It seems like far too long since I’ve revisited the Grand Unified Theory of Legal Value™ that inspired me to start this blog in the first place. I got a nice reminder, however, from an Inc. Magazine article this month titled The Two Keys to Profit. (
unfortunately it appears to be print-only).
The article is a quick one-pager, but it is loaded with important truths that Lawyers should embrace, starting with,
Companies that want consistent high profit should do two things: Emphasize better products or services over lower prices, and focus on growing the top line rather than obsess about cost cutting.
This squares nicely with my assertion that Cost Control is Not the Final Answer. But how can it be true when lawyers continue to feel price pressure from clients who have more choices, more information, and therefore more purchasing power than ever before?
Well, first we can just trust the experts. The article quotes Michael E. Raynor, author of The Innovators Manifesto and The Three Rules: How Exceptional Companies Think. Raynor is a seasoned Deloitte consultant who has spent his career ferreting out what separates top performers from other businesses, and his experience leads him to the following conclusion:
There is a role for cost-cutting as companies move up the performance curve, but to join the top tier, invest in making your products better.
Sounds good, but we can reach the same conclusion logically through the Legal Value Theory. As I said in one of my first posts , I propose that
Value = Benefit – Investment
This is for Value as perceived by the customer, though I later posited that the same equation also works for Provider Profit:
Profit = Benefit – Investment
I went on to describe the relationship between Provider Profit and Customer Value as follows:
Profit provider :: Value customer
Benefit provider – Investment provider :: Benefit customer – Investment customer
Which is to say, a larger provider Investment should result in a greater customer Benefit (and therefore a greater Value), just as a larger customer Investment should result in a greater provider Benefit (and therefore more Profit).
But on each side of the relationship, a party can only directly control its own Investment; each side is dependent on the other to gain Benefit. Put another way, each party can deliver Benefit to the other party, and it can influence the Investment on either side of the relationship, but it cannot deliver Benefit to itself.
So for a provider to increase its Profit unilaterally, its only lever is reducing its investment (i.e. cost control). This has two problems. First, cost control is, by its nature, an exercise in diminishing returns. Your costs are a finite quantity (though it may not always seem that way), and shaving them down gets geometrically more difficult as they approach the impossible goal of zero.
But the bigger problem with a Provider focusing on cost control is the risk that doing so will reduce the Customer’s perceived Benefit and thereby reduce the amount the Customer is willing to Invest in the service. Certainly controlling Investment can be done: I’ve even described Seven Wasteful Activities that lawyers engage in that offer no benefit to the client (which is the definition of waste). But just because cost control is possible doesn’t make it the best use of your time and energy.
A Provider who wants to increase Profit by increasing her own Benefit, rather than simply reducing her own Investment, must therefore figure out how to get her Customer to make a greater Investment. No rational Customer is going to make a greater Investment to receive the same Benefit (though this is the theory behind annual rate increases). Therefore, the Provider’s only option is to figure out how to deliver a greater Customer Benefit.
The challenge is twofold: (1) Figure out what will truly Benefit the Customer and (2) Get the Customer to increase its Investment in order to obtain that Benefit.
I’ve already discussed a few methods for doing this, and I will explore a few more in the near future. But in this season of reflection, I suggest that you spend a lot more time contemplating how to deliver more of what your customers want than worrying about how to do the same old thing but cheaper.
© 2014 John E. Grant.