January 02, 2008
Are Legal Service & E-Discovery Providers Becoming a Commodity?
It's funny how personal events tend to lead me into various thoughts and discussions about the legal market. Yesterday I flipped on my digital cable box to see that effective with the new year, Comcast has taken over Insight's cable business in Illinois. Knowing that Comcast has had several years of turbulent press (e.g., regarding tracking customers' web history, firing customers who used "too much" of their broadband connection, and the latest controversy over interfering with customers' BitTorrent file transfers), I did a little Googling to reacquaint myself with the latest news and blog posts.
In doing so, I found this insightful post at the Manifest Destiny blog. The gist is that broadband ISP providers are afraid to admit to themselves that they're just selling a mere commodity -- shipping bits. And, that it's virtually impossible for them to be honest with their customers if they can't first be honest with themselves. Before I relate this to the legal market, let me quote the following to help put things into clearer perspective:
"It must be pretty awful to wake up one day and suddenly realize that you're in a commodity business. As a software developer I've at least had a taste of it - it was unsettling to realize that an army of developers in Bangalore could churn out code better than I could, dollar for dollar. I had fooled myself into believing that what I was selling was so extraordinary and great that people would be begging - begging! - for me to deign to craft some SQL and PHP on their behalf. Such a rarified gift! Such a technical artiste!Which got me to thinking, "Haven't we been experiencing this in the legal market?" Legal work is being outsourced to armies of contract reviewers both here and abroad. Some of these lawyers aren't employed directly by law firms, as e-discovery providers are quick to tout their expanding review centers and legal outsourcing companies are growing. There are more e-discovery service providers than hardly anyone can keep track of (although my friend George Socha provides great value in doing so with Tom Gelbmann). Like the constant M&As in the wired and wireless telcos, e-discovery vendors are continuously being merged, acquired, and/or creating strategic partnerships with their "coopetition".
Is "Distinguishing" Easier Spun Than Done?
At various conferences this past year, such as ILTA's and ACC's annual conferences, plus the IQPC 4th E-Discovery Conference, I've asked many e-discovery vendors -- especially the conversion and hosting providers -- what distinguishes their services from their competitors? Some were quick to mention their proprietary web-based hosting and review software, while others point to their lower-cost contract legal reviewers, high-tech review centers, high-volume capacity, and/or quick turnaround. A few also mentioned either their top Socha-Gelbman survey rankings and/or their blue chip client list. While certainly impressive factors, these last two didn't serve to distinguish what they actually do.
Very few, if any, truly offer the full soup-to-nuts range of services all by themselves (i.e., without partnering). This isn't a criticism, mind you, as it's extremely difficult to build and excel in all aspects of the EDRM model by yourself, especially in the deadline-driven high-volume and high-stakes cases. Instead, several have distinguished themselves with niche software mousetraps for litigation holds and e-mail analysis. Others have begun building litigation-readiness consulting teams to get their feet in the door. I have to say I sincerely appreciated all their candor and hospitality, and overall found it to be a very congenial group of dedicated professionals trying their best to help their clients.
But for the most part, when I speak with lawyers and e-discovery consultants (some of which are both), many feel it's difficult to see any significant differentiation from a client's perspective, at least until they've had a chance to work together on projects. It's far easier for me to speak with friends and colleagues at law firms and in-house legal departments to hear who they've had good luck with (and those who have not been so good), than in trying to determine this from the e-discovery and law firm providers themselves. In short, even their best sales and business development executives have some difficulty with this, and it's understandable.
Now don't get me wrong -- legal and e-discovery providers offer valuable and necessary services, especially in light of the wide and blindingly bright spotlight cast by the increased focus on ESI. Rather, I'm simply left wondering how many firms and providers have truly recognized the market has already shifted into a more pronounced stage of commoditization. Everyone talks about providing "value-added services" while sustaining growth and profitability. The savvier ones focus on the client value not as the lower per-unit cost (thus recognizing the commoditization and competition issues), but on the overall cost savings achieved in successfully and timely resolving the matter -- all while avoiding the costs and negative publicity of discovery sanctions.
Larger law firms have been building up their litigation support and related IT professionals, and changing focus to make them a profitable line of business rather than a cost center. Yet some are still challenged to find this magic path while being extremely cautious (and rightfully so!) in taking on the liabilities and risks associated with the more forensic aspects. In addition, corporate counsel routinely say the top large law firms generally all provide high-quality services. In my opinion, this just adds to clients' perception of commoditization and their increasing desire to receive them at reduced or fixed cost -- assuming most everything else is being perceived as nearly the same.
Where Does This Leave Us From the Client's Viewpoint?
Answer: A rapidly-changing, crowded, and confusing set of choices. All of which makes it challenging for any single provider to, well, single itself out or make a large enough splash. Of course, a top-ranked spot still helps as lawyers tend to go with whomever most others are using -- as long as their professional network confirms good results. Offering a unique niche product or service is good too, and even better when properly aligned with one's other offerings and resources. Making it onto a client's preferred provider list is still incredibly important. Getting there and staying there without cannibalizing future revenues is the challenge. To borrow Bill Engvall's tagline, "Here's your sign" of legal commoditization.
Most recently, we've seen the entré of automated document search providers. In attempting to prove their solution is significantly more accurate and perhaps less costly than manual review, they are beginning to distinguish themselves from commodity-level contract reviewers. Indeed some of us are keeping an interested eye on these developments. While still nascent, there is potential here if they can deliver on their assertions and convince legal decision-makers that it's worth a try. Only time will tell if this is sustainable or just another tech fad that didn't catch on with more conservative lawyers. And if it does prove sustainable, how long before it too becomes commoditized? Or will there be a legal market "Google" to emerge as the distinguished leader?
As recessionary concerns grow, it will be even more incumbent on corporate counsel to continue to reign in legal costs while generating positive results for their corporate client. Some types of litigation matters increase in bad economic climates. Which means, of course, that the next few years could bode well for those service providers who can distinguish themselves with their potential client base and return consistently good results at an acceptable price. I'd even say the latter is the best way to distinguish yourself in the long run. As we all know from recent cases and the press, bad news travels fast.
As these services become even more commoditized, however, there will likely be even more shakeout and consolidation among providers. Now is a good time for those looking to fill in their gaps. Corporate clients generally prefer more depth in their outside providers. Not to mention their purchasing departments likely have been minimizing the number of outside suppliers to gain better pricing advantage and to simplify (i.e., reduce) their vendor administration overhead. They will likely provide some pushback to legal departments seeking new providers. In some cases, this will extend the RFP process unless or until corporate legal puts their foot down and tells them they need someone "Now!" So while there will be growth, particularly among e-discovery providers, expect it to be rather dynamic in terms of the overall player makeup. Like Comcast above, I expect the larger players will enjoy a larger land-grab. We'll also see a number of middle and smaller players assimilated or perhaps relegated to the less complex, more localized matters, where low cost and local access for clients is very attractive. We've seen this time and time again in the scanning and coding industry.
However, there's no magic crystal ball, and only time will tell how the legal market responds. There will be some legal decision-makers who have already recognized the importance of addressing these issues early, and many who will be economically cautious, only paying as needed. Sometimes that saves money, and sometimes saving money gets very expensive on the clean-up side. That's where having a good discovery advisor-partner is worth its weight.
We'll continue to see further consolidations and partnerships among e-discovery and other technology providers. We'll see more outsourcing, even if it's only internal to that provider (think coding banks in India and China, for example), to increase their global reach and financial efficiencies. And like my cable TV, we'll be launching our browsers or RSS readers only to find that ABC provider is now part of XYZ. Stay tuned...