The blog at Hildebrandt Baker Robbins includes an interesting series of posts analyzing the structure of the legal industry using Michael Porter’s Five Competitive Forces that Shape Strategy. In particular, Lisa Rohrer has written Porter’s Threat of Substitutes: Do LPOs Present a Competitive Threat to Law Firms? in which she suggests that because of lawyer licensing restrictions, the threat of substitutes has traditionally been very low in the legal industry. She then asks, “How much of what happens in law firms really falls within the boundaries of the legal ‘profession’?” I think this is a key question, because it highlights the ongoing shifts in the legal industry.
Porter’s materials (augmented & reprinted in 2008) include a section on “Defining the Relevant Industry.” There he suggests that the boundaries for defining an industry are (1) the scope of products and services, and (2) geographic scope. He summarizes that, “if the industry structure for two products is the same or very similar (that is, if they have the same buyers, suppliers, barriers to entry, and so forth), then they are in the same industry. If industry structure differs markedly, however, the two products may be best understood as separate industries.” Because these boundaries have shifted for the legal services industry in recent years, the definition of the industry itself has shifted.
Traditionally, law firms have bundled legal advice in conjunction with non-legal advice that would be difficult or inefficient to acquire as a distinct service. Litigation services are an obvious example. Until a few years ago it would have been prohibitive, if not impossible, for a corporation facing litigation to purchase litigation strategy, court & deposition representation, and discovery review from different services providers. Consequently, law firms providing these services to corporate America faced very similar industry rivalries, buyer power, supplier power, barriers to entry, and threat of substitutes, thereby suggesting that they were indeed competing in the same market. However, as the volume of discovery has grown, technology services have emerged that now allow corporations to source discovery review services from a range of providers including legal process outsourcing vendors. As a result, the market for discovery review services has been altered because the (five) forces acting on the discovery review market are different than those that apply to law firm litigation services generally.
Discovery services buyers are now both corporations and law firms. The supply of discovery review labor is no longer geographically limited to licensed U.S. (or U.K.) attorneys and the supply of capital is not limited to the assets and borrowing of a firm and its shareholders. Barriers to entry have shifted with the recognition that the licensing of discovery review practitioners is required only at the supervisory level of the reviews. Consequently, the application of forces to the discovery review segment of the litigation industry has shifted resulting in a new, related but distinct, document review industry. (While the example of litigation document review services is instructive, this analysis also applies to other services supplied by LPO vendors such as contract management and legal research.)
Clearly the emergence of a new class of competitors, or partial substitutes, cannot be good news for an existing industry. An option that reduces costs or improves quality compared to the status quo will reduce revenue for existing industry competitors. The obvious question for law firms is, “Can they leverage the trusted relationships with their clients to maintain or increase their profits in the face of lower cost competitors in portions of their business?” In the most recent article in the Hildebrandt series (Five Forces Continued: Legal Outsourcing – Substitute or Complement?), Kristin Stark writes that many law firms could be providing clients with superior value and service by incorporating lower cost discovery review into their services, and that the are making a mistake by not by embracing LPO in some way.
I agree. As more companies gain experience utilizing LPO services and realize cost savings, law firm clients will increasingly question the value of discovery services performed by higher-priced law firms. Firms have an opportunity to maintain their profits and trusted positions, but they have to continue to provide high value in return. In a future post I will address some of the ways that firms can do so.