Service promise: Why your law firm needs a client value guarantee

19 Sept 2014Feature

A client value guarantee can stimulate operational improvements and create substantial competitive and financial gains for your law firm, ?says Chris Hart

Implementing a client value guarantee (CVG) isn't easy. It requires significant effort, strong organisational support and, often, a marked philosophical shift. But, if your law firm is already committed to doing whatever it takes to offer exceptional client value, it could be exactly what you need to fully implement legal project management (LPM) and alternative fee arrangements (AFAs) and to realise substantial financial gains in an increasingly competitive environment.

The legal services landscape has clearly changed. Every managing partner would readily agree that we are in an increasingly intense competitive environment in which a business-as-usual strategy produces deteriorating profitability and market position. Many law firms seek competitive edge by claiming dedication to providing outstanding client value. Meanwhile, clients increasingly view law firms as offering fungible, undifferentiated legal expertise and services that, while generally good, are inconsistent and can be easily replicated by another firm.

But, what if a law firm were able to deliver the legal services equivalent of the consistently outstanding service and value that five-star hotel chains like Marriott provide their guests? Competitors would be jolted, client relationships would expand, and new levels of trust would evolve. Fee write-downs and write-offs would fall. Potential clients would inquire about this new, trailblazing service. The firm would become a recruiting magnet.

Enter Ungaretti & Harris, a US law firm that, in 1995, offered a radical CVG (see box: The legal profession's first client value guarantee). This was no typical low-octane guarantee that held little meaning for clients. Rather, it was an industrial-strength, spine-stiffening promise that galvanised the firm to identify and eliminate the causes of client dissatisfaction in every aspect of the client value chain.

The legal profession’s first client value guarantee

We guarantee that as a client of Ungaretti & Harris you will receive cost-effective legal services delivered in a timely manner. We promise to involve you and communicate with you regularly. We cannot guarantee outcomes, but we do guarantee your satisfaction with our service. If Ungaretti & Harris does not perform to your satisfaction, inform us promptly. We will resolve the issue to your satisfaction, even if it means reducing your legal fees.

In a flat, post-recession market, the firm's revenues grew by 50 per cent in the first 12 months after implementing the guarantee and its number of lawyers increased from 60 to 95. Further, it received numerous awards, including an 'ethics in advertising' award for best ad campaign and a prize for the nation's best marketing campaign.

Given these results, what could explain why there are so few CVGs offered by law firms? Numerous answers exist (see box: 'Why most law firms do not offer client value guarantees').

Why most law firms do not offer client value guarantees

No need. During the legal industry’s halcyon days, business was so good that a radical idea like a CVG would have been dismissed out of hand. But, the legal world has now changed. Forward-thinking firms realise that they must capitalise on opportunities to achieve competitive advantage.
Legal mindset. Why would a firm ever knowingly take on vulnerability and risk? “We’re trained to identify and mitigate risk, not embrace it. Who has done this before? A couple of firms in the US? Don’t think so.” In reality, the risk involved with a CVG is perceived rather than actual. No law firm should knowingly offer a CVG before ensuring clients are unlikely to be dissatisfied to the point of asking for a payout. Pilot projects should testthe entire CVG process on select clients and employees and assess guarantee-readiness, determine unforeseen improvement opportunities and generate short-term wins that prove to the organisation that a CVG will work. Further, making your firm vulnerable to clients is a trust builder; it does not increase your exposure to greedy, opportunistic clients.
Philosophical leap. This is the biggest hurdle. “I always thought of a guarantee as a sales and marketing tool. What’s this about it being an internal catalyst to make rapid improvements in value delivery? That’s a stretch.” People at all levels of a firm’s organisation must believe that implementing a CVG is the right thing to do, which requires a significant philosophical shift. Pilot CVG projects should be a catalyst for service teams to identify and close trust-eroding value gaps and mitigate the bulk of whatever risk exists.
Lack of bandwidth. “We’ve already got too much on our plate.”A CVG is an integrating concept that can be used as an umbrella for linking together what are often seemingly-disparate change initiatives –especially ones related to client value. When handled in a planned, systematic way, a CVG can be rolled out on a client-by-client basis. Strong leadership from the top is a CVG requirement, but firmwide mobilisation is not. Scaling up the CVG initiative to replicate pilot success and deal with new issues must occur on a service-team-by-service-team basis.
Partnership structure. “If I have a hard time stomaching this idea, imagine how the partnership will react to it!” A CVG is not a jam-it-down-their-throats proposition. Pilot projects must be engineered for success and the results must be used to generate internal demand from other partners and service teams.

