The Great Commodity Debate

6 09 2010

Fascinating debate over the last month on the Linkedin group “Leadership for Lawyers” on Mike Ames’ discussion “Is the law becoming a commodity, and if it is, what can be done about it?”.

If you can brand and differentiate salt, legal services should be easy, right?

One of the things that immediately struck me about the comment, was the implication that commoditisation was a bad thing, and something to be resisted. By contrast, my natural inclination is that there are certain areas of law that should be commoditised, but that the inefficiency of the law firm market and the business models of firms in the market that have prevented this happening extensively so far.

However, rather than look at the rights or wrongs of commoditisation, or indeed the future impact on the profession (which is where much of the Linkedin debate focuses) I thought I’d share my thoughts on what is driving this trend.

In understanding the roots of comoditisation, Delong, Gabarro and Rees in their great book “When Professionals Have To Lead” talk about the relentless commoditisation pattern facing professional service firms, and suggest that technology is a major driver of this trend.

Another author, Dawson in his book “Developing Knowledge-Based Client Relationships: The Future of Professional Servicesargues that the main causes are in professional convergence (i.e. the blurring of boundaries between the professions) and the “unbundling” of professional services. Unbundling  occurs where new competitors, rather than competing head-to-head with incumbent firms, select a very narrow section of services and offer very focused competition; to compete the incumbents have to unbundle their service offerings. I believe this driver will become increasingly prominent as a result of both the increased deregulation in the UK market place (leading to more new market entrants) and increasingly sophisticated LPO offerings that are beginning to reach the market.

In addition to these supply-side forces, I believe much of the drive towards commoditisation comes from the demand side of the market. In particular, as a law firm client I  frequently resisted paying for services by reference to a traditional “hourly rate” on the basis that the service was now a defined offering which had a clearly identifiable market price.

Buyers of legal services are undoubtedly getting smarter (whether commercially-savvy corporate counsel or in house teams working with procurement professionals) and the push for more fixed price work in turn drives law firms to put boundaries around their services (in order to control scope and risk). The recession has heightened these buyer behaviours, and as a consequence more and more services are being “productised” into individual and standardised products, which are easy to replicate and difficult to differentiate, which in turn means the market becomes price and cost driven.

So, that’s my take on some of the drivers. What it means for the profession (both opportunities and threats) are for another day, but if the comments on this post are as rich and well thought through as those on the Linkedin discussion, I’ll be a happy man.

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14 responses

6 09 2010
Simon

Have you ever thought that the only point of legal practice is to create commodity services?

Lawyers work with other professionals in highly creative teams, solving the problems of the day. But incrementally, their original thoughts feed their colleagues, their profession, their area of business and eventually the entire approach to a problem.

We are one of the earliest open source communities. We share, we improve, we make lean.

It is no surprise that in the nineteenth century after a millenium of improvement, it was fairly certain who owned land; but in the 20th we rapidly commoditised transfer of land. Similarly, setting up companies once demanded a petition to parliament, and now demand a small cheque and 24 hours. Venture capital transactions were once complex and became standardised. My own work has moved on and on as people have learned to deal with recurring themes better and better.

In the past a good idea might permeate the minds of Western intellectuals over the course of a few decades. Now, a blink in a back room in Niarobe and hit the consciousness of Palo Alto in a moment. I expect legal practice and the percolation of good ideas into the common approach will also become more rapid.

The question if you are not commoditising is what are you doing? Presumably you are either not being inventive enough or not sharing your new thinking!

6 09 2010
intelligentchallenge

Wow, where to start with that one! Fascinating comment. I’d not thought about the sharing of ideas around the marketplace as a whole, but it certainly happens in a big way. I suppose when solving problems on a transaction, there is no way of “hoarding” that knowledge in respect of the other parties to the deal, although I’m sure a fair few lawyers still don’t share the information as fully as possible when they get back to their firms!

I was looking at the issue of sharing knowledge within firms recently and reading how a number of blue chip companies (I think BP and Texas Instruments were the ones mentioned) have awards for best idea not created inhouse. I think that’s an important point; that innovation doesn’t just have to start in the firm, but firms can take the best ideas in the market place, and build on these to create improved and original solutions.

6 09 2010
Julian Cuppage

I suspect, on normal market principles (and come to that Darwinian principles), as soon as a service can be commoditised then it will be. If a service has not been commoditised then something must be blocking it’s commoditisation. The blockages could be various. The blockage may be in the nature of the service itself, being too complex, too variable or too high value to submit easily to commoditisation. More likely, the blockages could be professional regulation (e.g. restricting competition), inefficient markets, lack of market information, the power of a professional mystique, a weak understanding of the service by clients, real operational challenges and so on.

Remove a blockage and commoditisation will move forward incrementally as Simon indicates. New technology, new attitudes (or at least the disintegration of old ones) and corresponding new legislation are breaking down blockages at a pace.

6 09 2010
intelligentchallenge

Thanks Julian; removing blockages is another interesting way to look at it. My advice to inhouse clients would be to get working with your plungers!

7 09 2010
Dom

As always a thought provoking article. I agree with your sense that many in our profession see commoditisation as a threat, and similarly do not see why that should be so. I suspect it is down to the fact that the profession remains very conservative, and likes to project an air of mystique (I suspect as a misguided defence mechanism “what we do is too specialised to be commoditised; everything we do is bespoke and must be priced accordingly”).

