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Porter’s Five Forces – Threat of Substitutes

June 15, 2015, 1:50 PM

Editor’s Note: The author of this post is a law firm consultant with Fairfax Associates.

By Lisa Smith, Principal, Fairfax Associates

I’ve been exploring the relevance of Porter’s Five Forces in recent blog posts. One of those forces – Threat of Substitutes – has the potential to be a disruptor for the legal industry. While professional rules have protected the legal industry from many competitive forces, that is starting to change. Substitutes have the potential to reduce demand and prices for traditional law firm services.

Some of these emerging substitutes include:

• Technology is an obvious substitute for some aspects of legal services. Legal review technologies like predictive coding are a good example of this today, and developments in software are likely to impact other aspects of the practice of law.

• Legal Process Outsourcers continue to grow in both scale and scope of services. In fact as technology applications accelerate and impact some of the work that LPOs were doing they are looking to move up the value chain. In addition to eDiscovery, Integreon, one of the leading LPOs, lists contract management, due diligence, and legal research and drafting among its services.

• Accounting firms are re-emerging as legal service providers, particularly outside the US. PwC has said it is aiming for $1 billion in global legal revenue over the next few years. E&Y has 1100 lawyers in 52 jurisdictions.

• Virtual firms, while technically not a substitute, are gaining traction. At a recent conference a leading global telecomm described the increasing work they were doing with Axiom as part of their mandate to reduce their legal budget by 5 percent year-over-year.

Adding more fuel to the fire is the prospect of outside investment in the business of law, which will create new, and well-funded, competitors.

Porter outlined several conditions which increase the likelihood of the threat of substitutes, several of which apply to the legal industry. First, is the price of the substitutes lower than the industry product? The high cost of legal services is what is driving clients to look seriously at substitutes in the first place, and the substitutes are all offering a less expensive product. Second, is the quality equal or superior to the industry product? Some tests have shown that predictive coding, for example, results in a higher level of accuracy than people doing the tasks. While the substitutes are not going to replace the judgment of experienced lawyers, they can replace routine tasks that don’t require that level of judgment. Third, are switching costs low? Clients already work with multiple firms and providers. Switching costs are not a significant barrier for the work the substitutes are competing for.

Few firms will escape at least some impact from these competitive forces. Considering the threat of substitutes is critical in thinking about the future demand for a firm’s services.