Defining Value

As long as I’ve been practicing law, and certainly since the recent recession, I’ve heard much talk about “value” without a satisfactory explanation of what value is. You’ve heard it too: Clients talk about “getting more value for our legal spend,” lawyers talk about “delivering client value.” But what do they mean?

At the same time methodologies like Lean tell us to “define customer value” and “map the value stream.” They tell us to focus on value from the customer’s standpoint, and they (correctly) teach that value means different things to different customers. But they don’t often get to the heart of how customers perceive value.

The short answer, the common answer, and the answer that is dead-ass wrong, is that value is about reducing costs. People assume—naively—that improving value means exchanging less money for the same transaction.

On the surface this makes intuitive sense: clients think value is about getting the same legal work for less money; Lawyers think they can show value by writing down bills and applying discounts. But despite all the attention that people and businesses pay to the “bottom line,” money is only a small part of the value equation.

At one point while reading Ronald J. Baker‘s excellent book Implementing Value Pricing, I wrote down the following:

Value = the gap between what you invest and the benefit you receive

Since I’ve staked the claim that I’m searching for the Grand Unified Theory of Legal Value, I’ll reduce it to a formula.*

Value = Benefit – Investment

I think this gets pretty close. If you use the equation in straight monetary terms, it works out: If you buy a $50 shirt on sale for $40, then you gain $10 of value in the transaction.

Of course it isn’t so simple: I may get $400 of value from Shirt A, which I wear every week for 2 years, while at the same time I get $-40 in value from Shirt B because it sits at the bottom of my drawer. Or maybe it’s hard to put a number on it, but Shirt A is more comfortable, or I like the color better, or my wife said she likes it, or I saw George Clooney wearing it… you can see where this is going.

So this equation actually gives us two new problems: how to define “Benefit” and “Investment.” I’ll get into that in much more detail down the road, but for now I want to leave it with three thoughts:

(1) Money is a poor stand-in for Value. Yes it is fungible, and yes it is a common element that spans the business world, but it isn’t enough. Indeed, if value could be described monetarily, the world would be a much simpler (but really boring) place.

(2) Value is emotional. People can have a hard time getting their heads around this one, maybe because if value is emotional, the converse says that value is not rational. This is especially difficult for lawyers because we are drawn to rational, logical problem-solving. It also means that some of the tenets of free-market capitalism are vulnerable, namely the notion that the “invisible hand” of the market is guided by a collection of individual rational self interests. I’ll discuss this much more in future posts, but for now let’s just say that value is easier to feel than it is to calculate.

(3) Increasing the Benefit is almost always superior to slashing the Investment. Not only that, but this is true even if increasing the benefit means increasing the investment. Sometimes it doesn’t take much: I’m willing to guarantee you that I can get my 4-year-old son to wear his least-favorite t-shirt at least twice in the next two weeks. How? By understanding what is valuable to him.

I know my son is sports-obsessed, so I’ll bet that a little time and a $1.59 investment in an iron-on number for the back of his shirt will do the trick. And the better I know my customer, the better the results: If I want him to wear the shirt three times, I’ll put the number in front so he can see it when he looks in the mirror. And if I want him to sleep in it, I’ll make sure to pick the #4, which is not only his age but is also what Superbowl champ Russel Wilson wears.

Your customers won’t always be as easy to read as my 4-year-old, but if you put yourself in the right mindset you may be surprised at how quickly you can start to understand what your customer’s want. Sometimes they’ll tell you (and you should definitely be asking them). Sometimes you’ll have to read between the lines. But figuring out how to deliver a greater benefit to your customer will pay huge dividends.

So we’re off and running: we have the first postulate of the Grand Unified Theory of Legal Value. Thoughts? Questions? Disagree? Please don’t hesitate to contact me.

* Disclaimer: I have been a math-phobe most of my life, so I won’t presume that my theorems follow proper mathematical format. I’d like this to be a conversation, so if you’re better at this than I am, please provide feedback.

© 2014 John E. Grant.

 

8 thoughts on “Defining Value”

  1. Great article John. You’re right that discussions around value billing seem to be dominated by simply creating alternative fee structures or reducing the price. Your formula is a brilliantly simple way of communicating what value is really about.

  2. Pingback: Legal Project Management: You’re Doing it Wrong – Legal Value Theory

  3. Pingback: Legal Ops: Doing the Thing Wrong or Doing the Wrong Thing? – Legal Value Theory

  4. John, this definition of value is not really new (although I’m not clear whether you’re actually claiming it is). Google “value = benefits – cost” and you’ll get 343M hits!

