Defining Value

As long as I’ve been practicing law, and certainly since the recent recession, I’ve heard much talk about “value” without a satisfactory explanation of what value is. You’ve heard it too: Clients talk about “getting more value for our legal spend,” lawyers talk about “delivering client value.” But what do they mean?

At the same time methodologies like Lean tell us to “define customer value” and “map the value stream.” They tell us to focus on value from the customer’s standpoint, and they (correctly) teach that value means different things to different customers. But they don’t often get to the heart of how customers perceive value.

The short answer, the common answer, and the answer that is dead-ass wrong, is that value is about reducing costs. People assume—naively—that improving value means exchanging less money for the same transaction.

On the surface this makes intuitive sense: clients think value is about getting the same legal work for less money; Lawyers think they can show value by writing down bills and applying discounts. But despite all the attention that people and businesses pay to the “bottom line,” money is only a small part of the value equation.

At one point while reading Ronald J. Baker‘s excellent book Implementing Value Pricing, I wrote down the following:

Value = the gap between what you invest and the benefit you receive

Since I’ve staked the claim that I’m searching for the Grand Unified Theory of Legal Value, I’ll reduce it to a formula.*

Value = Benefit – Investment

I think this gets pretty close. If you use the equation in straight monetary terms, it works out: If you buy a $50 shirt on sale for $40, then you gain $10 of value in the transaction.

Of course it isn’t so simple: I may get $400 of value from Shirt A, which I wear every week for 2 years, while at the same time I get $-40 in value from Shirt B because it sits at the bottom of my drawer. Or maybe it’s hard to put a number on it, but Shirt A is more comfortable, or I like the color better, or my wife said she likes it, or I saw George Clooney wearing it… you can see where this is going.

So this equation actually gives us two new problems: how to define “Benefit” and “Investment.” I’ll get into that in much more detail down the road, but for now I want to leave it with three thoughts:

(1) Money is a poor stand-in for Value. Yes it is fungible, and yes it is a common element that spans the business world, but it isn’t enough. Indeed, if value could be described monetarily, the world would be a much simpler (but really boring) place.

(2) Value is emotional. People can have a hard time getting their heads around this one, maybe because if value is emotional, the converse says that value is not rational. This is especially difficult for lawyers because we are drawn to rational, logical problem-solving. It also means that some of the tenets of free-market capitalism are vulnerable, namely the notion that the “invisible hand” of the market is guided by a collection of individual rational self interests. I’ll discuss this much more in future posts, but for now let’s just say that value is easier to feel than it is to calculate.

(3) Increasing the Benefit is almost always superior to slashing the Investment. Not only that, but this is true even if increasing the benefit means increasing the investment. Sometimes it doesn’t take much: I’m willing to guarantee you that I can get my 4-year-old son to wear his least-favorite t-shirt at least twice in the next two weeks. How? By understanding what is valuable to him.

I know my son is sports-obsessed, so I’ll bet that a little time and a $1.59 investment in an iron-on number for the back of his shirt will do the trick. And the better I know my customer, the better the results: If I want him to wear the shirt three times, I’ll put the number in front so he can see it when he looks in the mirror. And if I want him to sleep in it, I’ll make sure to pick the #4, which is not only his age but is also what Superbowl champ Russel Wilson wears.

Your customers won’t always be as easy to read as my 4-year-old, but if you put yourself in the right mindset you may be surprised at how quickly you can start to understand what your customer’s want. Sometimes they’ll tell you (and you should definitely be asking them). Sometimes you’ll have to read between the lines. But figuring out how to deliver a greater benefit to your customer will pay huge dividends.

So we’re off and running: we have the first postulate of the Grand Unified Theory of Legal Value. Thoughts? Questions? Disagree? Please don’t hesitate to contact me.

* Disclaimer: I have been a math-phobe most of my life, so I won’t presume that my theorems follow proper mathematical format. I’d like this to be a conversation, so if you’re better at this than I am, please provide feedback.

© 2014 John E. Grant.