|From bespoke to commodity|
|Written by Professor Richard Susskind OBE|
The gradual commoditisation of legal services means that IT will be increasingly important for law firms. Don’t get left behind.
My purpose in this article is to introduce a model that clarifies our understanding of the evolution of legal services. The model, which can be applied to other professional services as well, depicts five steps on a path, as illustrated in Figure 1 (overleaf). Using this model, I make two main claims: first, that for the majority of legal services, there is an increasing pull by the market to the right-hand side, that is, towards becoming a commodity; and, secondly, that this move from left to right is largely (but not exclusively) being enabled by existing and emerging information technologies.
© Richard Susskind, 2005
As with all models, it is, of course, a simplification of reality. I am aware, for example, that the boundaries between each step on the path are fuzzy; that not all legal services evolve linearly through each step; that some might evolve no further than one particular step; and that some may not evolve from the first step in that they may begin life at one of the later steps. Nonetheless, despite these limitations, my experience of introducing this model to numerous law firms and their clients has been positive. I therefore hope that it serves as a useful tool for others to explain and predict the evolution of particular legal services and to clarify the key strategic options that lawyers face in developing their services for the future. I further hope that it provides a common vocabulary or framework that allows lawyers to compare their approaches to work with colleagues within and beyond their firms.
Figure 1: The evolution of legal service
The five steps
The first of the five steps along the evolutionary path is what I term ‘bespoke’ legal service. I have in mind the traditional, one-to-one consultative professional service, highly tailored for the specific needs of particular clients. Advocacy in the courtroom is one example of a bespoke service, the offering being, in a sense, disposable, in that it cannot really be reused. Another illustration is the lawyer who drafts contracts by starting with a clean sheet of paper, a blank canvas, and not with some pre-existing text or documentation. The bespoke service is ordinarily provided by one lawyer or a very small number of legal practitioners, and is delivered in a highly personalised manner, usually supported by face-to-face meetings.
When legal tasks are recurrent, however, there is the tendency for lawyers to ‘standardise’. This is the second step of the evolutionary path. Standardisation avoids duplication of effort or reinvention of the wheel. If a particular problem or task has been faced in the past, why not draw liberally on previous experience and work product? There are two forms of standardisation. The first is standardisation of process, where, for example, lawyers rely upon such tools as checklists or procedures that articulate good practice. A proven approach or method for some given legal job is captured and reused. The second form of standardisation is standardisation of substance. This involves lawyers reusing pre-articulated bodies of text such as standard-form documents or templates, or past work product, such as opinions, advice or solutions that have been deployed in the past.
The standardisation that I have in mind in this second step is paper-based. As with bespoke service, standardised service also tends to be delivered in a highly personalised manner, with regular, direct contact between the lawyer and client.
The third step on the evolutionary path is when legal service becomes ‘systematised’. Here, systems are developed and used for the conduct of legal work. I am referring to systems that are designed for internal use only, so that within a law firm, for instance, the lawyers will be the users and not the clients. This is not simply the use of IT for the storage of standard procedures and documents. Instead, a variety of enabling technologies automate legal activities. For instance, paper checklists and written procedures can be brought to life using techniques such as interactive checklisting, electronic workflow and know-how databases, while the drafting of documents can be taken beyond the cutting and pasting of standard text into the realm of automatic document assembly, whereby polished contracts can be generated after a user has responded to a series of questions (the system holds standards blocks of text and rules for the use of this text). In the world of banking and finance, many major law firms have developed document assembly tools to assist in the generation, internally, of large bodies of complex loan documentation (an illustration of which is Allen & Overy’s newchange documents system – www.allenovery.com). At the same time, innumerable smaller practices use these techniques in their conveyancing and personal injury work. At this step on the evolutionary path, as said, these tools are for internal use only, enabling speedier and more consistent legal work. However, the way in which the service is delivered is frequently less personalised. Electronic deal rooms and case rooms are often used – by consulting a website, clients can access their documents on an on-line basis, and also determine the status and cost of work undertaken for them.
From a technical point of view, the transition from the third to the fourth step of the evolutionary path is often fairly straightforward. Systems that are used within the law firm are made directly accessible to clients, usually across the Internet. One obvious example here is when law firms offer their clients access to their internal knowledge systems. More ambitious illustrations are where document assembly systems are given to clients to use directly (as demonstrated by Eversheds for employment contracts at www.eversheds.com/hrcontractdemo). The systems of the law firm and the knowledge embedded within them are thus ‘packaged’ for the client’s convenience as a form (crudely) of DIY legal service.
