Cost Control is Not the Final Answer

Embed from Getty Images

A few weeks ago I delivered a guest lecture at the Lewis & Clark Law School’s Law Practice Management class about value creation and value theory. We went over a lot of topics, including some (too short) introductions to Lean and Agile as tools for understanding and delivering on a customer’s actual needs.

Probably because it was too short, several students had questions afterwards about how Lean (which was originally a manufacturing concept) could work in the legal setting. My answer is nuanced, and it ultimately depends on what you think Lean is for.

Many—if not most—businesspeople tend to think of Lean as a tool to maximize process efficiency, and therefore reduce costs. Going back to my original Legal Value Theory, if Value = Benefit – Investment, then this view of Lean emphasizes increasing Value by reducing Investment.

And it works, both in my equation and in the real world: Law firms like Seyfarth Shaw and Hunoval are using Lean to scrutinize routine legal tasks, eliminate Waste, and pass (at least some) of their cost-savings on to their clients. The clients love it since they reduce their legal spend, and these firms can use their efficiency to great effect as a marketing tool to get even more clients. Who can argue with that?

The problem is that dramatic gains due to cost reduction are not sustainable over the long term. Cost reduction works well right now because there is so darn much Waste in the typical legal workflow. Lawyers who use Lean tools to reduce waste look like superheroes compared to their non-Lean counterparts (and their former selves). Therefore I don’t deny that cost control through efficiency is a pretty good way to increase Value, at first. I just don’t think it’s the final answer.

In Tomorrow’s LawyersRichard Susskind predicts that changes in the legal profession will go through three stages: Denial, Re-Sourcing, and Disruption. Denial, he says, is where GCs and other clients will try to simply get the same services for less Investment. He predicted that law Firms will go along with this, either hoping that the change is temporary or using “hide the ball” tactics to give the impression of a discount while making up for it in other ways. I think this is indicative of the legal industry over the last 3–5 years, as companies have increasingly used their buying power to squeeze their vendors, legal and otherwise, on fees.

Re-Sourcing, Susskind says, will come from a recognition that lawyers will actually have to start working differently rather than just lowering fees. This is where cost-cutting has been successful for leading-edge firms, and will continue to work as more firms adopt it. Lawyers who create efficient ways of doing routine tasks will be able to pass some of those cost savings on to their clients, while keeping the rest for their own profit margins. But these gains can be nothing but marginal. Each round of continuous improvement on the old way of doing things will have diminishing returns.

It is interesting to look at this phenomenon through my Value formula, or more accurately my two formulas. I’ve said that the formula for Customer Value and Provider Profit are essentially the same: both equal Investment – Benefit. I’ve also suggested a relationship between Customer Value and Provider Profit, though I don’t yet understand it well enough to call it a formula. Instead, I’ve described it as this:

Profit provider :: Value customer


Benefit provider – Investment provider :: Benefit customer – Investment customer

On each side of the relationship, a party can only directly control its own Investment; each party 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.

For example, a Provider can increase or decrease her Investment, but that change only directly impacts her Customer’s side of the relationship: Less Provider Investment generally results in either a lower Customer Benefit or a greater Customer Investment (or some combination of the two). In either scenario, the Customer will be less inclined to turn its Resources (a form of Investment, usually money) over to the Provider. This leads to to a lower Provider Benefit.

Now this doesn’t necessarily mean a lower Provider Profit: if the decreased Provider Benefit is outweighed by a greater reduction in Provider Investment, then the Provider Profit can still go up. That’s not what most of us are selling, but it is the reality in any business relationship. Of course the same is true on the Customer side of the equation.

The promise of Lean—at least from the cost-control view—is that a Provider can make some initial Investment toward improving her own efficiency, and then continue to deliver the same Customer Benefit at a lower overall Provider Investment. This thereby improves Provider Profit, assuming that the Provider can command the same fees (Customer Investment) for delivering the same Customer Benefit at a lower cost to herself.

Almost invariably, however, the provider passes on at least some of the cost savings on to the Customer due to the marketing advantages of that approach. This methodology works, but it becomes problematic because it keeps the Customer focused on it’s own Investment (cost). This in turn fosters an efficiency cat-and-mouse game: each side continues to squeeze the other for the same Benefit at a lower Investment. And that gets harder to do with each round of efficiency gains, because each incremental efficiency improvement requires a greater Investment than the last.

A Provider who wants to increase Profit by increasing her own Benefit, rather than simply reducing her own Investment, must 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) How to figure out what will truly Benefit the Customer and (2) How to get the Customer to increase its Investment in order to obtain that Benefit.

This is where Susskind’s Disruption stage comes into play. Disruptive Providers will be those who figure out how to create new ways of increasing Value by delivering greater customer Benefit and capturing additional Customer Investment (fees) from the gains. And this is also where I think the true value of Lean can shine.

My perspective on Lean is that it’s core purpose is not its drive for efficiency, but its focus on understanding Customer needs. Lean tools like  Voice of the Customer Analysis and SIPOC charts, along with Agile tools like User Stories, can help Providers understand their Customer’s Value premise and craft solutions around those discoveries.

The key is to truly understand what the Customer needs, not just what it is looking for. That is no easy task; what the Customer says it wants and what it really needs are not always aligned. Digging deep to understand the Customer’s fundamentals is critical, and you’re not done there. Next you need to consider the best possible way to deliver Benefit based on those needs, and it may not be they way you, or the customer, have always done things.

But if disruption were easy, everyone would be doing it.

So my overall point is that efficiency is good, but figuring out how to change the game is much better. Fortunately, lawyers who learn how to use tool sets from Lean, Agile, and elsewhere can do both.

© 2014 John E. Grant.
photo credit: John White Photos via Getty Images

Yellow Sail Leaning

6 thoughts on “Cost Control is Not the Final Answer

  1. Bravo John, you have nailed the very purpose of the Lean (and about the darn time that someone did so).

    Yes, lean is a great cost-saver, thus can boost efficiency for the long run. Overall, this does give an advantage, but the one which is also attainable by others in the mid-term at most, thus leveling the competitive advantage to zero.

    However, if one uses lean to LEARN rather than to SAVE, the potential to unlocking new industries, niches and values delivered to a client are limitless. That way also one can remain a premium service provider, and at a premium price to.

    Do not compete on the pricing – compete on the value given.

    Thanks for the amazing post,


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s