- Steve Homan
In the wake of recession, the question about cost of legal services is under great scrutiny and legal process outsourcing (LPO) is seen as an efficient way to reduce costs and maintain profit margins in a challenging economy.
However, outsourcing legal services is not as simple as it seems. It is extremely crucial to consider the legality of the matters. LPO services go beyond simple cost-cutting and focus more on the quality of services. You need to make sure that the provider you outsource to has appropriate precedents, the law is up-to-date and the provider has a thorough understanding of the law of the particular area or jurisdiction.
Here are five things that you need to consider in order to reap profits from the LPO seeds you plant:
Liability
When you outsource legal processes to an external service provider, you should monitor the accuracy of any advice or suggestions they have concerning your legal endeavors. If they supply you with wrong or incompetent information, then your business stands to take a loss. Such situations could mean liability, i.e., court decisions about who is responsible for any losses. Thus it is important to ensure that your service provider is ready to take on the liability or ownership for the results incurred by their services.
Professional Indemnity Insurance
Professional indemnity insurance covers claims brought against the policyholder due to professional negligence. If clients are hiring legal process outsourcing services from a vendor, then they need assurance that they'll receive quality work.
Understanding the English Legal System
Quality of work is of utmost importance in legal process outsourcing. If the outsourcing company is dealing with English law, they would need professionals who are qualified lawyers under the English legal system. Make sure your service provider has the correct and official qualifications attached to their names and their understanding of law is up to date.
Confidentiality
Legal process outsourcing entails a lot of security and confidentiality issues as well. This is where the fundamental point of difference comes between the client and lawyer. The client's interests should be protected at all costs and this becomes increasingly difficult when an outsourcing company is used. So make sure your service provider ensures your confidentiality at all costs. (See below.)
Lack of Knowledge of the Case
One of the most difficult challenges in legal process outsourcing is lack of understanding. If a professional doesn't understand your business model and your cases, there is no way they can supply you with effective solutions. So, choose a service provider who has ample experience in the industry and proven expertise in handling tasks similar to what you have to outsource. This will ensure that they understand you cases thoroughly and offer you advice that will benefit you.
If the seeds of profits for the LPO industry are nurtured properly, law firms may metamorphose into “strategic law firms.”
Duncan Hart has shared insights stemming from his decade-long tenure as managing partner of a 10-partner legal practice and as Regional Managing Director of one of Australia’s largest law firms. Duncan has written about his experiences and presents a strategic management methodology for globally focused law firms and legal organizations in his new book ‘The Strategic Law Firm.”
Innovation: When asked about what he curiously refers to as ‘disruptive’ innovations, he discusses how legal outsourcing fits into the innovation picture for firms as they look to sharpen their competitive edge in the legal services marketplace. It seems legal process outsourcing presents itself as just the right type of disruption a firm needs to re-visit its strategic business model if it hasn’t already.
Hart said his 30 years in the law in various firms ranging from five to 200 partners has provided a rich vein of experience from which to mine. When he finally resigned as a managing partner of an international firm in 2002 and set up his own consultancy it was interesting how others tackled similar issues. “It would be a mistake however to confine the learning that I have attempted to capture in this book as being derived solely from the legal sector – it owes a heavy debt to management theory and practice derived from a very wide range of industries and much to those who have written about organizational change and the development and implementation of strategy.”
How does Hart envision the legal profession evolving in the coming years? And why is it necessary to enact the methodology described in his book to gain maximum profits from LPO?
According to Hart, one of the main ideas is a plea for, and a discussion about, ‘tools’ that firms can utilize to better understand how and most importantly why they are organized and structured. Most firms still subscribe to a few very basic strategies in developing their practices particularly around growth, leverage and the like. More thoughtful firms are far more nuanced and reflective about what areas of law they practice in and look to consider a wide range of possible business models in considering where and how to develop their practices. “My prediction is that it is those firms that will develop the necessary flexibility and resilience to withstand the greater volatility that is evident in our wider economy.”
