Tuesday, 10 April 2012

The illusion of competition...

This blog is deliberately provocative.  I am not suggesting that law firms use "slight of hand" but seek to draw on an analogy that a lack of buyer control that comes from not focussing on what should drive buying decisions:

Cry of the Market Seller:
"Oranges, £2 per pound".

I can inspect the oranges and compare the price offered with that of the stall down the road.

Cry of the Fairground Worker:
"Roll up, roll up.  Ladies and gentlemen, a fair and open contest for those eagle eyed amongst you.  Three cards turned over, which one is the lady?" 

They all look the same. There is no transparency.  We try to follow the dealers hand, but he always manages to fool.  Why?  His trick relies on the similarity of what we are comparing and his ability to manipulate our lack of focus.

In a market, the consumer is in control.  In a fairground, the consumer is prey to other influences and chance.

Law firms, essentially, all look the same - partnerships, charging for time and materials.  The model offers little in the way of transparency and the buyer always bears the cost of reinventing solutions or over engineering. 

You can negotiate the hourly rate but not so the number of hours or seniority of resource that may be used.  Leaving aside certain well commoditised retail offerings (conveyancing, for example), fixed price is never fixed price - based always, essentially, on a guesstimate of time and materials. 

In fact, as hard as you negotiate rates - the total spend year on year goes up.

Law firms have thrived on the similarity of models, the lack of real transparency, and the lack of focus of the buyer on value.

Proof of this is that, even today, some firms are able to leverage super-profits (top 10 law firms margins are between 30-50%) that their customers can only dream of. 

A natural oligopoly has been allowed to develop.  Whilst there are over 15,000 law firms in the UK, there is only the "illusion of competition" - there is a limit to what the current model can deliver in terms of market led price pressure.

Let's compare this to the airline industry.  Let's imagine I need to get from London to Edinburgh by tomorrow noon.  According to facelesstravelagent.co.uk, I can fly with UKBRUMMYInternational or Das Germaner for £158 or £177, respectively.  If I fly cheesyJet, I am initially intrigued by a fare of £92 but with "extras", included in the other fares, I pay £162.  The mean of the other two.
 Professional services are, of course, a more complex model and with ABSs on their way, the challenge for buyers of legal services will be how they compare what "legal value" they get for every £1 spent on "legal cost" across a multitude of models, offering the same thing.  

Legal value may be risk mitigated, contract rights protected or the operational effectiveness of a project. It will change for and be pertinent to each buyer. However, in true economic terms "value" can be measured.

Buyers who learn to compare these measurements will shatter the "illusion" and enjoy a transparent market where they can assess value and make informed buying decisions.

So, in the future, where would you prefer to buy your legal services.  In a market or in a fairground?

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