A version of this article was originally posted on 1 July 2015 as Commoditization and the Fallacious “Apples to Apples” Comparison.
There is increasing discussion around the concept of commoditization with regard to legal services. Not just as a function of the struggle with marketing differentiation as noted in the recent American Lawyer article "The Second Hundred Are Being Lapped by the Top Tier,” but regarding the legal work itself.
While some core legal tasks may be viewed as commodity, the way in which those services are delivered, are not. In other words, the ‘what’ is increasingly commoditized, while the ‘how’ offers real competitive advantage.
Volume and Routine
Talk of legal services as commodity has escalated since the broad acceptance of alternative legal service providers and the adoption of formal operations discipline in legal departments to manage legal work at scale. These process-oriented approaches benefit from disaggregating work into discrete tasks, and the consequent routinization of managing the individual parts. The benefits of approaching legal work in this manner made cost-effective and efficient large-scale document review possible. It is now used to enhance services such as contract management and compliance. The result is decreased cost and risk associated with process standardization.
In large volume legal work (such as third-party contracts, document review in litigation, or open source software compliance for example), the bespoke artisan approach actually introduces risk through variance – particularly in terms of compliance – while routinization reduces it. But does the introduction of process and routine create commodity?
Commodity: Theory Not Practice
There is no such thing as a commodity. All goods and services are differentiable...the offered product is differentiated though the generic product is identical…The usual presumption about so-called undifferentiated commodities is that they are exceedingly price sensitive. A fractionally lower price gets the business. That is seldom true except in the imagined world of economics textbooks. In the actual world of markets, nothing is exempt from other considerations even when price competition rages...Customers attach value to a product in proportion to its perceived ability to help solve their problems or meet their needs. All else is derivative... (emphasis added) (Levitt, 2006)
The reality is that many things augment services, even the those perceived as the most commoditized. Many complementing, often critical services support, and contribute to, the "generic product" (the routine elements of legal services) and mark its value. Attributes like process excellence, management capabilities, resident expertise, resource availability, are critical elements accompanying the core service. To say nothing of brand value such as trustworthiness, experience, and safety, or the myriad benefits of service tenure.
Furthermore, different providers approach solutions to challenges in differing ways. Each with its own relative merits and demerits. The approach taken by service providers can be as varied as the problems they seek to address. There is no apple-like comparison that will account for a particular solution’s value to a particular organization’s requirements. In the core generic product, perhaps yes, but in the delivered service, no. Price is reflective of this.
There is Science in Art Too
So, while the core generic aspects of the legal work can be systematized and routinized (there is science in art, too), creating and delivering differentiated value requires new ways of thinking, A critical re-look at core competencies and how they are managed. It is no longer just about lawyering or embracing technology, but how firms organize to deliver increased value effectively and expertly over time.
[It is not just] a system, but a system over time. The value at stake will be the advantages of that total system over time…Services, delivery, reliability, responsiveness, and the quality of the human and organizational interactions between seller and buyer will be more important…(Levitt, 2006)
Vetting processes that focus solely on features, functionalities and specifications cannot comprehend the “value at stake.” This does a disservice to provider and client alike.
To be sure, there are specifications and features that need to be elucidated to ensure the product and services meet necessary specifications and the ability to handle any unique requirements peculiar to your needs. At this level, an “apple-to-apple” comparison may be made to some extent. But “specs” should represent no more than the “right to bid.” Baseline requirements only.
“The real leverage in most management situations lies in understanding dynamic complexity, not detail complexity…Improving quality, lowering total costs, satisfying customers [internal and external] is a dynamic problem.” (Senge, 1990)
When vetting potential providers for any service, the “value of the system over time” is paramount, and here the apple-to-apple comparison gets…well, mealy.
The specs, features, and functionalities; the bells, and whistles of a technology or platform, even unit pricing, are not much more than the skin. And it can appear shiny and crisp.
- All the boxes checked
- Per unit price is low
- All good.
But underneath this surface lie the true dynamics of the service. And these dynamics” can often belie the more visible surface details of specifications.
A low “per unit cost” for example, when considered in context of how a system is deployed, can have a much higher total cost than a more effective system with a higher per unit cost. This can be seen very clearly in the impact of process efficiency on cost regarding hourly rates (simple math). The “system dynamic” matters. The “system over time” matters. It is what the mantra people/process/technology attempts to communicate.
Furthermore, total cost (as opposed to simply unit cost) includes values that do not appear as a line item on an invoice or balance sheet. The risk of failure, or the difficulty of working with a service provider for example. These and many other factors (line item and not) should be considered in a total cost calculation, and ultimately a true value determination. Unfortunately, most RFP processes (the reverse online bid being perhaps the most egregious example) incent for the lowest unit cost, rather than the total cost — to say nothing of value.
Ultimately, the provider and the client are partners in this. How legal services are purchased and consumed has as much to do with the widespread discontent concerning cost as how the services are delivered. The continued focus on apples-to-apples comparisons (commodity) rather than dynamic complexity (service over time) will continue to frustrate client and provider alike.“
There really is no such thing as a commodity.”