The Commoditization of the Law

December 13th, 2013

A common thread in the legal debate is whether legal services can be commoditized–that is broken down into discrete parts that can be automated, or at least, partially automated. Opponents of legal tech frequently say that there are certain aspects of legal representation that cannot be trusted to computers, or less-than-lawyers. They are absolutely right. But what are these essential aspects? And, what aspects are less-than-essential, and could be entrusted to automation.

Law Technology news has a piece titled, “No Shades of Gray in the Commoditization of Law,” that seeks to decide what can, and cannot be deemed commoditized work.

Here is the intro:

Corporate law departments are increasingly separating new matters into one of two buckets of legal work: routine/basic and higher value/risk. There is a clear division: black and white—no shades of gray.

“Maybe you shouldn’t say that routine work is being commoditized,” said a lawyer-friend with a frown. “Attorneys can be a bit sensitive.” But once she read the Business Dictionary’s definition of commoditization, she was convinced that although the word commoditization might seem inflammatory, it was an accurate description: “Almost total lack of meaningful differentiation… thin margins … sold on the basis of price and not brand… characterized by standardized, ever cheaper, and common technology that invites more suppliers who lower the prices even further.”

This summer, HBR Consulting interviewed eight senior members of corporate law departments across various industries. The discussions were informal and all were off-the-record. But the research, which was then tested with other industry experts, confirmed that most companies maintain two lists: law firms associated with routine matters, and those used for higher-value matters. In our conversations, one in-house head of litigation said that having two lists also helps them include smaller firms and address broader corporate goals by using more minority-owned or woman-owned firms that might not have the resources to handle large-scale matters. However, not all law firms are following this trend. When a law firm informed one large software company that it only wanted to handle intellectual property litigation, not IP transactional work, the GC pushed back, and said it was all or nothing.

During the eight interviews, several patterns emerged that support the trend toward dividing up work and driving prices down for routine/basic matters.

And from the Commoditization section:

While certainly not a new trend, legal process outsourcing and the advent of remote or virtual service centers is working in conjunction with the other factors to advance the shift toward commoditization. Like so many other industries, the Internet has fundamentally changed the practice of law and could certainly be considered a form of “common technology” described in the definition of commoditization. Widespread high-speed Internet access and the advent of SSL encryption enabled new suppliers to emerge to provide back-office services and basic legal support services (e.g., docketing, coding, document review). New model law firms also have emerged using totally or semi-virtual models to dramatically reduce overheads.

So, what is the answer to commoditization? In response to increasing pressure, some law firms have attempted to narrow their practices to focus on perceived higher value work. But what determines when a particular matter is routine versus higher value? Several corporate law department executives explicitly said that the criteria for what qualifies as higher value matters are not necessarily practice specific.

We asked interviewees to expand, edit and challenge the five proposed categories of higher value work. The list will undoubtedly create debate, but here are the results:

1. High risk: Too significant to handle in-house, particularly for a publicly traded company.
2. Sensitive: Highly confidential matter where the general counsel wants another opinion.
3. Creative: Disruptive technology (e.g., 3D printing) where few even comprehend the invention.
4. Institutional knowledge: Detailed insight re: operations, regulatory, legislation, other key factors.
5. Unique: Unusual “one-off” matter and/or a matter in a jurisdiction with limited/no experience.

Breaking work into these categories is important, as it suggests which pieces of work product are most susceptible to commodification.

Of course, all legal matters have some degree of risk. But corporate law departments generally appear to use some simple criteria for sorting the relative risk of new matters. For example, all single plaintiff matters under a pre-determined estimated dollar threshold might go into the routine bucket. Similarly, all class action and/or multi-plaintiff matters over a certain dollar amount might be routed to the high-value grouping.

There was little debate regarding the “sensitive” category of work, and that on occasion a general counsel might need a quiet, outside opinion. Similarly, corporate counsel occasionally sent work out when it is “unique” because it was clearly outside their experience.

In earlier iterations, “creative” was labeled “complex,” but a conversation with the global head of strategy and innovation of a major technology hardware company made a compelling case for calling it “creative.” He explained that he only uses one law firm—and generally the same patent attorney—because he “knows how I think” and even though he may not “understand exactly how this new disruptive invention will work, he is smart enough to eventually get there.”

This same person pointed out that it would be certainly fine to use less experienced attorneys on basic patent family extensions. Interestingly, the “creative” category label was reaffirmed by one in-house litigator for a major software company, who told us he actually favored sending out litigation to firms with specialized practices, regardless of their size, because he thought they were often “more creative” in their strategies. His point emphasized that both large and small firms can be creative.

Regarding “institutional knowledge,” participants explained that this category should not be interpreted to mean that a firm has worked with a particular law department for an extended period of time. Rather, it was meant to capture matters requiring specific knowledge that would be costly to replicate often involving complex regulatory or operational issues.

This article focuses on transactional work. My sense is that transactional work is better suited for a commoditized model than litigation. Though, much of the backend of litigation, such as discovery, is very well suited for these improved processes.