Commoditisation is an opportunity, not a threat – if we as lawyers can look at processes to streamline a lot of what we do day to day, we create something more accessible and saleable to clients, whilst freeing up our time to win new business or work on those transactions which are truly bespoke.

7 09 2010
Paul Rutherford

Commoditization often comes about after de-regulation. Has that happened in legal services?

8 09 2010
intelligentchallenge

Conveyancing is a great example. Since that fell out of the area of regulated work, price plummeted as firms and new market entrants started using lower cost resource. With plunging prices came the drive for efficiency and (for some) the move to scale. Technology and workflow became part and parcel of the service delivery and outsourcing became a reality.

When much wider deregulation hits the market next year, it will be interesting to see which other areas start to see a similar progression….

8 09 2010
Mark Burton

Mark:

Nice commentary. One other element that is driving commoditization is the fact that certain areas of the law, and the practices that are created to serve them, have a natural lifecycle. If we start to look at individual practices on the basis of the rate of change in the law, the complexity of the law, and the strategic impact of an adverse outcome on the client, we can start to sort which practices are under the most threat.

As an example, here in the US we recently marked the 20th anniversary of some major changes in labor and employment law. If we look back 10-20 years, labor and employment was a hot area of the law. Why? Because there were new levels of complexity being introduced, the clients did not know what was at stake, nor did they have the iexpertise to address issues in house. Put another way, from the client’s perspective many labor and employment issues were perceived as complex in nature and were accompanied by unknown risks. As a result, they were willing to pay a premium for external legal support.

Fast forward to the present day the rate of change in employment law in the US is much less than in the past and many clients have greater confidence in managing these matters. They are also able to distinguish between what is routine and what is complex and/or high stakes. They price shop the “routine” work and they selectively use higher-end experts for the high stakes work.

This is just one example. Today IP law is a hot area. 20 years from now, it too could be under commoditization pressure

9 09 2010
intelligentchallenge

Wow, that’s a great comment Mark, and an insight from a pricing specialist really helps the debate. I’d certainly thought about the relationship between complexity and commoditisation, but not really about the natural lifecycle of an area of law and how that changes over time. Employment law is a good example over this side of the pond too: it remains a fast changing area of the law, but for low value tribunal claims, the process is becomming commoditised and price pressure is spilling over to the firms that do the claims which are higher value, but in process terms, not really much different. I suspect that perceived value to the client and the greater amounts of cash at risk will differentiate this type of claim from the commodity claim, but it’s a fascinating dynamic.

13 09 2010
Mike Ames

Nice piece Mark and I agree with your comments.

Whether people like it or not a change in the way that the law is offered, delivered and charged for (call it commoditization if you will) is taking place and if anything is accelerating.

Those firms that accept this and see how they can change to accommodate the expectations of the new world will find they will do better in the medium and longer term. Those that do not may not do so well.

I think this debate will carry on for some time to come.

13 09 2010
intelligentchallenge

Thanks Mike, and for prompting the topic!

21 02 2011
Mark Ashdown

Great debate, and I have been following the one on LinkedIn too.

Of course, all products have a natural lifecycle, though there are also areas of legal practice that are cyclical – conveyancing and Wills work to name a couple.

Looking at the growth of commoditisation, it is perhaps these areas of legal practice which have been most susceptible to the trend, especially as competitors outside the profession realise that much of the work that was once the preserve of lawyers in not ‘reserved work’ and can be productised. The growth of expert knowledge systems has and will continue to drive this trend as knowledge becomes more democratised…and a good thing too!

Somehow lawyers need find a way to exploit this trend (after all, ‘getting it right’ is merely a hygiene factor for clients and if intelligent systems can do this for most situations, then why not use them?) and then add value by mobilising their unique, tacit knowledge skills which cannot yet be commoditised.

21 02 2011
Intelligent Challenge

Great comment Mark – I think the concept of hygiene factors and differentiators is really relevant here

1 04 2011
Jon Busby

Commoditisation is beautiful!

Commoditisation gets most of the value to most of the people most of the time. Commoditisation niches as well as mass markets.

Suppliers fall back on the ‘commoditisation is cheapening’ argument. Rubbish…utter rubbish. They are happy to kid themselves The market decides not the suppliers, the suppliers are slaves to the market. Who cares what suppliers think? Suppliers present, market decides.

Waitrose deliver commoditisation, Thomas Pink deliver commoditisation. These are not cheap brands/products. They do it because their market demands it, and if they didn’t someone else would = survival/growth. They do it because that’s where the money is.

If suppliers (law firms et al) continue in failing to communicate value in a way the market can consume and understand that value then the market will decide. Who cares if lawyers think that their service is better? The market buys services where IT thinks is best.

Commoditisation takes out process cost whilst maintaining the (intellectual) value. It happens in every other industries some equally as ‘complex’ as legal, so why do lawyers think they are above it?

Probably because they fear change, yet change for the smart opens a whole new world of immense opportunity.

Only lawyers could endlessly debate the inevitable…it’s all going to arrive at the same conclusion, sink or swim.

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