There are various other ways in which packaged legal services can be offered. Most of these are based on IT. One is that a package might be brought directly to the market place without having evolved through the other three steps. LRN is a company that produces legal compliance tools which do precisely this (www.lrn.com). This company deploys multi-media, e-learning technology in support of its offerings. The use of multimedia will be increasingly popular in packaged service. Some major law firms repackage some of their multi-jurisdictional research as on-line legal reference services (such as Linklaters with some of its Blue Flag products – www.linklaters.com). For such law firms, packaged offerings are branded services, linked closely to the providing firms themselves. These are distinctive offerings that seek to differentiate their providers and are ordinarily made available for a fee or on a licence basis. Another approach to packaged legal service is the development of electronic legal modules or products that can be implanted into clients’ processes or systems. These packages might settle within clients’ intranets or be embedded more deeply within their systems. They provide a powerful way of injecting legal expertise into the life cycles of clients’ business activities. This will prove to be a crucial technique for legal risk management.
The most subtle and potentially controversial transition on the evolutionary path is from the fourth to the fifth and final step, to that of ‘commoditised’ legal service. The central idea here is that a legal service or offering is very readily available in the market, often from a variety of sources, and certainly at competitive prices. A legal commodity, as I define it (and I fully accept that others might use this term differently), is a package that is perceived as a commonplace, a raw material that can be sourced from one of various suppliers. Just as barrels of oil or sacks of sugar are regarded as basic and readily available offerings, then so too are legal commodities. As with a package, a commodity is a solution that is made available for direct use by the end-user, often on a DIY basis. On-line debt collection services are legal commodities (even though, only two decades ago, debt collection was handled in a bespoke manner). Much of the material found on legal websites can be classed as legal commodities – more-or-less similar analyses of new regulations, for example. Commodities can also be paper-based, such as standard form contracts (for instance, the master agreement of ISDA, the International Swaps and Derivatives Association; and the standard form construction and engineering contract of FIDIC, the International Federation of Consulting Engineers). In summary, a commoditised legal service is an undifferentiated offering in the marketplace. For any given commodity, there may be very similar competitor products, or the product is so commonplace that it is distributed at low or no cost.
Lawyers tend to fear commoditisation for two reasons. First, the very term seems to devalue the practice of law, reducing it to a mere commonplace. The second is a fear of the economics of information commodity markets. An on-line legal service is an information commodity, and competition amongst those who sell information commodities tends to move the price towards the marginal cost of reproducing and distributing the information, ie to the cost of producing one new copy. Because this cost is negligible, the prices of information products, where there is competition, tend rapidly towards zero. Lawyers fear services whose price is zero.
First impressions of the model
Even at first glance, a number of distinctions can be plotted along the path. For example, in relation to billing, services towards the left tend to be delivered on an hourly billing basis, while services towards the right tend to be offered on a fixed-fee basis. The style of service also differs along the path. On the left, there is a stronger emphasis on the service being delivered by a trusted adviser (often even a thought leader), while offerings towards the right may be strongly branded but are essentially shrink-wrapped. Psychologically and emotionally, the comfort zone of law firms is towards the left while movement towards the right is increasingly uncomfortable.
The most common reaction to the model that I encounter from partners in law firms is that their firms undertake mainly bespoke work and, further, that they ought not to move towards the right. As a matter of fact, however, on careful analysis, very few law firms live by bespoke work alone. And, as a matter of strategy, for reasons I discuss later in this article, it may not be sustainable or desirable for firms to resist a move to the right. Significantly, however, because commoditisation is anathema to many lawyers, any movement in its direction is frequently regarded as generically offensive.
Challenging first impressions
My purpose now is to challenge some of these first impressions. In the first instance, it is helpful to be clear about the nature of legal engagements for clients. Work on an individual matter for a client will seldom map directly onto just one of the five steps on the evolutionary path. Instead, work will tend to be distributed across a number of the steps. Crucially, very few engagements, as just hinted, are purely bespoke. And only a very few firms can live by bespoke work alone; these tend to be smaller, more niche and genuinely distinctive practices. For most matters, it is hard to disentangle the bespoke work from the rest and, in any event, it is surely not politic, I would have thought, for a firm to say to its clients that it only wishes to be involved in the expensive, bespoke aspects of any particular transaction or dispute and that it washes its hands of the rest. The key question in relation to any particular matter is this: what is the optimum balance and distribution of tasks and activities across the five steps? Clients should not expect that work will be, for example, entirely standardised. They should expect a spread of approaches for any given matter.