Hart continued: All of the nine key elements in the business model analysis approach are at some time or other prominent in any managing partner’s mind. The merit of considering all of those elements simultaneously and developing your strategy accordingly is the strength of the business model approach. Most of us realize that all the key elements are related but often act as though they aren’t – pricing is an excellent example. Just as importantly as understanding this approach is appreciating how useful it is in getting across to all of the firm’s teams the key messages and actions that need to be implemented if the firm as a whole is to move towards its preferred objectives. The business model approach is therefore
• a useful analytical tool
• a terrific means of communicating and building consensus
• drives outcomes within firms.
Hart writes of the need for the firms’ need to innovate to remain competitive, yet he seems to feel that there are disruptive models that should be avoided. Hart is unclear in providing examples that demonstrate his thinking in terms of how to innovate effectively.
But Hart sees no fuzziness: “Not at all – firms can choose to be innovative by adopting ‘disruptive models’ as Clay Christensen uses the term – at the very least they must always be scanning the horizon for emerging models that may impact their business. I give outsourcing a good deal of prominence in this area because I see it as genuinely disruptive and firms ignore such innovations at their peril.”
So, by disruptive, one wonders whether he actually means it as a positive for firms to seek out?
Hart: “By disruptive I mean innovations that may fundamentally undermine the model firms are working on currently – that model relies very heavily on generating profits from highly leveraged junior lawyers.
If that opportunity is denied to the firm because of outsourcing by a client then the whole current model faces disruption. An analogy would be the impact of Craig’s List on the classified advertising profit component of daily newspapers. Attack the classifieds and suddenly the whole model of the metropolitan daily falls – it is no longer sustainable.
Outsourcing is not just an innovation at the margins therefore - a mere operational efficiency that firms can chose to adopt or not. It has the potential to provide clients with the ability to seek far cheaper advice with much less involvement of their usual on-shore advisers. Now firms must take that threat very seriously indeed – some will chose to set up their own captives and attempt to leverage profit from utilizing those resources but even if they do the client is going to want to see a much more attractive pricing thus reducing the scope for leverage to the extent it is enjoyed today.”
There are some who may feel they do not have a reason to tweak their business model, which has made them a successful firm with a strong track record of growth yet which is feeling a slight pinch in today’s economic environment?
Hart told lposavvy that “if economic history has anything to teach us it is that ‘creative destruction’ is a fact of life – this is most clearly demonstrated in the continual evolvement of new models and the demise of whole industries that hung on too long to the ‘old model’. The core message is to know upon what key assumptions your model and its continued success is based. If those key assumptions look shaky then you have a choice – either you change your model which may require quite dramatic innovation or, as many firms decide to do , they grimly hang on hoping that they will make it to the ‘retirement line’ before they actually have to do something about the way they do business.
Hart has a chapter on the role outsourcing may play in a firm’s strategy. He is asked whether there is a less-than-obvious impact that LPO will play moving forward?
“When one looks across the tectonic changes that have arisen as a result of ‘outsourcing’ in the world of manufacturing and speculate that services may well experience something similar, it is hard to point to ‘less than obvious’ factors,” Hart said. “Let me speculate however on the possibility that if the economic center of gravity continues to moves Eastwards then the ‘rules of the game’ will be increasingly out of our hands. We have a tendency to think issues of this type can be managed by our own institutions, laws and practices or at least those that have been dominated by the West since World War II – this will almost certainly not be the case.”
LPOSavvy asks whether Hart feels the West should proceed cautiously when pursuing legal outsourcing? In a sense perhaps using a regulatory mechanism to control the ‘rules’?
Hart responds: “I think the centers of legal innovation and advice that the West will find, as economic growth is more evenly shared across the globe, i.e., will be moving East, with the West less able to control the levers of regulation or institutional control it might have turned to in the past. India and China will increasingly set the rules they want to play by as will no doubt Brazil etc. If as some predict ‘Chindia’ becomes pre-eminent, we in the West may be pleased to be the outsourced agents serving clients and law firms in the East! Again there are ready examples like Toyota/Sony and Lenovo not to mention Mittel where western firms and governments are falling over themselves to have these companies set up in their cities, act as their distributors etc. Why will the law be so very different??? We can see trends in medical services being provided far more cheaply in some countries than at the ridiculous prices similar treatments are provided in our own countries.”
