Press Articles & Comment

IP, IT and life sciences: Ringing in the changes

Legal WEek, 4 December 2008

Deregulation crashed and burned this year, but the other major driver behind recent economic growth — technology — remains as dynamic as ever, says Richard Kemp.

There are no easy answers as to what 2009-10 will hold for IT lawyers. What is certain is that recessions always feel worse than the numbers suggest. The last two years of recession in the UK — 1980 and 1990-91 — saw gross domestic product (GDP) drop by 2% and 1.4% respectively. So, assume no growth for 2008, a recession of -2% pa in 2009 and no growth in 2010 (at the bottom end of Bank of England expectations) and you get to a GDP per worker figure of £49,000 two years from now. Compare that with HM Treasury’s October 2007 (pre-downturn) forecast of £54,250, and the difference — of over £5,000 — explains why a 2% GDP contraction over three years will have a major impact.

Transpose this thinking to the legal world of revenue per lawyer, add law firms’ high cost bases and rapidly changing patterns of client demand in property, finance and high-end corporate, factor in the 45% increase in numbers in the profession over the last 10 years (Law Society statistics show that there were 82,000 solicitors in private practice in 2007 — up from 57,000 in 1997), and you can start to understand why many managing partners are wearing increasingly furrowed brows.

From HM Treasury’s October 2007 Pre-Budget Report, the UK economy’s output (GDP) is around £1,500bn, of which the consumer accounts for roughly £1,000bn (64%), business investment £150bn (10%) and the public sector £330bn (22%). For the technology end-market, according to researcher Sanford C Bernstein, these figures are switched around, with 65% of demand coming from business, 25% from consumers and 10% from government. What this shows is that although the consumer powers the economy, it is the corporate sector that powers IT.

What we are seeing emerging among FTSE 100 companies from the current re-budgeting round is a focus on projects that deliver well defined short-term benefits and efficiencies. There is also a shift to concentrating spending on fewer IT suppliers to achieve better terms, and deferral of projects with strategic but less immediate benefits. At the same time, there continues to be an appreciation that in a world of intensifying competitive pressure, IT remains up there as an essential strategic priority.

All this is perhaps most visible in the outsourcing arena. From the days of the mega IT outsourcing deals, outsourcing has continued to grow and has become a generally applicable efficiency tool, spurred on by the rise of lower cost centres in emerging markets. Datamonitor estimated that one-third of the top 50 IT service vendors’ 1.7 million employees in 2006 were employed in low-cost locations. Tougher times are accelerating this trend.

In addition to IT applications and support, functions outsourced increasingly include human resources and accounting. Outsourced processes also cover much back office administration, document production and call centre work across many industry sectors. Perhaps the most surprising feature of recent outsourcing developments is that many deals are quite small — a handful of employees transferring under Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), for example — signalling just how granular and routine these outsourcings have become. Emphasis on this kind of outsourcing will grow during the downturn.

In more demanding economic times, the trend to consolidation (Hewlett-Packard’s $14bn (£9.1bn) acquisition of EDS was the standout example of such a deal in 2008) will also gather pace, as large IT buyers use competitive IT procurement to reduce price and improve non-price terms. On the IT and telecoms purchase side, there will be a movement towards global, cross-platform deals with single — or fewer — suppliers.

Cheaper software

We are also at the start of a generational shift in terms of how software is used in an organisation, enabled by broadband internet, a digital river in full spate in 2008. Powering corporate IT, the internet is enabling new service delivery techniques that are displacing traditional licensing patterns. Two things stand out from this autumn as an inflection point along the trajectory from software as a licence to software as a service: the release of Google’s web browser Chrome in September and Microsoft’s October announcement of ‘Windows Cloud’.

Open source

If the software licence/service shift is just starting, then use of open source software is plumb in the mainstream. Allowing ‘free’ software to be used in the organisation, and enabling expensive in-house programming resource to be deployed elsewhere, open source is the chief information officer’s (CIO’s) boon — although it is normally the legal department that picks up management of risk associated with safe use of open source.