Imagine if your firm offered a CVG along the lines of Ungaretti & Harris'. Instead of being seized with fear about the apparent risk, ask yourself "how would our internal processes and client services need to change to minimise the risk of a client even thinking about asking for a payout?"

The answer is simple: you would change the elements of your service delivery that you already know need to be improved but that, for a multitude of reasons, have stubbornly defied resolution, such as LPM and AFAs.

Case examples from other professional service firms show not only that such change is possible, but also that a powerful CVG can become a visionary beacon and a firmwide burn-the-bridge catalyst for rapid improvement.¹ Even for top law firms, a radical guarantee will 'turn up the pressure on the hose and expose the leaks', which creates a compelling incentive to close them.

Noted legal services expert David Maister had this to say on the topic: "A guarantee forces a firm to live up to its quality claims. If you're really aiming to be the quality leader in your market, why not put your money where your mouth is?"²

In this article, I will outline the concept of a CVG, explain why it is important to the legal industry, and help you to determine whether it makes sense for your firm. I will also provide advice on design and implementation.

What is a CVG?

A CVG approach is rooted in my 25 years of research in the area of customer guarantees. A CVG is uniquely capable of bringing commitment, structure and urgency to strategic initiatives that are focused on building customer value.
A CVG has three components:

The promise
The payout
The payout process

The first step toward implementing a powerful CVG is to construct your value guarantee promise to clients and to ensure that the systems are in place to deliver on that promise. The promise needs to be easy to understand, satisfaction based, free of fine print and fully focused on your clients' needs.

By far the most important differentiator, though, is the payout. A CVG needs teeth - extraordinary teeth - to answer the client's burning question: "What happens if you don't meet your commitments?" This type of guarantee shifts the burden of failure from the client to the service provider in the form of a punitive payout.

The beauty of the payout is that it acts as a driving force for your law firm to identify and resolve any value-impinging issues. The payout highlights value gaps and makes them much more visible - and potentially painful. These gaps are insidious, either preventing powerful client relationships from developing or corroding the strength of existing relationships.

Instead of asking yourself "how
could we ever in our right minds think
of accepting the risk and cost something like this entails?" you should be saying "imagine if we actually offered a CVG.
It would be a catalyst - an accelerant
- for identifying and making the changes needed to actually deliver the kind
of value we talk about delivering to
every client!"

The Ungaretti CVG assures responsiveness, efficiency, communication and a resolve to provide the finest technical skills. The firm realised, when drafting the CVG, that it already offered clients what they were being promised. Its lawyers asked themselves a series of questions: "Don't we like to do business with firms that stand completely behind what they promise? Shouldn't we become one of those firms?" And then, the killer: "When would be the best time to start?" In short, they saw an opportunity not only to build a competitive edge, but also to accelerate the process.

Although financial adjustments were part of the offer, the firm's CVG was not a crass money-back guarantee. According to then marketing partner Ross Fishman, "that commercial attitude demeans the fundamental principle: write-offs and payouts don't keep clients satisfied, but meeting their needs and building long-term relationships does. Clients do not want payouts. They want outstanding value."

The foregoing logic notwithstanding, concern about payouts is arguably the single-most prevalent reason that organisations in any industry avoid going down the guarantee path. Their concern
is twofold.

First, they are worried about cost.
"That kind of guarantee would cost us a fortune! I have to question whether we're good enough to be making this kind of promise!" The second concern is more to the point: "Are you cracked? Customers
will cheat us blind!"

Neither concern is valid when a guarantee is properly designed and implemented. Indeed, rejecting a guarantee because of payout fears
before thoroughly considering the
idea and running carefully-engineered pilots is akin to throwing the baby out with the bathwater.

No firm has ever offered a powerful guarantee before taking pointed measures to identify and close value gaps. You have surely identified that issues exist within your firm, but imagine the impact on your clients (and internal operations) if you could eradicate them. And, actually, delivering the value promised dramatically lowers the risk of payouts.

To reiterate, clients do not want guarantee payouts; they want what the guarantee promises them. Still, payouts do occur. What can a law firm expect? This question is enormously important because, with no guarantee payout information to rely upon, companies notoriously overestimate payouts by a factor of 10x to 20x.