“We will only fail if we cling doggedly to the old ‘gas guzzling models’ when the real growth lies elsewhere and could be just as profitable. Sure there are different skills to be applied, concerns about quality, etc., but if Wal-Mart and thousands of manufacturers both large and small can manage why can’t we? In the final analysis the clients will vote with their feet and pocket books – I doubt a return to ‘protectionist’ policies will work and I for one would prefer to take a more aggressive approach.”
Hart comments on tailoring his advice to small and medium-size firms versus the larger law firms? What are the types of things smaller firms should take into account that applies to them?
Hart: “As with the development of ICT technologies [information and communication technology], outsourcing provides a great opportunity to level the playing field if the firm, no matter what its size can develop the right skills to manage such relationships. Size is a very uncertain metric; I would be more focused on the client base, type of work and capability of the practice or more specifically the ‘team’ concerned. One of the other key concepts I explore in the book is the ‘large firm’ which is less than the sum of its parts because of its disjointed and largely unworkable business model. Small firms if sufficiently focused are in an excellent position to promote the benefits of outsourcing to their clients.”
Hart said, “The strongest models I have seen appear to be those where the outsourcer is dealing directly with the client rather than through a law firm as such. Certainly the larger outsourcers are moving in that direction and becoming extensions of the corporation’s in-house legal department. This promotes longer term contractual relationships, better management from both perspectives and more transparency in revenue streams.”
“What is surprising about the evolution of legal outsourcing is how, in recent years, there has been almost a ‘perfect storm’ of events which will give that change a mighty big push! I refer here to ICT, the learning of the outsourcing model in the manufacturing arena, the emerging strengths of Eastern economies, the huge supply of unemployed graduates, the financial/debt crisis in the West, globalization of markets and deregulation in the U.K.
“The key messages to LPO managers as they cater their services to the types of firms who follow the methodology in the book are about examination of a firm’s business model to enable them to see clearly where LPO can assist them, combined with an understanding about how they can be adversely impacted if they don’t appreciate the likely impact of outsourcing on their model are the biggest ‘take-aways.’ I reflect upon the relatively slow introduction of ICT in the legal profession in the 1970s-80s – most saw it as merely a productivity enhancer for generating increased typing output and getting the invoices out at the end of the month! Let’s hope the profession has developed a more aggressive and perceptive attitude toward such innovations as LPO represents in the 21st century.”
Another key message to LPO managers will be, as in any growing industry, consolidation. This is recounted by Neeraja Kandala, an analyst, who believes that consolidation is inevitable:
"Most Indian legal service vendors are self-funded, and may not have the capability to develop adequate marketing infrastructure without VC funding. For a large number of the smaller vendors, growth beyond a point will be difficult. While a few will manage to grow given their strong onshore presence, several smaller players will be vulnerable. On the other hand, the interest of large BPOs such as Infosys and HCL in this space is growing. As these BPOs look to build presence and scale rapidly, the acquisition of smaller vendors is an option. Though there is not much activity yet, over time we will see consolidation, with large BPOs and LPOs acquiring capacity and capability."
Ron Friedman, Senior Vice-President of Marketing for Integreon and one of the world's leading authorities on knowledge support strategies and the legal outsourcing industry generally provides his view on the consolidation of the LPO marketplace:
“I suspect it will consolidate in the next two to three years. Whether that is a result of organic growth of some plus attrition of others or by acquisition is too early to say.
For LPOs, scale will drive consolidation. Scale is important for three reasons. First, it supports operating efficiencies. While lower offshore labor costs continue to offer significant savings today, in the future law firms will expect further savings from process improvements. Achieving these requires a large enough volume of work to gain the requisite experience and resources to re-engineer work flows. Second, scale means being able to offer a range of services which law firms will find valuable as they grow comfortable with offshoring and seek to outsource additional functions to a single supplier. And third, scale allows an LPO to recruit the best talent. Though talent is still readily available, the supply is limited, even in India. Larger operations will be able to invest in recruiting and, more importantly, to offer desirable career paths for the best workers.
Size will also help address whatever reservations law firms may have about offshoring. Law firms are always concerned about supplier stability and frequently have reservations about small ones. Larger LPOs will address this general concern and, as important, have both the reputation and references to allay other fears."
