New Zealand Law Society - Why lawyers shouldn’t fear commoditisation

Why lawyers shouldn’t fear commoditisation

Why lawyers shouldn’t fear commoditisation
Photo by Flickr user Andrii Stashko CC-By-NC-ND

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When I first started practising law in New Zealand the law firm at which I worked charged $1500 + GST for an employment agreement. In most cases, the agreement was formulaic and based off a template which didn’t require much alteration other than in perhaps 20% of cases. I don’t know what they charge now, but I do know that a New Zealand business owner can build and download a legally compliant employment agreement for free from the internet and my observation is that a significant number of businesses do that.

When I practised in the UK, I recall some conveyancing firms would adopt a charging methodology based upon 0.5% of the transaction value for their fees. Conveyancers would bemoan real estate agents who would charge significantly more for doing comparatively less (in their eyes at least). Then they moaned when rival firms started offering low-priced fixed fees and there was increasing competition. The subsequent introduction of licensed conveyancers meant that you didn’t have to have a law degree to do conveyancing, and prices fell further.

What I witnessed in both scenarios was the effect of commoditisation.

What is commoditisation?

Wikipedia defines commoditisation as:

“The process by which goods that have economic value and are distinguishable in terms of attributes (uniqueness or brand) end up becoming simply commodities in the eyes of the market or consumer. It is the movement of a market from differentiated to undifferentiated price competition and from monopolistic to perfect competition. Hence the key effect of commoditisation is that the pricing power of the manufacturer or brand owner is weakened: when products become more similar from the buyer’s point of view, they will tend to buy the cheapest.”

In many consumers’ eyes, acquiring an employment agreement has become a commodity. Similarly, the conveyancing process has become a commodity. Why pay several thousand dollars for the same outcome you can get down the road for half the price (or free in some cases)? As I write, I am already hearing the horror cries from lawyers protesting that their conveyancing service or employment agreement is far superior to the one offered as a ‘commodity’. That may be, but it is what the consumer thinks and understands that matters.

What causes commoditisation?

It would be tempting to think that fixed fee pricing is the cause of commoditisation. That’s what seemed to happen to conveyancing in the UK. However, the notional 0.5% of transaction cost was a fixed fee of sorts because the consumer knew in advance what they would be paying. It was just more expensive than the rival firm down the high street.

What causes commoditisation is a perception in consumers’ minds that the service being offered no longer adds value to the outcome. As one user of legal services put it in a recent survey of legal service users:

“I have always viewed lawyers as very expensive for what they offer. Legal advice can be hard to quantify the return on and the expenses quite unpredictable. With a couple of exceptions (court cases) I have only used them when absolutely essential, primarily around conveyancing work and [employment law].”

The good news is that it doesn’t need to be that way.

Consider coffee

To make a cup of coffee you add coffee powder to a cup, add boiling water and then milk and sugar (if desired) to taste. Whilst a container of instant coffee is relatively inexpensive I can’t remember the last time I did that, despite being a coffee drinker. That’s because I am one of those people who spend upwards of $3.50 on one or more barista-made coffees each day. I even have my favourite cafés and am reluctant to drink coffee in a chain coffee store.

So, whilst you could argue that coffee is a commodity because it attracts a fixed price, people are willing to pay a lot of money (the profit margin on a cup of coffee is between 300-400%) and demonstrate evangelical brand loyalty to get their regular cup of Joe each day. What does this mean for lawyers?

The lawyer’s answer to commoditisation

Brands like Apple spend billions of dollars on advertising to inform the consumer of their latest product because they understand that they cannot fight commoditisation in the digital age. They are continually delivering more features to their phones and devices to justify the price tag they want to charge and differentiate themselves from their competition. They understand that because commoditisation is a way of life, they must keep delivering more for less to maintain their profit margins. I offer the same cautionary tale to lawyers and will suggest some strategies.

First, identify which parts of your practice can be commoditised and deliver that commodity better than anyone else. We have all turned our noses up at the ‘clunky’ downloaded document, so figure out how to deliver a better document at a lower cost than you would normally. Perhaps technology can assist you?

Second, identify what areas of your practise can’t be commoditised – and be honest here, because if it can be commoditised at least in some way, someone else will figure out how to do it and leave you behind. Those areas of your practice that can’t be commoditised are your profit centres. Lawyers have great minds which need to solve complex business problems. How do you know what those problems are? Ironically, delivering a commoditised service can sometimes help identify to you and your client, where those complex problems lie. That’s why commoditisation is not always something to fear.

Have you noticed the effects of commoditisation in your practice area and how are you addressing it?

Michael Smyth is a sole practitioner and director of Approachable Lawyer Ltd. He has been in private practice for 22 years, six of those working in London. Michael has a particular interest in understanding how legal services can be delivered more efficiently to meet client needs and is exploring some of the themes uncovered by his research, including a survey of 79 legal services users.

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