November 10, 2010

Will Disaggregation and Outsourcing Destroy the “Apprenticeship” Model?

Lawyers, consultants, and investment bankers follow a fairly similar career path: excessive hours and tedious work at the start of their careers, followed by vastly better compensation and marginally better hours later on.

This makes a certain amount of sense: the fastest way to get a decade of experience is do work double-time for five years.

The system works for people who are already in the industry: they get their grunt-work done. It works for people who are joining the industry: they learn everything they need to know, and the difficulty of the work allows the industry to keep an “up or out” structure along with a steady path for advancement.

That may not last. Outsourcing strikes the most easily-automated jobs first—and those are the boring jobs that people start with when they join an industry. Will law firms keep hiring associates at $160,000 per year when they can staff up in India instead?

This has an interesting redistributive effect: it’s obviously beneficial for poor countries, since the wages from legal work are far better than the other options. It’s great for experienced lawyers, who can throw more bodies at a case for less money. It’s terrible for new lawyers in rich countries; there’s less work for them to do.

But in the long run, it’s terrible for the law firms, too. The point of outsourcing is to commoditize work to the point that it can be done by the low bidder: as long as they adhere to the right specifications, they can’t possibly produce too low-quality a product. But that commoditization means that none of the lawyers being outsourced to can distinguish themselves. At best, they can do generic work faster, for proportionately more money. But the streamlined process of outsourcing doesn’t permit them to do anything extraordinarily useful.

It’s not so bad for the JDs who don’t get Big Law offers: JDs who don’t practice law tend to do well for themselves, at least at the extremes. But if firms hire fewer and fewer talented junior people, and give their junior people fewer opportunities to distinguish themselves—the end result is an undistinguished bunch.

This trend is happening fast in the online marketing business. The Demand Media IPO underscores the profits from disaggregating content production from other marketing agency activities. If Demand Media keeps making content more cheaply than anyone else, the online marketing agency of the future will probably be a more profitable, higher-margin business—with fewer, older, employees. (The job I started doing has been rendered mostly obsolete by Demand Media in just a few years. And they still pay better than my actual job, in hourly terms.)

Big law firms, consultants, investment banks, and marketing agencies are still hiring and training inexperienced people, and there’s a limit to how much outsourcing alone can impact that trend. But if even 10% of the new hires are replaced by outsourcing, that’s a huge number of people who could have had potentially successful careers in a high-value profession, who will end up doing something else instead.

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I’m currently the Co-Founder and CEO of a startup providing equity research and M&A due diligence to investors analyzing online businesses.