Outsourcing Legal Processes

Transcription

1 Looking Beyond Your Backyard : Outsourcing Legal Processes By George Hefferan, Ganesh Natarajan and Danny Ertel Over the last decade, the legal and regulatory environment has become increasingly complex and the risks increasingly substantial. At the same time, the growth in data to be managed and safeguarded whether it is for discovery in litigation, due diligence in an acquisition, or regulatory compliance purposes has been explosive. While outside counsel provide critically important services and assurance in dealing with those challenges, the pressure from business units and the CFO s office to reign in spending has never been stronger. As general counsel (GCs) have begun taking a closer look at the services they deliver internally and those that they send out to their preferred law firms, they have found that it pays to unbundle those services and consider their component parts. ACC Docket 53 October 2010

2 Many companies routinely outsource document management or parts of ediscovery, and counsel work with non-lawyers at third parties to get specific tasks completed accurately and efficiently. Others have started taking activities previously handled by junior associates at law firms, and sending them to providers who may use a combination of lawyers and non-lawyers, located onsite, onshore or offshore. Sometimes they engage those third parties directly; sometimes the relationship is an indirect one, through outside counsel. Consequently, GCs today must manage what has become an inter-dependent matrix of providers, including internal resources, traditional law firms and some newer entrants. 1 Making good use of those providers, however, is not without its risks. Outsourcing is not a panacea for discovery cost, and it is not for everyone. As you consider whether, and to what extent, to outsource tasks that you have traditionally performed internally or delegated to your outside counsel, you need to think about how to manage two kinds of risks: substantive risks concerning the work, its quality and how you contract for it; and relationship risks with a new provider and with your principal outside counsel. Let s look at the substantive risks first. George HefferaN is vice president, general counsel for Mindcrest. He co-founded Mindcrest with Ganesh Natarajan, Rohan Dalal and Teju Deshpande in Previously, Hefferan worked at McGuire Woods LLP where he focused on international transactions, and often represented US companies investing in India. He also spent three years at McGuire Woods Brussels office, representing global corporations with pan-european operations. He graduated from the T.C. Williams School of Law at the University of Richmond, and received his undergraduate degree from Hamilton College. Hefferan can be contacted at george.hefferan@mindcrest.com. Ganesh Natarajan serves as president and CEO of Mindcrest. Prior to Mindcrest, Natarajan was a partner and spearheaded the India practice at McGuire Woods LLP. He has an MBA from Brigham Young University in Utah; a JD from Washington University in St. Louis; an undergraduate degree from the University of Bombay; and a graduate degree in management from the Symbiosis Institute of Business Management, Pune. He can be contacted at ganesh.natarajan@mindcrest.com. Danny Ertel is a founding partner of Vantage Partners, leading its outsourcing practice area. He also chairs the Legal Process Outsourcing Chapter of the International Association of Outsourcing Professionals. Ertel was previously a senior researcher at the Harvard Negotiation Project; taught negotiation at the University of Toronto Law Faculty; practiced law with Debevoise & Plimpton, and served as a law clerk to the Hon. Justice Harry A. Blackmun on the US Supreme Court. He is a graduate of Harvard College and Harvard Law School, where he was managing editor of the Harvard Law Review. He can be contacted at dertel@vantagepartners.com. Outsourcing the wrong tasks or for the wrong reasons To make good decisions about what to outsource, start by asking: Why are we outsourcing? Legal processes still constitute a relatively immature market for outsourcing, with a growing but limited experience base about precisely how to unbundle activities and where to draw lines. There are important trade-offs to be made among objectives like spending less, improving predictability and transparency of an engagement budget, freeing up your own team so they can focus on higher value activities, and providing new or different kinds of support to the business that you could never have afforded previously. Understanding what you hope to achieve by shifting work to a different kind of provider is critical to making good choices among the sometimes dizzying array of assertions made. A chart showing objectives and options, such as Chart 1 below, may be a useful device to inform a conversation with your team and, after you clarify your objectives, a discussion with providers. In filling out the chart, consider how well each alternative meets the stated objective. You could label each box with your conclusion, similar to the format used by Consumer Reports, or take a more sophisticated approach Chart 1 Objectives Top tier national firm Lower cost regional firm Technology service provider Offshore LPO Spend less money on discovery Minimize sanctionable errors Improve reliability of budgets Redeploy internal staff to higher value activities they can t get to now Affordably provide new support to business and deal teams ACC Docket 54 October 2010