    That said, what you say in this article about the need to focus on benefits is absolutely what’s bourne out by research into drivers of value in professional services firms that we did when I was at Beaton Research + Consulting. What we found, in a multi-year, multi-profession study which captured responses from several hundreds of thousands of buyers of professional services, was the following equation:

    Value = Client Service Performance + Cost Consciousness +/- Perception of Fees

    (There’s a video of me going through the equation at a conference here: https://www.youtube.com/watch?v=zngHnwKa2vI )

    Client Service Performance, the way we measured it, is equivalent to the client’s perceived benefit.

    Cost Consciousness is, essentially, ‘spending the client’s money as if it were your own’.

    The thing about price (the last factor) was, that not only was it a very weak driver of value, but for premium priced firms, price was _positively_ correlated with value. Ie the more you charge, on average the more value clients got.

    So I absolutely agree with you that a focus on benefits (and Cost Consciousness) is the real path to client value. I think the real benefit of process improvement is not to take costs out of the business/workflow (although this is still good). It’s that it helps us demonstrate to our clients that the work we’re doing for them is being done efficiently, and that we’re not racking up costs simply because we can’t organise or plan our work.

    1. Tristan:

      Thanks so much for your comment. A few things:

      First, I certainly don’t claim that the formula I’m using is original to the world, although I can honestly say that I first wrote it down (with pencil and paper no less) while doing a bit of independent noodling on Ron Baker’s book Implementing Value Pricing. Somewhat uncharacteristically, it never occurred to me to Google it. That’s not really important except that, as an aside, I am fascinated by the notion of multiple discovery, both personally and as an IP lawyer.

      Second, I think the equation you’ve described, Value = Benefit – Cost, is subtly different from the equation I propose, Value = Benefit – Investment. (Incidentally, a Google search on the latter returns far fewer results, though there are still plenty to defeat any claim I’d have on originality). My choice of the term “Investment” is intentional and is meant to encompass a broader set of investments than just money (which, in a later article, I lump under the broader term “Resources”). I realize “cost” and “investment” are close synonyms so I may be articulating a distinction without a difference. I might even admit that “cost” is a better term, since “investment” implies an intentional act whereas “cost” can also encompass all of the hidden costs that so often sneak up on us.

      I do think that both “cost” and “investment” are something different from “price.” I would argue that in the simplistic equation you proposed (and convincingly knocked down), Value = Benefit – Price, the term “price” perhaps fails to encompass all of the non-monetary costs a customer may incur in its relationship with a professional services firm. But again that would be splitting hairs.

      I certainly have no argument with the superior equation you propose, Value = Client Service Performance + Cost Consciousness +/- Perception of Fees. It’s the “perception” bit that I think is crucially important and often poorly understood. You could really add “perception” to all of the terms and come up with “Client’s Perception of Value = Client’s Perception of Provider’s Client Service Performance + Client’s Perception of Provider’s Cost Consciousness +/- Customer’s Perception of Provider’s Fees,” but that would get awfully unwieldy on a Powerpoint slide.

      What your use of the term “perception” gets at is something I firmly believe but can’t yet fully describe: Value is largely emotional. Yes there are rational components like dollars or pounds that influence the emotion, but I believe there are just as many–if not more–non-rational factors at play (perhaps even irrational ones?). I think the takeaway is that customers want to feel like their service providers care about them. For most of us in the service industry that means that we (1) probably need to actually care and (2) certainly need to give customers objective and subjective signals that we care. (I can see where certain hucksters more skilled at sales than I could occasionally accomplish #2 without prerequisite). Getting back to your presentation, I think that discounting is often a ham-handed way of attempting to signal caring. Your research and analysis definitively show that not only does that signal not function as intended, discounting is more often inimical to the service professional’s interests.

      Finally, I really like your suggestion that the benefit of cost control from process improvement is derived more from the need to give customers a positive perception of cost consciousness than from the inherent benefits of efficiency. This too may be a subtle distinction, but your research seems to prove that it is an important one.

      Thanks again for your thoughtful and thorough comment, and let’s continue the conversation.

  5. Pingback: Beware the False Idol of Localized Efficiency – Legal Value Theory

  6. Pingback: Cost Control is Not the Final Answer | The Agile Attorney

  7. Pingback: The Two Keys to Lawyer Profit (Spoiler Alert: Cost Control is Not One of Them) – Legal Value Theory

Leave a Comment

Your email address will not be published. Required fields are marked *