In fact, payout percentages across companies in businesses ranging from industrial strapping to IT consulting tend to congregate in the range of 0.0025 to 0.0175, or 0.25 per cent to 1.75 per cent. This is hardly a death-defying risk, especially when almost all of these customers have problems that must be addressed in one way or another! From a different perspective, what is your current percentage of fee write-downs?

As for payout abuse (i.e. cheating), experience shows that the percentage of total payouts is roughly one per cent. Satisfied clients do not cheat. Period.

Why choose a CVG?

"Why should I implement a CVG at my firm?" you may ask. The most direct answer is that a well-implemented CVG will dramatically improve your firm's - or practice area's - ability to attract, acquire, retain and expand Tier 1 clients.

This certainly proved true for Ungaretti. The firm built its extraordinary guarantee based on research which revealed that, given a choice between equally-qualified law firms, more than
half would select the firm that offered
a legally binding, client-focused
guarantee contract.

With these findings in mind, the firm crafted its guarantee language to reinforce and reward clients who willingly communicated their concerns. These clients promptly identified hidden problems so that issues could be resolved immediately, with the added benefit of reduced payout risk.

The results were astonishing. The firm's reputation gained national media attention as it became one of the 10 fastest-growing law firms in the US. In just one year in a stagnant market, revenues jumped 50 per cent, client retention increased, attorney retention increased by 400 per cent, and the success rate for winning new business increased from 15 per cent to 50 per cent.

Another firm which has successfully implemented a CVG - the second comprehensive legal-services guarantee in the US - is Exemplar Law (see box: The Exemplar Law client value guarantee). Exemplar was also the first corporate law firm in the US to abandon hourly billing and move to fixed price, value-based pricing. With offices in Boston, LA, New York, Dallas and Silicon Valley, its primary target is high-growth, mid-market firms.

The Exemplar Law client value guarantee

At Exemplar, we ensure each Customer gets the value they paid for by standing behind every engagement with a Value Guarantee! Our commitment is to serving our Customers, not tracking our timesheets.

By offering a Value Guarantee, we hold ourselves accountable to consistently deliver value and ensure that our Customers receive the service and quality they expect on each engagement every time.

We are so confident we will deliver unmatched value in the services we provide that we encourage you to determine what the value of the service was worth to you. If the value was less than the price you paid, call us and together we will determine a fair price. By defining the unmet expectation or how we could have better served you, you are helping us make adjustments and improve our service.

Company founder and CEO Christopher Marston says that the point of offering a guarantee is to encourage clients to determine for themselves the value of the service being provided. "Our value guarantee builds trust and leads to long-term relationships. For our part, we aim to deliver legal service that meets or exceeds clients' value expectations. To hold ourselves accountable, we engage in an 'after-action review' at the end of every matter, to gauge how successful we were - in the client's eyes."

Internally, the value guarantee has become a cultural and operational touchstone. According to Marston, "we have engineered everything pertaining to our client teams to align with the objective to deliver value, not bill hours".

As far as payouts, Marston says "I've had two clients in ten years invoke our guarantee. One was a client that we shouldn't have taken on in the first place - the fit wasn't there. The second was a new client we were working with for the first time. We ended up issuing them a partial refund - and they stayed a client."

CVGs for law firms

The nature of relationship-based legal services makes it ripe for a well-executed CVG strategy. The end-to-end delivery of legal services is highly complex and creates many opportunities for a loss of trust in a business where clients very much want to trust their outside counsel. Typically, this loss of trust is not based on the quality of the legal solutions provided, but rather on clients' perceptions of the overall value received.

The formula is simple: Great legal solutions + great client value = strong trust

The problem is that the value of client experiences tends to average out when a client engages a firm to handle work across multiple practice areas. This point is supported by industry satisfaction surveys, which show that a small percentage of partners and their teams earn 9.5+ satisfaction ratings. At the other end of the curve are partners who score in the low 7s. Inconsistency has an exaggerated impact on clients' perceptions of value because it plants doubt in their minds about the value they might receive in
the future.

Doubt is a trust defect. In manufacturing, the aspirational goal is
zero product defects. In legal services,
it must be zero trust defects.