And then there is the stigma for a firm, such as a major firm in New York City, who admits that it has some of its work done in India and not within its glitzy skyscraper in midtown Manhattan or in the Financial District.
Although major law firms have begun to explore the benefits associated through offshore legal process outsourcing they are also clearly still operating from a standpoint of reluctance to discuss their outsourcing relationships. There is a feeling within the industry that the major firms still view their own offshore legal outsourcing arrangements as a dirty little secret.
Attempts by LPOs to include provisions within their contracts that allow publicizing of the deals have generally been met with rejection to date. Over the last 12 months many at leading LPOs have written articles for or been interviewed by journalists for publications as varied as Time magazine, the American Bar Association, Wall Street Journal, the Los Angeles Daily Journal, and the Association of Legal Administrators, to name but a few. The vast majority of these articles are still missing out on the "major firm" perspective. There is an unwillingness to go on record and confirm that the firm is outsourcing elements of their legal functions, whether back-office support or higher value legal work, to India. This is clearly frustrating for the LPOs who want to shout from the rooftops about every major client they have on their books.
This will change over the next couple of years. Don't expect a tidal wave of confessions; however in the same way that the major firms' initial interest in exploring legal offshoring was client driven, so will their eagerness to publicize the fact of their involvement. During the last year many of the law firm partners who have contacted both LawScribe and some of the other leading LPOs have been perfectly content to acknowledge that the reason they are approaching an LPO in the very first place is because their corporate clients are starting to demand that they offer an offshore element in their responses to RFPs or they will simply lose their business altogether.
As it was with the first uptake of offshore legal outsourcing, the public acknowledgement of the actual utilization of these services will of course be client driven. In 2007 came the very first signs that an inherently risk-averse legal profession was publicly embracing the harsh reality that no industry was immune to the forces of globalization. Although the majority of the world's leading law firms are still reluctant to go "on the record" and acknowledge their interest in offshore legal outsourcing, throughout 2007 AM Law 200 firms have been consistently approaching the world's leading legal process outsourcing companies, submitting RFPs and inquiring about the various services on offer.
The picture has started to change. On occasions representatives from leading firms have joined their LPO providers on panel discussions at a variety of legal conferences that have begun to address the subject in 2007. Soon we will reach the point where having the law firm's name out in the public domain as one that embraces offshore legal process outsourcing will actually be an attractive bonus for potential corporate clients, hence helping generate new business rather than turning people off.
There is a common "tipping phenomenon" among large firms where no one wants to be first. Of course, a firm does go first and eventually a couple follow. Once a half-dozen or so have moved, the market tips - then, no one wants to be left behind not doing the new thing. Looking at adoption of e-mail and creation of marketing departments as examples, it seems to take at least five years for a cycle to play out. Today, firms are reluctant to acknowledge publicly that they offshore. Once a few go public, it will likely take little time for the rest to follow. And because of perceptions, more are likely to go public soon…
Law firms have many constituencies but clients come first. Large firm clients are, by and large, cost-sensitive in-house counsel. Firms can gain both a perception and actual advantage with clients by making clear they understand and are responding to the cost pressures facing their clients. Cutting associate or partner rates (whether directly or by discounting) is not attractive. And, talk notwithstanding, fixed and alternative fees have yet to gain significant share. So the number of ways to reduce costs is limited. As firms gain comfort with offshoring quality, they will understand that it is a good way to offer savings without affecting the firm's core business. It therefore seems likely that market pressures will cause the early law firm adopters of outsourcing to also be the early "announcers."
Regulation, Accreditation and Certification
There have been numerous calls from some of the major players within the industry relating to the formation of trade associations, independent training programs, regulatory bodies and best practice procedures. To date there has been no specific general consensus in these areas. It is likely that soon there will be the development of at a very minimum best practice rules for the industry.
2007 saw the first moves from within the industry towards accreditation and self-regulation. Russell Smith from SDD Global Solutions led one initiative with the formation of the first LPO trade association with the inaugural meeting held in Delhi in the summer of 2007. In November, through the forum of the International Association of Outsourcing Professionals, LawScribe led the first Legal Outsourcing Topic Chapter meeting attended by senior representatives from leading LPOs, BPOs, Law firms, academics and other interested stakeholders. 2007 also witnessed LPOs Jurimatrix and QuisLex, in association with one of India's leading training organizations, develop the Global Legal Professional Certification Test.
