Commodization: Threat or Menace?

Legal Week sounds the alarm about the coming of the "procurement professionals" to the selection and hiring of outside counsel, and predicts, based upon their impact in other sectors:

• at least a 15% reduction in fees;
• greater objectivity in the selection process (less value put on "networking");
• more rigorous performance measures;
• formalized contracts and agreements throughout the relationship, starting with RFP's; and
• performance-based remuneration.

Appalling?  Surely so, from the traditionalists' perspective, but I'd like to suggest another way of approaching what to many will seem a skunk at the garden party.

Let me lay the groundwork for what I'm about to recommend by flatly predicting that the involvement of "procurement professionals"—if not formally, then the toolkits and mind sets they advance—is not only here to stay, it will only grow.

Why?   Econ. 101:  There's simply too much money at stake.

And the Econ. 101 "Competition Made Me Do It" Corollary:  As soon as a Fortune 500 company adopts procurement professionals for its legal spending decisions, any serious competitor of that company is going to have to look at doing the same.

Legal Week offers three tactics for dealing with this:

1. "Prevention is better than a cure."  In other words, forestall having the selection process captured by the procurement professional, by appealing to senior executives' visions and ambitions, and the (invaluable) contribution your firm makes to the realization of those ambitions.
2. Embrace commoditization:  If you can build the IT systems, and install new assumptions about hiring and training associates and para-professional staff, you could conceivably become the procurement professional's "go-to" firm.  More on this below.
3. Hope it will all go away, and in the meantime meet them on their own terms.

(3) is obviously not advisable; it's surrender without a fight.

(1) is ideal if you can pull it off, and certainly entails the least disruption to existing relationships, practices, and assumptions.  In this sense it's also the most familiar and comfortable.

I might add that there's truly something to be said for the sense of reassurance, confidence, and trust that comes with a long-standing relationship with a close advisor.  And that it is precisely under these conditions that you can and should be "reassuringly expensive."    No one would engage a procurement professional to select a cardiac surgeon, and the depth of expertise, wisdom, and instinctive good judgment that one achieves only after years of practice have no price.

Consider a story I heard earlier this week from the managing partner at an AmLaw 25 firm:  A client had inquired to a department chair at the firm about a sensitive, complex, and nuanced matter, at the intersection of law, ethics, and the client's reputational capital, and in the course of a meeting lasting less than an hour came to a complete understanding of the ramifications of their situation, and the options going forward, and had put in place a concrete plan of action.

The firm delivered a bill for $10,000, which the client's law department promptly and happily approved; but when it arrived at accounting to be paid, it was rejected for want of itemized specificity.   Ultimately, things were resolved in the law firm's favor, but does anyone doubt for a moment that a bill for the exact same amount, generated by three low-level associates arduously itemizing time, would have sailed through accounting?  Despite the utter disconnect in "value received" by the client?

[This also reminds me of my favorite, true, headhunter's story:   A firm retained a headhunter to find, vet, recommend, and place a lateral partner in a hotly competitive and arcane practice area.  Forty-eight hours later the headhunter introduced a candidate who breezed through the interview process and was hired within weeks.  "For services rendered:  $100,000."  The managing partner—a different one!—sputtered that the recruiter had taken so little time that the charge should be reduced.  Replied the recruiter, who did collect the full amount, "You hired me to save time."]

Now let's get to the interesting choice:  (2), "embracing commoditization."

Here one can do no better than to study at the feet of Tony Williams, who wrote late last year about precisely this:

"There is often a degree of unreality in a law firm’s approach to the commoditisation of legal services. The first approach is denial: ‘No, of course we do not do that sort of work, but firm X does.’ The second answer is: ‘Yes — but we do very little, although it is useful for training our junior lawyers or trainees.’ The third answer is: ‘We do not do much now but we anticipate more of our work becoming commoditised and do not know how to cope with it.’"

I—with Tony—am here to tell you:  (1)  denial is becoming an increasingly untenable attitude to adopt towards commoditization; and (2) it's actually nothing to be afraid of, but rather a phenomenon to be embraced by forward-looking firms with new tools and techniques that can both delight their clients and continue the happy ever-upward march of profitability.

Why is denial untenable?  Consider the moves by "thought leader" corporations such as DuPont, GE, and Motorola to streamline, outsource, and rationalize their legal spending. 

This toothpaste is not going back in the tube.

Perhaps most dramatic of all will be—I predict—the surprisingly rapid development of brand-new business models delivering baseline legal services in the UK following implementation of the Clementi Commission's report and the subsequent enabling White Paper.

In a nutshell, as I've noted previously, the Clementi reforms will permit wholesale ownership of legal practices by non-lawyers.  If you reflect on this for five seconds or more, the implications become clear:

• "Non-lawyers" is a large enough category to embrace public and private companies, the public at large (can you say, "IPO"?), private equity funds, etc.
• These types of owners bring with them intrinsic access to great amounts of capital.
• "Capital is [almost] irrelevant to law firms—and is certainly not a meaningful restraint," you say.  True enough, for the AmLaw 200 and the UK 50 as they exist today, but access to tremendous amounts of capital permits creation of hitherto unprecedented types of legal practice.  Imagine an "H&R Block Law," or a "Wal-Mart Law," or a "Citigroup Law," and you begin to be able to envision the possibilities
• New, strongly branded legal service providers, using state-of-the-art technology, sophisticated advertising and marketing campaigns, will presumably begin to serving Mr. & Mrs. Consumer, with real estate closings, routine tax advice and business formation, divorces, estates, and trusts.
• But how long will it be before they begin creeping into small business services?
• And then larger business services, working their way inevitably up the learning curve, using proven systems and processes that guarantee the client:
  • A known result
  • At a fixed price.

This is actually both more and less than a "prediction:"  It is simply a description of how competitive marketplaces work.

What's the bottom line?

Change is afoot. 

Firms that seize the once-in-a-generation opportunity to truly understand ("grok," as they say), the change that clients are going to impose on our industry will emerge more client-focused, stronger, and more profitable, than those that lag behind or engage in comfortable denial for too long. Tony Williams nicely states the alternative to change: "You can do nothing — but only if you intend to retire within the next five years."

I know it's hard.  So I will offer my favorite quote on how difficult change is, from the always-masterful Machiavelli:

“There is nothing more difficult to carry out, or more doubtful of success, nor more dangerous to handle, than to initiate a new order of things. For the reformer has enemies in all those who profit by an old order, and only lukewarm defenders in all those who would profit by a new order. This arises partly from the incredulity of mankind, who do not believe in anything new until they have had actual experience of it.”

What alternative do you propose for your firm?