Can your clients say goodbye?

20 03 2011

Regular visitors to this blog will know I’m a big fan of Michael Porter’s work, and have a genuine belief that all business people should read his two books (Competitive Strategy and Competitive Advantage). Competitive Strategy provides a framework for analysing industries, and helps the reader think about how attractive their marketplace is.

Wisto & Partners' client wanted to make sure the message was fully understood

One of the determinents of this attractiveness, are the presence (or absence) of “barriers to entry”.

If a market is particularly profitable, the high profits will attract new entrants who will join that industry and increase the competitive intensity of the market (ringing alarm bells any UK lawyers?!). This ultimately reduces profitability across the industry. Barriers to entry are factors that stop these new entrants, or at least make it more difficult for them.

One of the most obvious barriers to entry, is of course regulation. The legal profession has benefitted from this in most countries for many years, and only now as the cold wind of deregulation blows through town, do we see this barrier to entry crumbling.

However, this isn’t the barrier to entry I want to consider  today.

Rather, let’s spend some time thinking about “switching costs”  – essentially these are one-off costs that a buyer (i.e. law firm client) faces when switching from one supplier’s product or services to another’s.

Now on the face of it, the concept might seem  more relevant to industries other than legal services – for example if you were switching your CRM (customer relationship management) software from Oracle to Microsoft. There you might have data migration costs, systems integration challenges, and user training issues.

However, it was another book, Information Rules by Shapiro, that got me thinking about how the concept of switching costs could apply to legal services.

The situation I want to investigate is not whether or not a client wants to stop using a particular law firm or not (see some of my previous posts on client relationships or quality for factors that might influence THAT decision), but if they do make the decision to say goodbye, how hard is it for them to actually make the switch.

At the lower end of the spectrum, where the relationship between clients and law firm is pretty transactional, there are very few switching costs. The client takes their business elsewhere (probably not even telling the previous law firm), gets the minor hassle of identifying a new firm, making contact, and then after engagement letters and anti-money laundering checks are complete, they are up and running.

Another fairly unsophisticated, but surprisingly effective tool at the lower end of the spectrum, is the classic smaller firm technique of being named as the registered office of a company (possibly supported by company secretarial activities). Not a major block to an advisor move, but certainly another layer of inconvenience. There are plenty of similar examples for consumer based law firms (for example, retaining a copy of the client’s will).

Moving up a level, where the relationship with a corporate client covers multiple services, and includes a large degree of interaction, this can definitely make a move more difficult, particularly if both the legal team and business people (for example the HR vice president) at the company instruct the firm.

It might be that this type of broad relationship benefits not just the law firm, but also the client, in that the larger volume of work underpins significant price discounts. Subsequently trying to move one work type to a new firm could put those enterprise-wide discounts at risk. These broad relationships provide even stronger ties (higher switching costs) if the relationship is multi-jurisdictional.

Many firms try to achieve this type of model, but a much smaller proportion really do it effectively, frequently lamenting their failure to cross-sell and up-sell. Perhaps the notoriously protective attitude of many partners to their clients (and the firm cultures that support these attitudes) contribute to this, or maybe it’s the siloed nature of many larger firms that makes providing a truly integrated services to clients challenging, but either way, experience suggests it’s not as easy as it should be.

The other large switching cost that might cause a client to think twice about a move, is the depth (as opposed to the breadth) of the relationship with the law firm.

If the firm has made a large investment in understanding the client, this can be difficult for a new supplier to replicate. Here I’m not just talking about understanding the way in which the client works, but also things like their commercial models, their decision making process (formal and informal), the personalities involved, their history, their competitors and their products.

If this is done well (and both in private practice and in-house, I have seen firms do this VERY well), then this is a benefit which should be carefully weighed up before a relationship is terminated – it’s not the type of information that a new firm could harvest in an “investment in a new relationship” (such as spending two days on-site with the client, notionally free of charge).

Another area of potential switching costs can arise from technology and documentation ties. If a law firm provides a useful extranet for a client, or hosts a large number of important documents (having perhaps scanned and indexed them for the client), then a move may put these benefits at risk. Greater technical integration (such as access to time recording systems, maintained and automated precedent banks) offers clients higher benefits but may also increase switching costs.

So in my view, switching costs are alive and well in the legal profession, even if they are not recognised as such. With one critical barrier to entry being swept away in the UK with the full implementation of the Legal Services Act, it’s maybe time for law firms to look at the concept of switching costs a little more closely.

The one caveat I’d say, is that often creating switching costs requires an investment by a law firm. To know whether that investment makes sense, the firm really needs an understanding of the likely return from that client, and the concept of “lifetime customer value” is not often applied in the legal profession, but that’s a topic for another post….








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