Innovate, Commoditise or Retire?

The "C" word is starting to catch up with law firms, it seems. Commoditisation, I mean. The process by which nice, profitable, bill-by-the-hour work becomes not-so-nice, unprofitable, fixed-price drudgery. Legal futurologist Richard Susskind has been talking about it. Some firms have retreated from it. And after years of ambivalence, any lawyer with a career horizon longer than five years is starting to worry about it. Is someone going to commoditise me?


Commoditised lawyer... will work for food

Unfortunately, for many lawyers, the answer is yes. Sure, there will always be full-fee, high-end, high-value transactions and disputes to keep the wolves from the door (and the Dom Perignon flowing). Legal rocket science, if you like. But clients don't just need help with their rockets. They need to keep their trucks and cars running smoothly, too.

Tim L'Estrange, Senior Counsel, ANZ Bank, used a different analogy to say pretty much the same thing (Judgement day: lawyers feel heat over costs, service, AFR 16/5/2005):

We almost have too many hotels at the Sheraton and Westin end of the market and not enough at the Travelodge end.

While clients may be happy (or at least willing) to pay rocket scientist rates (or Westin rates) for things like complex mergers and acquisitions, high risk litigation, innovative financial products and other ground-breaking lawyering (the rockets), they don't like paying those rates for repetitive, lower-risk, lower-value transactional work (the trucks and cars) where fat fees do not represent good value.

But they do need help with their cars and trucks. Clients need to manage risks across all parts of their business. Even small transactions can deliver big liabilities in the wrong circumstances.

So, with an eye on value, and a growing awareness of how systems and technology can be used to deliver streamlined services at fixed (and fair) prices, clients are demanding more from the firms they deal with. If they know something isn't rocket science, and that it could be delivered in a smarter, more cost-effective way, it won't be long before they expect their preferred firms to deliver.

As one managing partner recently put it (Living in a commoditised world, ALB 3.10):

Commoditisation is what clients think about what we do.

Commoditisation is also the inevitable result of market forces. What do clients care most about? According to a recent survey of US companies, "client focus" (41%) and "good value" (20%) were the stand-out reasons why GCs would recommend a law firm.

How can you improve client focus and deliver better value than your competitors?

Not by wasting valuable time re-drafting and re-negotiating obscure clauses that clients don't care about. Not by cranking up hourly rates across the board.

A better way to show client focus is to streamline and automate repetitive work so that it can be done quickly and consistently by junior staff, allowing the senior lawyers to spend a much larger proportion of their time working closely with the client and helping them with the issues they value the most.

A better way to show value is to be the first to offer a packaged, fixed price solution to a problem your clients would love to solve, at a cost aligned to the value of the solution.

Which begs two questions. Which of today's pay-by-the-hour work will be tomorrow's commodity? And when will it happen?

According to Susskind, anything that can be systematised, probably will be:

If you find yourself in a practice area which you can imagine, hand on heart in the small hours of the morning when you wake up in a cold sweat in bed thinking about it, that “actually what I do is highly process-based and I can well imagine that being systematised” – if you can conceive of it being systematised, I think it will be systematised.

To my mind, the key question to ask for commercial/transactional work is this: Are the issues I negotiate and the documents I prepare for transaction X starting to follow a predicable pattern, most of the time? If there are predicable patterns to the commercial deal, the allocation of risk, the negotiations and the documents, then it is probably only a matter of time before it is commoditised.

A recent example that springs to mind is employment contracts, which many Australian companies will be reviewing in light of regulatory changes to workplace law. One firm, Australian Business Lawyers, is already offering a self-service, online solution to those who want a compliant agreement at a fixed (and fair) price.

Other examples might include routine loan agreements, mortgages and other securities documentation, shareholders' agreements, non-disclosure agreements, debt-recovery, software licences, consultancy agreements, real estate leases, etc.

How soon will it happen? It seems to be happening already. As Tony Williams (former Managing Partner of Clifford Chance and Andersen Legal) says in this article from Legal Week (17/11/2005):

...the tools to help firms change are available now. If they use them quickly and effectively, firms have every opportunity to beat off the new competition, to respond to the general counsel’s needs and to remain very profitable, at least in the medium term. You can do nothing - but only if you intend to retire within the next five years.

Innovate, commoditise or retire? Interesting choice.

Now would be a good time to read (or re-read) Clayton Christensen's classic, The Innovator's Dilemma. Or, you can cheat and read Bruce MacEwen's potted summary on his blog, Adam Smith, Esquire.