So, what am I talking about?
Take the case of a designer t-shirt. You walk into a store and a designer t-shirt catches your eye, you try it on, decide you like it, but as you look at the price tag you realise to your horror it is $200, which seems crazy – even if it does look and feel great, and is 99.99% guaranteed to increase your street cred.
Now imagine, at that moment, an impeccably well-timed retail clerk swans over to inform you about a sale currently going on, and that as it happens, the particular shirt you are looking at is 50% off. All of a sudden, this expensive t-shirt doesn’t seem so expensive anymore, and you even feel a bit of excitement as you consider the potential $100 savings.
But if you were being completely rational, you would probably take a step back and look at the situation more objectively. You would closely examine the value of this potential purchase and consider things like the fit, colour, texture and softness, type of material and durability. If you felt it was the kind of t-shirt you could wear every day for the next 10 years, then it might be worth that $100, or even maybe the original $200. More likely though, you would come to the realisation that you could actually get similar benefits and features from a much lower priced t-shirt. And so, of course, you would continue to shop around.
But the interesting thing is that many people just don’t do this. Because the cost of the t-shirt was initially anchored in their mind at $200, their perception of the value of the shirt has gone up at the new price of $100. This mindset is known in psychology as the anchoring principle or framing effect. One high priced product can be used to make everything else seem relatively inexpensive by comparison. It is a classic influencing technique, frequently used by sales and marketing professionals and negotiators alike.
Similarly when it comes to buying legal services, in-house corporate counsel are not immune to this effect. I often see the same principle in action, despite the ever growing sophistication of buyers of legal services.
Take for example a simple discovery document review. Let’s say a company, we’ll call it BigCo, engages a law firm, which we will call BigLaw, to act on a dispute. There are 500,000 documents which need to be reviewed for relevance in order to comply with a discovery order. BigCo makes it very clear they need to keep costs under control. BigLaw then tells BigCo that they can do the work cost-effectively, without compromising on quality, by using graduate lawyers and paralegals, charged out at a rate of $200 per hour, which is indeed much less than having senior lawyers doing the work at $400 per hour. But the client baulks and breaks it down:
“Assuming that you have people working on the review for 8 hours a day and they can review 500 documents a day, this is still going to cost us $1.6 million, which is a lot of money! Can you come up with an alternative solution?”
BigLaw, being client focussed as they are, responds by saying they have recently set up a captive operation for commoditised legal work modelled on their experience in working with legal process outsourcing (LPO) providers, and thus under this innovative model can do the work for as little as $100 an hour, saving BigCo a nice 50% off what it would normally cost. At this point, the revised cost of $800k seems like a pretty good deal in comparison to the originally quoted $1.6 million. So, BigCo gives the go ahead on the project.
Now I won’t go into a lot of detail about the comparative costs of using an actual LPO provider, but suffice to say BigCo could have probably received much greater value by outsourcing the review to a reputable LPO provider like Integreon. From a pricing perspective, this is because LPOs support a broader client base than is typical of most law firm captive operations. The scale of most LPOs essentially enables them to operate more efficiently and offer their clients a better price advantage. But what is really important to know is that the value of LPO goes beyond simply the notion of price. Leading LPOs offer management and technology expertise, mature processes (think Lean Six Sigma here), sound project management, and experienced reviewers who see the work they do as more than just a career stepping stone, which all feeds into the overall quality of output and means that in most cases an LPO is the better, faster and cheaper option.
Going back to my t-shirt analogy, my favourite t-shirt is a no name brand that I bought on holiday on the NSW North Coast almost 20 years ago. It has hardly changed since I bought it for $10 in 1998 and it is still as comfortable as ever. If I could buy 10 more of these exact t-shirts, I would, because of the quality and value I have experienced. And knowing what I know now, I would also be willing to pay a lot more than the original $10. I see the same thing with clients who have used LPO services. They very often keep coming back once they have experienced the “product” and can fully appreciate the value LPO has to offer.
My simple point: Price is often used as a decision making heuristic – whenever buying t-shirts, legal services, or almost anything – but in actuality price may not be an accurate reflection of the true value of the product or service. So the next time you are about to go for a $200 t-shirt, or maybe a $200 per hour document review, take a step back and look at the bigger picture in terms of the value you will likely receive. Price is not everything.
By the way, if I had to compare a $200 t-shirt and $200 per hour document review – ok, yes, I know this is comparing apples and oranges – but I honestly must say that the t-shirt will win every time. You just can’t put a price on street cred.
Wells Church is Director, Australia and New Zealand, at Integreon. He previously held a range of business service manager roles at leading Australian law firms and has a strong understanding of the competitive challenges faced by law firms and corporate counsel. Wells is a qualified lawyer and MBA graduate of the Australian Graduate School of Management.