That said, it is clear from my research and discussions with clients over the past few years that they are increasingly encouraging law firms in a rightwards direction. This is partly for financial reasons. On the one hand, as mentioned, work towards the right tends to be offered on a fixed-fee basis and clients tend to welcome the certainty that this brings. On the other, they are right to expect efficiency gains as a service becomes standardised, systematised and more. Clients are attracted to firms with a strong track record in particular areas and this surely entails an ability to draw more rapidly and less expensively on past experience. Why pay for the wheel to be reinvented?
But clients are also attracted to the right because of the promise of better performance by their advisers. With more formal organisation of procedures, knowledge and expertise, gathered on a collective basis from across a firm, this should bring greater quality, consistency and speed of turnaround. This is the essence of effective knowledge management. Moreover, clients expect a match between the evolution of their offerings and those of their legal advisers. A shrink-wrap software supplier, for example, will require packaged or commoditised software licence agreements to accompany its products. Likewise, financial institutions are happy to instruct lawyers on a bespoke basis for their new products, but as their offerings themselves become packages and commodities, it is reasonable for them to expect lawyers’ input to be similarly configured. And similarly, as bespoke legal advice becomes more costly, small to medium-sized businesses will increasingly find it to be beyond their reach. They will only be able to afford legal services that match their scale, which will tend to be towards the right of the path (although, ironically, it may only be large firms that will have the resources to develop these services).
If the clients’ pull away from bespoke service was not sufficient to incline law firms rightwards, then the prospect of competitors driving in that direction should surely give pause for thought. Although direct competitors may also feel most comfortable at the bespoke end, it is realistic to be concerned that one or more may break rank and so attain first mover competitive advantage. Major firms should also be wary of smaller firms that might seek to launch services towards the right, with a view to migrating to the left – the plan here would be to build confidence through efficient routine work and so position these smaller firms for more bespoke, high-end work. A further source of competition is the new player that might jump, as LRN has done, straight into packaged services and seek to dominate that sector. All of these possible competitors are potentially disruptive and worrying for the law firm. With client pull and competitor thrust in a rightwards direction, it is unlikely that many law firms can prosper by bespoke work alone.
And if none of these arguments convince, then firms that are asked to deliver services on a fixed-fee basis will quite naturally find themselves looking for efficiencies and savings; and inadvertently find themselves moving rightwards.
While some firms regard any movement to the right as threatening and unsettling, others will see exciting opportunities. Systematisation of service offers the chance to provide clients with a more responsive and competitively priced service and, if the offering is not matched by competitors, then profitability can be maintained and even increased. Firms that deploy automatic document assembly technology internally, for instance, may reduce the unit cost and unit profitability of each document produced for clients, but can radically increase their volume.
Far more contentious is the provision of packaged legal services. The intuition of many lawyers is that bespoke work is the most profitable for them and that venturing along the path that I have laid out is, by steps, increasingly unattractive from a commercial point of view. I accept, for reasons discussed earlier in relation to the tendency towards zero of prices in information commodity markets, that the commoditisation of legal services of itself will yield little or no profit. However, I remain of the view, as first fully articulated in my book The Future of Law (Oxford, 1996), that packaged on-line legal services can give rise to substantial income and profit; indeed, on some occasions, much greater profit than is possible when selling one’s time on an hourly basis. The commercial opportunity is this: if a chargeable on-line legal service is developed and is of such value and use to clients that they are prepared to pay serious fees for its use, and there are no competitor products, then once the initial investment in the system has been made, all later sales yield funds that are unrelated to the expenditure of time and effort by lawyers. I like to refer to this as ‘making money while you sleep’.
It will immediately be seen that keeping the competition out of the market is central to success. Providers must lift the metaphorical bar so high that others will shy away from attempting to imitate. This does not mean that the price should be very high, because this can result either in purchasers not buying or in potential imitators identifying the offering as potentially lucrative and therefore deserving of serious investment. The commercial trick is to maintain the offering as a package and not let it slip into becoming a commodity. This distinction, between packaging and commoditising, has not been recognised by most lawyers in the past. While the latter may indeed be commercially unattractive, I believe the potential for profitable packaged work is considerable.
