NAPSTERIZED! - Industry Trend or Event

Industry Standard, The, Sept 18, 2000 by Larry Downes

Tech turned the music biz inside out. Next: professional services.

Regardless of the outcome of its legal battles, Napster has already left its legacy Instead of talking about companies being "Amazoned," businesses are now warned about the dangers of being "Napsterized."

While both fates are clearly to be avoided, the latter is the more ignoble of the two. A competitor "Amazons" you when its e-business strategy turns your current assets suddenly against you. In the original case, Amazon.com's online sales channel was not only cheaper to operate than the chain superstores, it carried a larger virtual inventory, was more convenient for its customer to use and to some extent turned the superstores into Amazon "showrooms" for previewing merchandise.

To be Napsterized, however, is to have the entire structure of your industry turned on end, with even more dangerous -- and embarrassing -- consequences. In the case of Napster, a few technologies coming together largely by coincidence (the Web, MP3-compression algorithms and low-cost playback devices) have effectively solved the problem of getting music from performers to their audiences -- without the need for a physical medium. This has left the music business high and dry. Yank away the distribution system and you realize that nearly all of the cost, profit -- and power -- of the industry was buried inside those CD jewel boxes. Oops, e-business did it again.

STORM WARNINGS, REVISITED

I have heard clients in every industry imaginable express their fears about both "Amazoning" and "Napsterizing." Yet it is interesting to note that both phenomena first materialized in the same industry: entertainment media.

It is no coincidence. I have written before about industries that have a high risk of being suddenly disrupted by small improvements in technology [see "Storm Warnings," March 20]. Media had almost all of the warning signs: a highly regulated market (as we are seeing, strong copyright laws are a powerful regulator); a "product" based on information (music, novels, movies); a few dominant sellers who have more or less worked out ways to avoid real competition (the five remaining music labels recently settled a CD price-fixing case brought by the Federal Trade Commission); and large numbers of customers who have no easy way of organizing themselves (mass market consumers).

There's another, much larger industry with similar features -- the professional services industry, which includes such disparate activities as medicine, law, consulting and education. In addition to being in that sector myself (as a consultant, part-time university teacher and occasional lawyer), I have been working closely as a consultant to law firms, consulting firms and other service providers over the last few years. While it doesn't get as much press, this old-economy sector too is already being Napsterized. For service providers, the music industry provides a parable of the worst way to experience industry transformation.

This month, I describe how the services industry is being transformed under the noses of its practitioners. Next month: how they can save themselves and lead happier lives at the same time.

VOODOO ECONOMICS

The services industry shares the same risk factors as entertainment media. It is also built around an assumption that a medium is required to deliver products to buyers. In this case, however, the medium is an organic one -- people. The essence of professional service is that the information delivered is of a special variety, called expertise. It is performed in front of the client through various chants, incantations and other rituals, usually after elaborate forms of preparation.

Consider the principal method of pricing used by professional service providers -- the time-and-material billing model. For most service offerings, the fee paid for the product is based on how much of the professional's time is used up in the process of collating, coordinating and consolidating information to create a unique product for a client. This is a wonderful way to do business if you can get away with it. If you want to work less but make more money, just raise the rates -- and get laws passed that make cheaper competition illegal.

This can't last. If you pay me by the hour, I have little motivation to work quickly. Indeed, the more efficient I am, the less money I make. As a result, professionals are among the world's least enthusiastic adopters of information technology.

Worst of all, most professional service providers don't believe they are being wasteful. They don't believe that technology can help a true professional. So not only are they unaware of the potential of new technology, most of them are still resisting the last couple of generations of hardware and software. For example, the American Bar Association is still trying to convince its members that word processing and online research software do not lead directly to malpractice suits.

The real resistance to improving operational efficiency is generated by the currently lucrative billing model, but like music execs, service professionals can't see the anticompetitive forest for the high-margin trees. Soon they'll be the only ones who believe that customers care more about "professionalism" than money.