performed can’t be accurately assessed until after it has performed its business objective, survived litigation and outlived any operational provisions.  In short, quality can only be measured long after the value proposition can be tied to the price.

As a result, the quality of legal work must be measured on other factors.  Typically, these revolve around the reputation of the law firm and its principal partners – their breadth of experience and the depth of their capabilities.  The partners whose reputations attracted the client, however, are rarely involved in the drafting of documents.  Instead, documents are drafted by associates and, perhaps, young partners for whom it is impossible to obtain much in the way of reputational information.

Effectively, therefore, much of the quality of legal work must be judged on the basis of the credentials of people doing the work.  Most of us have spent some time in our lives sitting in a doctor’s waiting room looking at his or her diplomas and certificates.  We somehow feel greater confidence in the quality of the medial care we are receiving if our doctor attended Harvard Medical School and did a residency at Johns Hopkins.  Certainly there are dozens of medical schools and teaching hospitals that produce doctors of equal or greater quality, but the perception by the patient is that the most recognized schools produce the best doctors.  Accordingly, if I have a serious disease, I would go to someplace like the Cleveland Clinic or the Mayo Clinic because I believe they attract the best doctors (presumably because they pay the most money).

Law firms whose business model is based on clients who place great value in the highest quality legal work must convince their clients that they have the best lawyers available.  The way to do that is to pay the most money – and make a show of doing that.  Hence, we have law firms working the media to publicize their setting or meeting the highest associate starting salaries.

Quality Service
One of the features of a business model is that all elements must conform to other elements.  We have learned to equate the best service with the highest price.  Therefore, it is difficult to support a top-quality value proposition with a minimal service business model.  Quality service involves two features.  The first is the breadth of service options.  The highest quality service involves an array of services to clients so broad that it borders on being unlimited.  In fact, it often involves providing whatever service is necessary to meet the client’s expectations.  If a firm is seeking clients who want high legal quality it is difficult to envision a limited service offering.  For example, I recently called the managing partner of a large law firm known for top quality and very high hourly rates.  His secretary answered the phone and offered to take a message.  When I asked to use voice mail, I was surprised to learn that they do not offer voice mail to their clients; it is only available for internal messages.  As a result, I had to go through a much more time-consuming process to leave a dictated message and, in the end, an incorrect message was transmitted.  The purpose of having the secretary take client messages was to give the image of high client service but, increasingly, part of client’s perception of the quality of service is the options that are offered.

Of course, the second aspect of quality service is how well the service is performed.  More precisely, the issue is how consistently the service is performed well.  Judgments about quality are based on accumulated experience but a single bad experience can erase a history of positive experience.  In fact, a track record of superb service causes a single instance of poor service to stand out by comparison.  As a result, the lawyer who returns telephone calls consistently within 24 hours may be perceived as providing superior service to the lawyer who usually returns calls within two hours but occasionally takes 24 hours.

Accomplishment  Quality
Every survey of what clients value in a lawyer focuses on an understanding of the client’s business.  As one general counsel put it, “I don’t have legal problems, I have business problems.  I want a lawyer who understands my business.”  Yet, many law firms known for the quality of their legal work fail to grasp this basic point and miss a critical aspect of the client’s value proposition.  Examples of lawyers not understanding their client’s business issues are legendary.  For some clients, making sure a deal closes on time is far more important than negotiating the very best deal.  For others, the business objective is “making a law suit go away,” not winning.

But, as important as an understanding of the business objectives is to the client’s value proposition, success in achieving those objectives is always at the top of the value curve.  Quality law firms get deals done, win law suits and achieve business objectives.

Relationship Quality
The most difficult aspect of quality to appreciate and describe is the contribution that personal relationships make to the value proposition.  All the aspects of quality may be present and contribute to the value proposition.  But for a law firm’s business model to truly meet the value proposition of a client, there must be a personal relationship established.  Analogies are difficult to express.  I had the pleasure of joining a client for dinner in a restaurant in Brussels.  The meal was imaginative and cooked to perfection.  The service was completely attentive.  But what transported the meal from a great meal to one of the best I have ever had was the chef’s appearance before we ordered to talk about what foods we particularly liked and what were the best items he had picked at the market that day.  Then, after cooking the meal, he joined us at dinner to share the entrée.  The chef created a personal relationship with us.  The meal was insanely expensive but, to my value proposition, was the highest quality dining experience of my life and worth whatever it cost.

Relationship quality is the interweaving of knowledge and trust.  The feeling that the law firm, in the form of the relationship lawyer, has complete knowledge of the client (our lawyer knows everything about us, our business, our trade secrets, our vulnerabilities – everything we value.  Part and parcel of this knowledge, however, is a trust that the knowledge will be used, and used to my best interests.

Matching the Value Proposition with the Business Model
The matching of a business model of a law firm with the client’s value proposition is a delicate balance.  Presumably the firm is constantly adjusting its business model (the combination of the level of quality it offers and the price it charges) to match changes in client’s value proposition (the amount the client is willing to pay for a specific quality level).  If the firm undershoots (provides a level of quality and service below what the client values) the client will be dissatisfied and will seek other counsel.  If the firm overshoots (provides a quality level above what the client is willing to pay for), it loses money by its inability to charge enough to cover the costs of the quality level.

Diamonds Figure 2

Alternatively, a firm that achieves a business model with which it feels comfortable may find that it must prune its client list.  This does not entail a wholesale firing of clients.  Instead it may be as simple as adjusting its client acceptance standards and allowing clients for which the firms quality level does not match their value proposition to voluntarily terminate their engagement of the firm and seek counsel more appropriate to what they value.

While this does represent a delicate balance, the firm does not have to get it dead solid perfect.  The value proposition of clients shifts to some degree to match the business model of the firm.  A client for whom a firm’s quality level is beyond what they find valuable may, over time, come to value the increased quality, especially if it is compared to other counsel.  Conversely, the client seeking a higher quality level may find that the cost savings provided by a firm is of greater value than the quality levels the client traditionally demanded.

One of the most difficult aspects of this balance is the ability to serve widely divergent levels of client value propositions simultaneously with differing business propositions. This is accomplishable at the margins, e.g., a firm with a top-notch private equity practice where high legal fees are viewed as “deal dust” may recruit a slightly higher level of lawyer and provide a different level of service than they offer to middle market M&A clients.  But we are talking about nuances.  In our experience, the operation of multiple business models within a single law firm has not proven to be a sustainable option.

Selecting a Business Model
It is unrealistic to believe that a law firm managing partner will wake up one day and decide to change the firm’s business model.  These are changes that are almost generational in scope. But there are short term issues that play a major role in firms’ strategies.  But if clients are not willing to pay the rates realistically required to support the levels of quality you are providing, it is a pretty good sign that the business model you are offering is not matching your clients’ value proposition.

Get your management group together some Saturday morning and talk about what your business model really is and what kind of client it supports.  Get the answers right and it could be time well spent.