Trust defects also occur inside the firm. No partners want to think that the value they offer is less than outstanding, but that doesn't mean they trust other partners and practice areas to meet the grade. This problem's real and perceived costs are substantial. Leveraging an existing relationship into an expanded range of practice specialities has enormous implications for increasing fee revenue and, especially, for building strong, virtually defection-proof primary client relationships.

When viewed through the lens of
an improvement opportunity, the trust-
defect problem is transformed into exceptional potential to forge strong
client-trust bonds across practice areas. What would happen to relationship expansion, new client acquisition and fee write-downs and write-offs if a firm could raise its average client satisfaction rating
by, say, a full point on a 1-10 scale (e.g. from 8.2 to 9.2)?

Research conducted by J.D. Power
and Associates shows that trust has an outsized impact on clients' openness to expand their relationships with outside counsel. My research confirms this finding and takes it a step further by showing strong linkage between client satisfaction and account revenue and profitability.
Other researchers found that clients at
the highest end of the satisfaction scale exhibit markedly lower sensitivity to fees
and a higher propensity to make introductions to potential clients.

Building trust is not just an outcome from a well-designed and implemented CVG. It is the very essence of your firm. Conceptualise your firm as a production operation that, at its core, is designed to do one thing: produce strong trust relationships with clients. When thought of this way, everything your firm does is intended to build strong client trust.

Rolling out a client value guarantee

A CVG is not an easy solution, but it is a powerful and sustaining one. Designing and properly implementing the right CVG is often so challenging that a large percentage of companies that start down the CVG path end up being derailed in less than six months. How do you know if your firm can go the distance?

1. Client service focus

Does your firm truly want to be known for outstanding client value? Is client value a strategic priority? Are resources being invested? If yes, a CVG is a logical solution. If no, then is your firm looking to make a major push in client value? If so, a CVG can be a longer term, visionary beacon for what you want to become. If, however, your client-value focus is insufficient, a CVG is not advised; it simply will not go anywhere.

2. Firm stability

Is your firm in turmoil? If yes, do not consider a CVG.

3. CVG feasibility assessment

If you score high on client service and turmoil is low, the next step is a CVG feasibility assessment. Design and conduct a working session for key people. Hold interviews with those people and ask about competitive strengths, challenges and previous experience with change initiatives. What worked? What didn’t work? Why?

Working session objectives

Create a deep understanding of the CVG concept, including its costs, benefits and risks
Analyse case examples of professional services firms
Generate discussion about a CVG prototype for your firm
Analyse the upside, risks, implementation challenges and potential failure points
Generate a go/no-go decision to further explore a CVG

If your firm decides to move forward, a project team must be created.

Project team tasks

Financial projections: Include costs and benefits, with sensitivity analysis where called for
Client research: What would they want included in a CVG, especially the payout and payout process?
Sales and marketing: How would the CVG be sold? Marketed?
Pilot projects: Which partners? Which clients? Which service teams?

Partners, service teams and clients must be carefully selected for the pilots, which are to be engineered for success. The maximum should be three pilots, which must be monitored (with all lessons chronicled) so that the CVG rollout process can be developed. The rollout must proceed in a deliberate, well-led fashion.

Time for action

What law firm would seriously consider offering a CVG to its clients? It is the
firm that is tired of dealing with persistent client-value-relationship challenges that are like termites, eating away at the foundation of a house.

A CVG is best suited for a firm whose leaders have the foresight and courage to explore a new approach, especially one
that is radically different and can capture the attention and imagination of every person in the firm.

If you were a client, how would you feel about the lead partner at your external counsel telling you about a powerful new CVG? How would you feel after learning that it is a tool for building an even stronger partnership and that it has already been used to achieve significant improvements for select clients?

Shifting back into your partner's shoes, how would you respond to a long-time client who shows you a powerful CVG a competitor offers - and asks if you will match it?

This idea will work in the legal business and confer substantial advantage to the first law firms that embrace it.

Ensuring your client value guarantee is a success

Do not use a CVG as a marketing gimmick
Track as many aspects of progress as possible
Do not declare victory too soon
Continually promote the CVG philosophy to prevent backsliding

Christopher W. Hart, PhD, is a former professor at Cornell and Harvard Business School (chris@hartconsulting.ca)

Endnotes

1. See 'Guarantees come to professional service firms', Christopher Hart et al, Sloan Management Review, Vol. 33,
No. 3, Spring 1992

2. See True Professionalism: The courage to care about your people, your clients, and your career, David Maister, 1999