20 Apr Low-balls and low costs estimates. Please stop now: it’s silly!

For law practices, the issuing of low costs estimates has to be one of the biggest – and silliest – drains on profitability.

Whether done deliberately, subconsciously or innocently it leads to internal write-offs, discounting, poor productivity, client frustration and stressful long hours for employed solicitors who don’t record time when this will lead to WIP bursting through the estimate, so then have to stay later to make up the time on other files.

It happens everywhere – big firms and small and from experienced principals to the most junior staff. The cost to law practices is massive but often goes unmeasured because 1) the time isn’t captured in the first place – and 2)because law firms don’t measure the massive opportunity cost of more assertive pricing.

So, how does it happen, why does it happen – and what can you do about it?

Different types of silly

The term ‘low-ball’ actually refers to a deliberate persuasion and selling technique in which services are offered at an initial low price with the intention of raising the price later. The theory behind this is that if a person emotionally buys into the initially good deal, then backing out would create cognitive dissonance, which is prevented by ignoring the negative effect of extra costs. So they still pay the higher price.

In the context of legal practice, and beyond the significant ethical implications, this approach is just silly. If it occasionally works in the short term, businesses like law practices live and die on their reputations, and very few law practices consciously follow this approach.

(maybe subconsciously a few more?)

Much more common is the situation where law practices don’t deliberately intend to issue low costs estimates, but for various reasons discussed below, end up doing so. The impact is just as bad: even though it might be a failure of skills, communication, of process, or of courage, the client will often see upwards costs revisions as an ethical issue – either in terms of pure greed or  wilfully misleading communications.

Then you get law practices tying themselves up in knots by trying to ‘soften the blow’ of high legal costs. The most common way solicitors do this is by offering a costs estimate in the form of a range (e.g. $3k to $5k). When used appropriately (with explanations of how different issues will affect price), ranges are a useful part of the costs discussion, but more often than not, they are shamelessly misleading – with $5k being a reasonable estimate if most things go well and $3k being just an unrealistic throwaway.

Stop it all. It’s silly.

Why so low?

There are a number of reasons solicitors issue unrealistically low costs estimates:

1. They believe price is the most important factor driving the buying decision. It isn’t: 80% of law practice clients buy primarily on trust, expertise, value or some other factor
2. They see losing work as personal criticism and rejection which they can’t cope with psychologically, so they offer a low price to limit the risk of losing out. Studies have shown that the pessimistic, perfectionistic nature of many solicitors means they struggle to cope with any type of failure, criticism or rejection.
3. They lack the (sales/pricing) skills to sell the value of the work
4. They lack confidence in their ability to sell the value of the work. Even when they get next to no pushback on fees, solicitors still believe they are charging too much. If you do get pushback on fees, there is a good chance the problem isn’t the price but the specifics of the service. Or they just don’t like you. If you don’t get pushback on fees, you’re not charging enough.
5. They lack the time, inclination, data or resources to do a rigorous estimate based on detailed understanding of the matter, analysis of historical time-cost data and risk assessment
6. They have convinced themselves that accurate estimating is impossible, so they don’t try
7. They think they just get paid for their time and don’t appreciate how important estimating is to profitability
8. High-ability lawyers (successful partners) underestimate their superior competence, and so under-estimate how long it will take others to do a task which is easy for them but complex to others.
9. Strategic discounting Yes there are genuine good reasons for discounting but they are few and far between. Cross-selling and loss-leading approaches don’t work as clients get more sophisticated. More often than not, strategic discounting involves a number of dubious self-justifications and unlimited potential for partner conflict.

First of all, admit that you might have a problem. That should keep most practices busy for a year or two. Directly measuring the cost of low costs estimates might speed the process up.

Then, work out what the main problem is. Is it

• a skills issue,
• a confidence/mindset issue
• a marketing issue (differentiation, clear positioning and strong referrals give your pricing power)
• a process or resource issue.

Training, coaching and performance management can all help with the above. The fact is that solicitors are rarely taught sales and pricing, so skills shortages and mindset challenges are inevitable. For some, assertive pricing will remain a challenge (the limiting beliefs are buried deep), but the majority will improve.

There are other options to changing mindsets and behaviours:

• Outsource costing to a costs assessor (not ideal as it breaks the notion of an agreed solicitor/client deal, but most costs assessors will find more time and increase the value of the bill.)
• Just do it. Enforce an increase of 15% on every estimate and see what happens.

Issuing unrealistically low costs estimates is an increadibly expensive habit for law practices.

Stop it. It’s silly.

www.gileswatson.com.au