So what does a firm do if another competitor does indeed enter the market, if a package threatens to become a commodity? Several options are open to the law firm. One is to add further value to the package to enhance it in a significant way so that it defies commoditisation and once again delivers benefits to the client that are replicated by no other offering in the market. Another tactic is to sell the package to another organisation that perhaps sees opportunities for maintaining it as a package and resisting commoditisation where the law firm does not. A final option, when the transition to commoditisation seems inevitable, it is to give the commodity away to the marketplace at no cost to users. This is clearly a form of marketing. But many firms have unnecessarily adopted this tactic before fully exhausting the income potential of the packages in which they have invested.
Although most partners in professional firms say that their firms mainly undertake bespoke work, and that is how they wish to stay, I am suggesting there is a natural flow so that services will move, more or less quickly, along the evolutionary path. When clients are faced with a legal problem, they will increasingly be attracted to service towards the right and will increasingly call for justification and explanation when firms insist on staying to the left. In contrast, law firms will want to stay in the bespoke end and partners will require justification where departure from this point is proposed. Here lies the fundamental tension between the needs and wants of clients and their advisers.
No matter how strong the gravitational pull to the right, I accept that, because of the nature of some legal work, there will always be a place (even if gradually diminishing) for bespoke work. It is helpful in this context to imagine the series of evolutionary steps as a conveyor belt, always running and bringing about a natural flow of work from left to right. Work that at one time is bespoke will move rightwards, while standardised service in its turn will transition into systematised, and so on. This presents a clear challenge for lawyers who are keen to remain in the bespoke camp – they must continually innovate and so generate new bespoke offerings, because what is bespoke today will not be so in the future. This suggests that the scope for innovation (and so differentiation) in legal services lies as illustrated in Figure 2: on the one hand in creating new bespoke work and, on the other, in developing systems and packages ahead of the competition.
Figure 2: Scope for innovation
© Richard Susskind, 2005
Resourcing a move to the right
If it is accepted that a move to the right is desirable or inevitable, law firms must assess how best to resource such a shift. One option, where complex transactions would involve work that is distributed across the evolutionary path, is to outsource those steps that are not deemed within the competence or strategy of a firm. A law firm might take on a transaction and undertake the bespoke work itself, but manage and parcel out, say, the systematised work to other firms that are better suited to undertaking work at that level. This is the approach underpinning Lovells’ Mexican-Wave service – Lovells carries out the ‘higher-grade work’ while managing the outsourcing of the more routine work to a group of smaller law firms that are supported by various on-line tools (www.lovells.com/lovells/onlineservices/mexicanwave).
However, if the move to the right is to be resourced internally, then two key sets of tools and techniques must be brought to bear. First there is IT. Each step along the evolutionary path requires quite different forms of enabling technology. The further to the right one goes, the more the ‘disruptive’ the technologies become, in that these systems fairly fundamentally challenge the conventional, bespoke way of working. Any firm that aspires to providing packaged services, for example, must generally embrace on-line and document assembly technologies, while those that offer systematisation will inevitably need to adopt intranet, workflow and (again) document assembly techniques. The other key enabler is knowledge systems. Indeed, the evolutionary path gives some insight into why so many firm-wide knowledge initiatives have disappointed the law firms in which they have been launched. The reality is that different forms of knowledge system are required for different steps along the path. Lawyers who undertake bespoke work will be inclined to want know-how systems, on-line research resources and books-on-screen. In contrast, those who undertake systematised work will instead rely on internal checklists, workflow systems and document assembly. It is very unlikely that one single knowledge tool (a search engine, for example) will satisfy the needs of different practice areas whose work is spread differently across the five steps. The danger is that one size fits no one.
How should a law firm respond to the challenge of moving in a rightwards direction? As just hinted, responses will tend to vary and different practice areas may, quite properly, adopt different strategies. Those at the bespoke end, such as corporate lawyers, will view their options rather differently from those who lean towards systematisation and even packaging, such as banking lawyers. It is interesting to note, incidentally, that many corporate lawyers overstate the extent to which their work is genuinely bespoke. The potential for systematising the process of due diligence, for instance, is considerable, if not yet realised.
In any event, there are three basic options open to a law firm and its practice areas. First there is the option to lead, ie to pioneer and play the role of first mover along the path, with all the benefits and potential risks that this entails. The second option is to invest enough to be ready to respond, poised to drive rightwards in the event that a competitor does so or a new entrant jumps in at a later step. The third option is to resist any move to the right. In the medium to long term, this third option, it seems to me, is commercially suicidal.
This article © Richard Susskind, 2006.