Cost Consciousness: The Missing Link
We are very pleased to be able to bring you this guest blog from our collaborator and business partner Dr George Beaton, a director of Beaton Research + Consulting and Beaton Capital.
The Missing Link.
The great majority of practitioners have not discovered cost consciousness. Yet, of all the client service attributes we measure amongst the clients of law firms in our Beaton Benchmarks studies, it stands out head and shoulders in importance – and neglect by solicitors.
Cost consciousness is a ‘missing link’. Improvements in cost consciousness have the potential to offer solicitors – and their clients – more than anything else in the overall client service experience. Yet cost consciousness is poorly understood and receives little attention with the result that both clients and law firms are deprived of the benefits.
Origins of Cost Consciousness.
Cost consciousness was uncovered in research for a Melbourne Business School doctoral thesis in The University of Melbourne in the mid 1990s. Dr Margaret Beaton was researching how members of Australian Corporate Lawyers Association and Chartered Secretaries Australia perceive the value of solicitors’ services. Her work revealed a large ‘black hole’, i.e. something large and important, but not explained by knowledge at that time. The ‘black hole’ was important in explaining what drives perceived value in clients’ minds, yet it had no name. It was nick-named cost consciousness; and the phrase has stuck.
What Cost Consciousness Means to Clients.
In their own words, this is how clients of law firms and solicitors described those that score high on cost consciousness.
“We are always kept up-to-date on costs and issued notice if extra costs or variations are envisaged so that we, as the client, are always fully aware of the cost position.”
“The firm is aware of the budget available for any matter and suggests options based on different budgets.”
“They always quote first and explain the cost estimates.”
In other words cost conscious firms are mindful at all times of the costs incurred on a matter. They provide accurate cost estimates upfront and again when any additional charges are incurred. The provision of low or fixed cost solutions and diligent care for organisations with small budgets is also important.
On the other hand, clients of firms and solicitors that score low for cost consciousness say things like this:
“Way too expensive for simple matters and tend to over-service.”
“Their invoices for a particular dispute were far higher than anticipated.”
“They failed to provide realistic cost estimates.”
These disaffected clients most often feel that the fee charged is too high for the quality and/or value to the client of the service. These perceptions may be the result of an undue focus on making money, an excessive reliance on junior staff, not accurately identifying the likely costs upfront and/or a lack of care in containing costs or working within a budget.
Case study: The Rewards of Being Cost Conscious
The managing partner of this disguised firm believed he knew his was a top-performing firm because he was winning almost more work than they could cope with. What he didn't know was he and his partners were leaving money on the table. In short, because the firm was well rated on cost consciousness, it had substantial price-setting discretion. In other words, for what the firm delivered against the big end of town firms, it was under-charging.
Our research shows over and over, that the situation described in this case study is true of many smaller law firms.
Research Facts About Cost Consciousness
Beaton’s research demonstrates clients regard price and value as positively related, particularly for premium providers. That is, higher fees signal higher quality. Price is social proof of a firm’s market position and quality. Yet this doesn’t mean a firm can charge as much as it likes; there is another factor in the mix. This factor is cost consciousness.
Yet our research consistently shows the weakest link in managing clients’ perceptions of value is poor cost consciousness. This applies to all types of client and all work types. You can read more about Beaton’s research on cost consciousness here.
Cost consciousness is the attribute in the bundle of attributes measured by Beaton that has increased the most in importance since the 2008 economic downturn. Crucially, the importance of the ‘sticker price’ i.e. the quantum of fees has shown no increase in relative importance. But cost consciousness, which clients describe as their solicitors "spending our money as carefully as if it were their own" has increased.
Beaton’s research shows that if a solicitor demonstrates cost consciousness (as explained above) then the quantum of fees will have relatively little impact on clients' perception of the value they receive. This is particularly true if the solicitor also provides high levels of client service, i.e. is responsive, reliable and easy to do business with.
A Call to Action!
Solicitors that demonstrate a cavalier attitude to spending their client’s money can expect clients to push back on every single invoice, no matter what the amount. Solicitors that communicate with their clients openly and regularly about fees, demonstrate concern when costs are mounting, and show an eagerness (yes, eagerness!) to discuss their budget constraints and how they can work within them, will find that their clients will more readily accept their rates.
There is profit in cost consciousness!