Deregulation of U.K. Legal Sector and its Impact on the Legal Process Outsourcing Industry.
In the U.K. the Legal Services Bill finally received Royal Assent on October 30, 2007. The true impact of this piece of legislation will only start to be felt in the years beyond. The particular section of the Bill that will have the most far reaching consequences on the legal profession and provide a colossal boost to the growth of offshore legal outsourcing, is the provision allowing the formation of Alternative Business Structures. The summary to the Bill at paragraph 15 states as follows:
"Alternative Business Structures (ABS) will enable lawyers and non-lawyers to work together on an equal footing to deliver legal and other services. External investment will be possible".
Put simply, non-lawyers can own and invest in law firms. To all intents and purposes this opens the doors to banks, insurance companies, supermarkets and other corporate entities both owning and investing in existing law firms or alternatively setting up their own firms and marketing legal services to the general public.
Tony Williams, a former Clifford Chance Managing Partner, recently penned Ten trends that will shape the legal market for the Times Online (October 2007). At trend number four, he comments that:
"Technology will enable projects to be 'unbundled'. This may mean that parts of the project are outsourced to India and that they are done in a systemized manner. This could have a significant impact on the need for junior lawyers, particularly if they start to price themselves out of the market."
Trend Number Six States
"High Street legal services will be fundamentally transformed by the Legal Services Act. A number of major brands will dominate the provision of retail legal services. Will that be law firms, or outsiders such as supermarkets or banks? It is too soon to tell whether existing law firms will be able to develop strong enough retail brands."
Finally, at trend number seven, the author went on to say:
"If the Clementi reforms (the forerunner to the Legal Services Bill) are broadly successful, one can expect firms higher up the chain to take in outside capital and float on the market."
Over the coming years there will be an influx into the legal market of major corporate entities that previously were prohibited from providing legal services. I do not anticipate that in the near future banks and supermarkets will necessarily be providing high end, premium legal advice, however I do believe that these corporations will come to dominate the provision of routine, retail legal services.
None of these corporations will be bound by the traditional and antiquated existing methods of legal services delivery. They will simply look for the most cost-effective method of providing legal services to the general public. These companies either already have offshore locations or have the capability to scale up significantly quicker than even the world's largest law firms to provide legal support from offshore destinations. This in turn will have a domino effect and will inspire the world's leading law firms to look at new operational models for delivering routine legal support, with offshore legal outsourcing being the logical choice.
In addition, the potential floatation of some firms "higher up the chain" only reinforces my belief that this will give the offshore legal outsourcing industry a huge boost. When major firms also have responsibility to their shareholders, as well as their clients, then the salaries that they pay their junior associates to perform relatively routine, offshoreable level legal work, will raise more than a few eyebrows. When corporate clients increasingly demand that law firms provide an offshore solution in responses to Requests for Proposals, shareholders will not be happy if the firm is incapable of responding to these requests.
The face of the legal profession in the U.K. is changing dramatically. These changes will have far reaching, cross-Atlantic repercussions. The U.K. and U.S. legal markets are inextricably linked, with many of the world's leading law firms having offices on both sides of the pond. Together the U.S. and U.K. account for over 90% of the world's $250 billion legal services market. What happens in the U.K. does not stay in the U.K. but will soon be felt all around the Western legal world.
The Future - What can't be done?
Within a few years, in a much consolidated industry, off-shoring routine level legal work will have become the norm for the world's leading law firms and corporations. Of the current 100 plus LPO providers, many will have ceased to exist and have been swallowed up by BPOs or will simply have gone out of business. We will have witnessed the development of clear and unequivocal ethical standards of practice and procedure relating specifically to the industry. New destinations and talent pools in Africa and South America which are currently virtually untapped will be in the process of being developed as the rupee continues its rise against an ever-decreasing dollar. I believe that as advances in technology continue to grow exponentially and the quality of the offshore attorneys improves that the question will move beyond what can offshore employees do to what can't they do?