The cost benefits of open source mean that its use is likely to become even more widespread in tougher times. In a recent global open source software survey conducted by Gartner in May/June 2008, the top three reasons for use were all directly related to costs: lower TCO (total costs of ownership), lower licence and support costs, with vendor independence and flexibility (indirectly costs related) close behind. Fundamentally, compliant open source use in the organisation is all about good management — reviewing what you have, remediating where necessary and putting in place good governance — and it is striking that the Gartner report found that 70% of the companies surveyed did not have an open source policy in place.

The growing prominence of regulation

Even before the seismic financial events of autumn 2008, the combination of technology development and deregulation across many industries was significantly increasing demand for technology lawyers and requiring us to deepen our expertise in technology regulation.

This is most visible in financial services, which accounted for around 9% of UK GDP (£135bn) in 2007, employing 3% of the UK labour force (one million out of the 30 million total). A year after the implementation of the Markets in Financial Instruments Directive (MiFID), the introduction of technology-driven pan-European ‘best execution’ products and growing competition in fast securities trading platforms (where newcomers like Chi-X and Turquoise are taking on established exchanges) are requiring technology lawyers to develop a much deeper understanding of the regulatory regime. Added to this, the new world set to result from increased government intervention will see a greater regulatory emphasis on technology in managing operations, transactions, risk and compliance generally.

Growth of the online retail sector

How far the internet has come in the UK is seen most dramatically in the retail sector, where mid-2008 figures from the Internet Advertising Bureau show that 17p in every retail pound and 15p in every advertising pound were spent online. Recessionary pressure in the high street is likely to speed the quest for cost savings and spur the shift to doing business through the internet. As a result, the proportion of pounds spent online could well increase in 2009-10 more quickly than anticipated even a few months ago. The internet retail channel will become an increasingly significant feature of the IT lawyer’s daily workload, with its platform and fulfilment deals, internet search-optimisation and affiliation arrangements, customer data, privacy and security issues, and e-commerce and related consumer regulation.

Convergence and web X.0

For the consumer, it is all about the internet and broadband finally delivering on the promise of convergence, with iPhone 3G queues around the block the defining image of consumer technology in 2008. For consumer businesses, the focus will be on working out ways of making the web profitable — the challenge being to carve out sustainable income streams in a world of user-generated and increasingly free content. The business and legal challenges of the web X.0 world — effective commercialisation of intellectual property rights in data, responding appropriately to piracy and creating effective legal structures that ‘follow the money’ — will continue to keep lawyers busy as clients move to maximise user engagement and attention across multiple platforms, expand their global footprint and increase advertising, e-commerce and subscription revenues.

So, what is in store for IT law?

The fog around the current structural and cyclical change affecting the general economy and technology markets is so thick at the moment as to defy anything but occasional glimpses of what the new landscape will be like when it lifts. Deregulation, one of the two fundamental drivers of economic growth and development of the last 30 years, crashed and burned spectacularly this year. But the other — technology — remains on the threshold of enormous change.

Richard Kemp is senior partner at TMT industry specialist Kemp Little.

Demystifying the jargon

Cloud computing — using the internet and computing services from a remote data centre to fulfil the user’s computing needs. Example: Microsoft’s Windows Azure ‘Windows Cloud’ service announced in October.

FLOSS — free/libre open source software: a software development and licensing technique based on communitarian principles now firmly in the corporate mainstream. Example: the operating system Linux licensed under the GPL (General Public Licence) of the FSF (Free Software Foundation).

SOA — service-oriented architecture: the assembly of applications from various software components, each providing a specific service based on required business processes. Example: Starwood Hotels and Resorts Worldwide new SOA service to replace its legacy room-reservation system.

SaaS — software as a service: using the internet, web browsers and scripting languages to host and maintain software applications. Example: Salesforce.com with its market leading SaaS/cloud computing CRM (customer relationship management) service.

Virtualisation and hypervisor — virtualisation enables efficiencies by creating more than one virtual operating system to run on the same computer at the same time. The hypervisor is the software application that runs virtualisation. Example: VMWare’s ESX Server 3i hypervisor.