INFORMATION & TECHNOLOGY LAW
Battered to Bits: Professional Services Firms and the Economics of Information
By Jon M. Garon*
As published in Interface Tech News, May, 2001
In October 1997, Philip Evans and Thomas Wurster of the Boston Consulting Group wrote a Harvard Business Journal article entitled "Strategy and the New Economics of Information" and, based on that article, developed the book Blown to Bits. They studied how the Internet's informational flow has fundamentally reshaped the relationships between consumers and retailers, and among businesses.
Since the publication of the book, however, the high-flying days of unlimited capital have ended, and quarterly earnings are again the central measurement of most companies' success. Nonetheless, despite a return to the old ways for corporate assessment and evaluation, many of the lessons suggested in Blown to Bits bear repeating. Because the book tended to focus on retail and supply-oriented businesses, in this column I focus on the changes wrought to service businesses such as the legal profession, software, consulting, accounting, and similar service industries.
Information as Glue
Evans and Wurster suggest that the "glue" that holds most companies and supply chains together is information. By controlling the flow of information, companies tend to keep the supply chains linked. Unglue information content from the delivery mechanism for that content, and old business alliances unravel. In health care, for example, it is estimated that there are currently 400 mutually incompatible electronic data interface (EDI) systems in the market. The cost of building and installing a provider's EDI system often keeps company relationships intact. In 2002, when the health care simplification laws go into effect, there will be one federally mandated system requiring universal compatibility. Companies will lose all competitive edge based on legacy technology and exclusive inter-operability. Service and price will dictate most new health care relationships.
Richness vs. Reach
The second phenomena identified by Evans and Wurster is the inverse relationship between "richness" and "reach." Simply put, richness is the amount of information made available in any communication, while the reach is the size of the audience. A 10-second television spot during the Superbowl maximizes the reach of the message to one of the widest mass audiences available, but it delivers a short shallow message. In contrast, an in-home product demonstration reaches only a single person, but communicates an almost unlimited amount of information, maximizing richness. Evans and Wurster suggest that, historically, the relationship between richness and reach has been a direct, inverse relationship. This is true when one assumes that the cost remains constant.
Because new technologies like the Internet dramatically reduce the cost of communications, however, cost no longer has to remain constant in the formula. As a result, both richness and reach can be increased without a sacrifice of the other. Companies now provide much more content to all online consumers expanding both richness and reach. Nor is this phenomenon limited to the Internet. Today, wallet sized CDs are being popularized as content-rich alternatives to the traditionally content-impoverished business card. Instead of the traditional college catalog, some schools mail CDs to prospective applicants, at a much lower production and mailing cost. The CD includes the catalog and may also include interviews with current students, virtual walking tours of the college community, and video samples of courses. Soon, variations of Napster-like peer-to-peer networks may allow fully interactive communications on everything from DNA research to business plans that make even these observations obsolete. (The production costs of rich content can be significant. This continues to set the limits on the richness of some content.)
Vulnerability to Competition
Before fully exploring the ramifications of this new communications paradigm, Evans and Wurster make a third compelling point. To fatally disrupt a business, the competition need not impact all (or even most) of its central features. So long as competition hits even a few profit centers, a business will need to restructure or close. For lack of a better term, I call this "marginal competition" competition that affects only a portion of a company's business, but which may dramatically affect overall profitability.
The U.S. Postal Service provides a case in point. The Post Office delivers universal service at bargain prices because, in certain business segments, it has no competition. (It has already conceded much of the business package segments to UPS and Federal Express.) As nonprofit newsletters and monthly billing statements move to the Internet, the Post Office risks losing its most stable profit centers. These are highly lucrative services with a relatively low incremental cost. The Post Office response is to seek rate increases, pushing business to look for more alternatives, further escalating rate increases. As a federal monopoly, the Post Office cannot simply disappear, but the prospects do not look good.
Adding Value, Building Trust
Truly rich communications is more than just in-depth. From early lessons in distance education, we learn that it must also be customizable to the needs of each consumer, and interactive, so that the consumer participates directly in the information process. Equally important, the consumer must trust it, meaning the validity, security, and reliability must be present from the outset.
Validity is a measure of the trustworthiness of the source. If the Wall Street Journal ran this article, far more people would be calling the Boston Consulting Group (or me) than in any other paper. Security means that the information provided by and to the consumer will not be compromised in any way it will not be sold, published, or leaked. Reliability means the source is durable, it will be available consistently when needed by the consumer. Strong newspapers like the New York Times and Wall Street Journal, as well as leading portals like Yahoo!, serve as good examples of validity and reliability. Amazon.com has led the Internet world in promoting security, reliability, and validity through its customer reviews, interactive purchasing suggestions, and one-click purchasing.
Applying the concept of marginal competition to the wide-reaching, very rich communications provided by service companies, one risk stands out. Companies that rely on in-person, one-on-one communications as significant profit centers risk losing that market to the cheaper competition from sources using new technology. If the competition can provide rich quality including validity and reliability at a lower cost, the service provider may lose this segment of the business.
Tax preparers, for example, have continually lost market share to Turbotax and Internet services. The lawyer, who makes his living preparing simple wills, divorces, and bankruptcy filings, suddenly risks losing business to web sites like mycounsel.com that provide fixed-fee services for simple transactions. This type of web site provides rich information on fees, services, and realistic client expectations. As such, the richness and reach of its content will outpace similar practitioners who operate under more traditional or professional constraints.
Software like Quicken Family Lawyer, Real Estate Lawyer, or Smart Family Law bring more troubles to the endangered small-office lawyer or business consultant. The software provides instructions and forms for many situations where consumers do not need, or believe they do not need, professional advice. Instead, the software provides absolute security, as well as good reliability, customization, and interactivity. The only thing missing from software is the validity that (hopefully) comes from working with a licensed, trusted professional. Add a reputable attorney or business consultant at one of these web sites to review the documents and materials submitted by the clients, and validity will instantly be increased. The same situation applies throughout the service industry. High profit areas can be targeted, ungluing the delivery of content from the content itself.
To stay successful, service companies must understand these new economic risks, and take strategic business and legal steps to maximize the value they provide. Fortunately, strategies to improve the chances of business survival are available using effective contract language, copyright, trademark, and other business tools. Next month, I will focus on some of those strategies to help companies compete in this changing marketplace.
See Part II: Weathering the Storm with Monopolies and Exclusivity
*Jon M. Garon is admitted in New Hampshire and California.
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