The trust premium: How trust affects business development

Experience painfully suggests that clients who are less trusting of law firms and more antagonistic get bigger discounts off headline rates, cause higher write-downs and cost a lot of time and stress to service.

Conversely, clients with whom firms enjoy a trusted relationship pay higher matter fees, are subject to fewer write-downs and are more pleasant to deal with. Building more of these relationships, and perhaps managing them differently, can be a profitable investment.

As Warren Buffett pointed out, in highly competitive markets it is difficult to charge more than your dumbest competitors. His business partner, ?Charlie Munger (one of the world’s richest lawyers), has argued that the best way to usurp commercially-dumb competitors is to build a moat around your business.

Placing a focus on building trusting relationships is exactly the kind of moat that is effective in a professional services environment because it is a real differentiator and is hard to replicate.

The power of trust has been understood for millennia: Confucius advised that everything else should be abandoned in the service of maintaining trust. In the modern era, the philosopher Marek Kohn pointed out that, while contracts may act as substitutes for ?trust, the need for trustworthiness can never be eliminated.

Trust is the oil that lubricates commercial relationships. Currency ?itself is essentially promissory in nature and the banking industry is embedded ?in a vast web of belief. Whole supply chains, necessary to furnish every ?aspect of our material needs, are ?operated largely on trust: trust that suppliers will be paid, that goods are of described quality and that deliveries will occur on time.

So, what are the key components of trust in law firm-client relationships?

There are four aspects of trust that, together, cover most situations:

1. systemic trust;

2. trust from familiarity;

3. trust through encapsulated interest; ?and

4. trust from a meaningful relationship.

A particular situation might involve ?trust from several quadrants (see Figure 1). Trusting relationships can – through ?effective application – be moved from ?one section to another.

1. Systemic trust

To steal Adam Smith’s phrase, systemic trust is the ‘invisible hand’ that makes our daily lives function effectively. When ?you drink tap water, turn on your gas ?fire or use the road or rail network to get to work, you are placing trust in a large number of people you have never met; ?you trust in the system they operate and ?the processes that govern their ?(and your) behaviour.

Similarly, to some extent, people will trust you because you are a regulated lawyer and they trust the system.

2. Trust from familiarity

Trust from familiarity occurs when ?someone’s repeated actions (or inactions) indicate whether they are trustworthy, even though you do not have a close or meaningful relationship with them.

For example, you may only meet your child’s school teacher twice a year and ?have scant knowledge of their personal life, but you entrust them with your most treasured possession on a daily basis nonetheless (systemic trust is also relevant in this example).

In business terms, trust from familiarity ?is one aspect of the firm’s brand. When ?a client chooses a law firm, unless he has worked with the firm in the past, the ?entry point for the relationship may be somewhere on the border between ?systemic trust (‘I need a qualified lawyer’) and trust from familiarity (‘I will choose ?a well-known firm because it is likely to ?have relevant experience’).

3. Trust through encapsulated interest

Trust from encapsulated interest occurs when the interests of the parties overlap because some aspect of reciprocity exists.

There are a number of ways in which firms can create a common interest, the most obvious being working to fixed, capped or even value-based fee arrangements – in other words, putting your money where your professional reputation is.

This can make a lot of sense; in encapsulating interest, the trust supporting the relationship becomes thicker and is necessarily more reciprocal.

You will then have moved into the collaboration space. But, this does not guarantee the existence of goodwill that sustains trusting relationships through ?tough times. Goodwill often involves something different.

4. Trust from a meaningful relationship

In commercial terms, trust from a ?meaningful relationship is the optimal arrangement. The relationship is based ?upon mutual respect and even ?personal friendship.

Clients are not giving you their trust just because you are a qualified lawyer, nor because of your brand, or through encapsulated interests; they just give ?you their trust because they feel ?comfortable with you.

Ultimately, trust is a gift from one ?person to another. It may or may not have a rational basis, and it may prove to be unjutified, but real trust is a gift. When this kind of relationship is achieved in a client/supplier relationship, cut-price competitors are consigned to the wilderness.

So, next time client relationship management is on the agenda at your management meeting, take the time to reflect on the nature and quality of trusting relationships with key clients. Ask how your firm is actively developing relationships from those based on systemic attributes into fully-trusting relationships.

Profitable relationships can be built ?and even sustained without the gift of ?trust but – to use Munger’s term – trust is the moat that protects your firm from cut-price competitors. There are a lot of them out there.

Andy Heslop has bought professional services on behalf of numerous large organisations and is completing postgraduate research on the themes ?of trust and community