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May 02, 2007

Selling and spending in other professions, Part 2

If you’ve been reading this blog since the beginning, you know that I’m fascinated by budgets. It all started when I went to my first legal marketing meeting and heard about ALM’s research showing that law firms spend about 1.1% of gross receipts on marketing and business development. I thought that must be too low. But whenever I saw a new survey, it was always in this general area, including the latest Legal Marketing Association figure of 2.6% of the firm’s gross receipts.

When Kathy Born quoted a figure for architects -- 6% of gross fee income spent on marketing -- the audience gasped. None of the other panelists offered definitive surveys from their fields, but when I had asked Deloitte’s Maria Abernethy the same question before the session, she suggested that I look up the reports of publicly traded competitors, and gave me a list of companies to start with.

When I got back to the office and did the research, most of these companies seemed to be blowing as much smoke as they could to hide these numbers. But Accenture’s report did have the figures I needed to calculate what they spent on sales and marketing: 8.4% of revenue. Two more firms from the list (Bearing Point and Navigant) reported results of 22% and 21% for the larger and more general category of “selling, general and administrative expense.” There’s nothing in their reports to separate selling from general from administrative, but if you assume all three are equal, the selling share would be about 7%, close to Accenture’s 8%. It’s hard to imagine a scenario where selling would be as low as the law firm figures of 1% or 2%.

When panelists discussed this issue at the LMA lunch, several mentioned that there is a big problem comparing apples to oranges. Different firms calculate figures differently, and the accounting treatment of salaries is particularly critical.

But all of these figures are extremely low compared to the world I come from: selling training. According to Don Schrello’s book How to Market Training and Information, in the training business “marketing and sales costs consume one third of every revenue dollar.” (Full disclosure: I first read Don’s book 10 years ago, and was so impressed that I hired him as a consultant. He has since become a member of my Board of Advisors, and a friend.)

Why do I think the high spending in training companies is relevant to law firms? Because there are many similarities, starting with the huge number of training companies that do good work. Customers have many choices, and quality is not a good differentiator. Excellent service is a requirement for success, but growth is based on relationships and building trust. And in order to grow relationships and build trust, companies need to invest in marketing and sales. As Don summed it up in big bold letters: “Good training products are abundant and cheap. It’s good sales and marketing that’s scarce and expensive.” If you ask me, law firms are headed for that exact same position.

In any case, whether you compare to 33% for training, or 6-8% for other professions, 1-2% sounds much too low to last.

Why do I think all these numbers are so critical to the future of legal marketing? Because to win at selling, you just need to be a little better than your competitors. When competitors spend more, you must spend more. Surveys conducted by BTI Consulting, ALM Research and others have shown that legal marketing expenses are already going up. I think they have a lot farther to go. From my perspective, the 6-8% spent in other professions could be seen as a reasonable prediction for the future of law firms.

Now let’s do the math. Suppose we talk about only the 100 largest law firms. In the most recent tally, the total annual revenue for the AmLaw 100 is $50.9 billion. So if average legal marketing expense went from 2% to 4%, these 100 law firms would need to spend an extra $1 billion on marketing. That’s right, billion with a B. And if it went to 8%, they would need to spend $3 billion more every year. Any questions?


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