The reality of client ‘loyalty’

In my last post, I said I would come back to the question of client loyalty. It isn’t possible to state definitively what keeps clients with firms — each situation will be governed by a unique combination of events and actions. However, experience suggests that, amongst those elements, one or more of three key factors is likely to be at issue. Knowing and dealing with those will help firms (and their new competitors) understand and address their strengths and weaknesses within the future market. In the end, they may conclude that what looks like loyalty is no more than inertia. It is essential not to be complacent about that — inertia is rarely permanent.

2015-02-12 13.51.24-1

These observations are primarily relevant where firms have long standing relationships with clients with the expectation of a pipeline of work. Similar factors may be at play where the relationship is more intermittent or ad hoc, but I know much less about those.

The three factors that play a part in sustaining relationships between clients and their firms (whether a single firm or a panel) are the following:

  • Minimal relationship management
  • The 9x problem
  • Genuine trust

Relationship management

In recent years, some law firms have invested significantly in actively managing client relationships. On the other side of the fence, some of the largest clients have begun to extend existing vendor relationship management programmes to their legal advisors. This is atypical — for most businesses, the relationship with lawyers is much less important than that with other suppliers. Law firms value the client relationship much more, which is why they are right to invest in it.

A few months ago, I spoke to a former colleague who now runs a significant in-house legal function to see if he might need any help with knowledge issues in his team (or in liaison with his panel firms). I got a friendly, but firm, rebuff. As he saw it, his biggest problem wasn’t one that I could fix — he just didn’t have enough time to do everything the job demanded.

I think this is a common situation for GCs and in-house lawyers generally. I once started to sketch out on a mind map all the things that a GC might have to do, manage, or understand. The result is below (click for a bigger version).

IMG_3729.JPGI only have a partial understanding of the burdens of an in-house lawyer, so I have probably mssed many more things that concern them. This exercise was also done in the context of thinking about content published by firms for clients, so there is a bit of an imbalance. Notwithstanding these caveats, I think it is clear that GCs have very little time for active management of their external lawyers, except when a formal review of advisors is scheduled.

As a result of pressure on time and the low priority for legal supplier management, it shouldn’t be surprising that many clients are loyal to their law firms for no better reason than a disinclination to invest in change. Businesses without in-house legal support probably have even more inertia.

The 9x problem

Even if a client commits time and effort to reviewing existing relationships with advisors, there is no guarantee that they will value new providers properly. The Harvard academic John T. Gourville has studied the psychological reasons why new products or services don’t succeed as quickly as they might. Building on, amongst others, Daniel Kahneman’s and Amos Tversky’s prospect theory, Gourville suggested a rough rule of thumb for expressing the scale of the persuasion problem that new entrants have.

At the heart of this conundrum are two facts.

  1. People who use a particular product or service (consumers) will tend to overvalue it, by comparison with new alternatives
  2. People who produce a new product or service (developers) will tend to overvalue its benefits, by comparison with existing equivalents.

Gourville applied numerical factors to these propositions:

Consumers overvalue losses by a factor of roughly three.

And:

Developers overvalue the new benefits of their innovation by a factor of three.

With this outcome:

The result is a mismatch of nine to one, or 9x, between what innovators think consumers desire and what consumers really want.

This is presented diagrammatically:

R0606F_B

The 9x effect explains why innovative entrants into any market often fail to achieve the success they expect (at least initially). Incumbent firms with a traditional offering will benefit from their clients’ nervousness about novelty. The psychological factors are also relevant, but to a lesser extent, when a like-for-like exchange is proposed — any incumbent has an advantage even against an equivalent competitor.

The trust factor

When all else is equal, an firm with a particularly good relationship with the client (or, at least, those who are responsible for instructing lawyers) will have another advantage — the relationship itself.

One of the clichés of professional services is the notion of the ‘trusted advisor’. It is even the title of a classic book on the topic. One of the authors, Charles H. Green, now runs a consultancy focussing purely on developing trustworthy professionals. At the heart of The Trusted Advisor is a measure of trustworthiness based on four elements:

  • credibility
  • reliability
  • intimacy
  • self-orientation

These elements match the common academic division between cognitive and affective trust:

Cognitive trust is a customer’s confidence or willingness to rely on a service provider’s competence and reliability. It arises from an accumulated knowledge that allows one to make predictions, with some level of confidence, regarding the likelihood that a focal partner will live up to his/her obligations.

Affective trust is the confidence one places in a partner on the basis of feelings generated by the level of care and concern the partner demonstrates. It is characterized by feelings of security and perceived strength of the relationship.

(These definitions are taken from “Cognitive and affective trust in service relationships” by Devon Johnson and Kent Grayson.)

Most law firms now claim to understand their clients. Ultimately, such claims can only be assessed by reference to the clients’ level of trust. Lawyers (or any other professional) who work hard on knowing everything about their clients’ businesses, markets, and customers may succeed in being seen as credible and reliable — cognitive trust. Only those who show that they genuinely care about those things and provide security in the relationship will enjoy sufficient  intimacy and diminished self-orientation to justify affective trust.

The distinction between the two types of trust matters most in times of stress. When the relationship is tested (when mistakes are made, for example) it is unlikely to survive if only cognitive trust is present. This is because cognitive trust depends only on what is known or presumed to be known of the other party’s credibility and reliability. If those are demonstrably reduced, trust will disappear and the relationship will founder.

By contrast, a relationship rooted in affective trust can withstand failures in performance. Being good at the job is necessary but not sufficient as a foundation for affective trust to develop. Once affective trust is present, mistakes are more likely to be forgiven — at least until the point that confidence in the other party evaporates.

Newton’s first law of motion

An object that is at rest will stay at rest unless an external force acts upon it.

An object that is in motion will not change its velocity unless an external force acts upon it.

The three factors described here may explain why law firms might be confident about the loyalty of their clients. That confidence is misplaced unless nothing changes at all. In reality, many things may happen to overcome inertial loyalty.

Incumbent firms should, first of all, be wary of the assumption that any or all of these factors are present. Only those who engender affective trust in their clients, whose services are not three times overrated by those clients, and whose clients are disinclined to spend any effort reviewing the relationship may rest easy. Anyone who doubts the nature of their clients’ trust, who is nervous about the perceived quality of the service provided, or whose clients regularly examine the relationship closely should be very worried.

I suspect most firms are in the latter category. Whether they are worried enough is another matter.

Very few lawyers can be sure that the trust the client has in them is rooted in confidence and intimacy. It is much more likely to be based on an expectation of service quality that can be spoilt too easily. Even where there is affective trust, it is likely to be a bond between individuals. If either the lawyer or the client move, the relationship is likely to move with them. The firm cannot rely on it.

More significantly, any of these factors are irrelevant when the relationship is controlled by others. One such situation arises when the client’s procurement team manages and reviews appointments. That team is likely to be immune to the 9x problem, unbothered by trust issues, and ready to review relationships on a frequent and/or regular basis.

Client loyalty is by no means an immovable object, and the forces acting on firm/client relationships are almost unstoppable. The only same assumption is that inertia will be overcome. The only possibility of surprise is when and why it might happen.

Firms can reduce the element of surprise by actively working on improvements for clients, to match client need with the firm’s own capabilities (this doesn’t mean aping new entrants, since they will always have a head start). The situational awareness required to assess need and capability should in turn make it less likely that firms would fall short on any of the three factors described here.

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