Mike Davidson: Why ensuring the price is right does make a difference

FEES have come under significant pressure as law practices across Scotland endeavour to retain existing client relationships and to win new work.

Competition for work has been extremely high and this has provided clients with greater choice and more bargaining power when selecting advisers.

Client loyalty is still strong where firms have focused on providing excellent service, but the fact is, where clients have been able to secure a better pricing arrangement during the recession, they are unlikely to want to see increases as we emerge.

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They themselves will be under pressure to keep costs low.

In fact, the whole question of how legal services are charged for has been thrown into the spotlight and needs careful thought by all practices if they are to remain competitive.

The truth is clients and providers of legal services look at cost/value in different ways. The law practice will be focused on process, whereas the client is focused on results.

Different pricing models include hourly rates, fixed and capped fees, contingent fees and value-based billing. All will have their place, but the circumstances of each case need to be considered, and the most appropriate method selected to enable both the practice and client to be happy they have secured value. Above all, it is important to recognise an hourly charge rate is not an indication of value but is simply an internal management measure of cost.

So how do you assess the level of value delivered to a client?

The client will only be focused on the end result, and often will have no concept of the level of work required to get there. If time is taken to explain the process at the outset, would this affect the client's perception of the work being done for their benefit? The answer is, probably, yes.

If, during the course of the work, we keep in regular contact with the client, explaining where the process has reached, and notifying them of any problems or delays which are likely to occur, then this keeps the client informed and keeps the value perception high.

It is usually when we don't explain what is going on and the client calls to chase that the value perception is damaged.

Detailed and careful scoping of work in any fee quote is also important. Clients may well shop around and be quoted a range of prices, but are they comparing apples with pears? Are you doing more than your competitors?

By setting out in detail what you will do, this will enable clients to get properly comparable quotes, and set you apart from the competition.

This may lead to clients being able to secure a reduction in legal fees simply by recognising routine tasks you are planning to undertake as part of your work, which they could easily do themselves.

The client is likely to be grateful that you have been open and given them the opportunity to consider this, and will also feel reassured they are paying you for complex work they can't do.

Work scoping is also important in terms of securing additional fees when things don't go as planned. This is particularly vital where a fixed-fee arrangement is in place. Set out clearly and in detail what you will do, and also what work the client has agreed to do. Be clear about what the fee does and doesn't cover. Ensure there are timetables included. If a client agrees to provide information by a certain date and then doesn't deliver, resulting in additional pressure for the law practice, then you have a basis on which to agree additional fees.

We have talked here about client service to aid value perception, but there is another dimension and that is the changing nature of the clients themselves. We are in an internet society where certain clients will look to buy certain services online, without wanting or needing a strong relationship with their service provider.

These clients will not perceive value in a traditional client relationship and will not be prepared to pay for it. This needs to be taken into account when pricing this work, and also in ensuring you are not including unnecessary services which are simply not part of the equation. This is the market where fees will most likely be quoted on a fixed basis and will be very highly competitive, with low margin.

Clients are unlikely to want to pay a higher price for legal service unless and until they have a bad experience, so don't make the mistake of building this into pricing.

The challenge now is to understand the buying behaviour of each client or potential client, and how they perceive value. This will enable you to agree the most relevant method of pricing and secure a competitive level of return for practice and client.

• Mike Davidson is an Edinburgh-based partner at accountancy firm Baker Tilly and specialist adviser to law firms.