3 and list the set of assumptions that would have to be true for each alternative to be the best option. For example, in the top-left box for spend less money on discovery, you might say that for a top tier national firm to meet that objective better than the other service-providers, it would have to: have the technology to substantially reduce the amount of manual review required; have resources available to do the necessary manual review at a rate lower than their usual associate billing rates; and have the ability to reap some efficiencies from having done the document review in other aspects of trial preparation. You can then sit down with providers, test your thinking and push the providers to demonstrate that they can deliver on your objectives. As with any assessment, consider how to resolve conflicts across objectives if you find that an alternative scores high on some objectives and low on others. Taking time to articulate required truths for each viable choice in this matrix provides you with more specific propositions to discuss and validate as you continue to narrow your choices across categories. And as a nice by-product of the effort, this analysis also provides you with a clear set of criteria that can be used to select specific providers within a category once you have settled on a path. Service level agreements and other contract terms should be oriented toward desired outputs and their enablers. Selecting the wrong provider The market for outsourced delivery of these services is still very much an evolving market. There are many more legal process outsourcing (LPO) providers, for example, than there is work to sustain them and the investments in people, processes and technology they require. 2 Under such circumstances, substantial due diligence, including onsite visits and customer reference checks, is essential. Conducting pilots with one or more providers prior to committing to a full roll-out helps ensure that both sides fully understand what is required and what it will be like to work together. If you have articulated what must be true for a particular alternative to meet your objectives, as described above, you have also started to protect yourself against the risk that you have the right model but the wrong provider. You can make a request for proposal (RFP) process much more meaningful than a price auction. You can state the objectives you are trying to meet, your assumptions about what must be true for those objectives to be met, and you can ask potential providers to demonstrate (not just state) how they meet those criteria (or how they have a different way to achieve your objectives). Defining the wrong solution or scope We sometimes hear people talk about whether to outsource as if it were a single decision: Should we take some high-volume, repetitive tasks and have lower cost resources perform them, aided by technology and good process? But as you think about the different possible objectives for a LPO program, you need to also start thinking about different kinds of tasks that could be outsourced, including some tasks that are currently not being performed. Your analysis of how well different alternatives meet your objectives might vary, depending on whether you are considering pre-production review of documents pursuant to a discovery request; a due diligence review of the early termination and currency adjustment provisions in an acquisition target s customer contracts; or a review of how liability and indemnification obligations flow across your own 600 supplier contracts and 1,100 enterprise customer contracts. Making a decision to outsource high-volume, repetitive tasks simply to save money through labor arbitrage is not sufficient. An effective outsourcing solution also requires: a carefully structured document and information flow; the assurance that the provider can work as an extension of your team, and your outside law firm s team, when necessary; clarifying designated responsibilities and activities for yourself, the LPO provider and outside counsel (where appropriate); and building quality assurance and continuous improvement in error reductions, turnaround times and efficiency into each engagement. Negotiating the wrong contract terms When counsel start looking at components of legal services as commodities which for some is a requirement to getting comfortable with outsourcing them they often start to treat those services as if price were all that mattered. Even when the primary (or only) objective of outsourcing routine, high-volume tasks is to spend less money on them, it is important to consider what impacts the overall cost of the engagement that includes these ac- ACC Docket 56 October 2010

4 Typical Challenges in Outsourcing Relationships Coordinating activities among provider and client resources, and across numerous geographies; Dealing with differing perceptions about what is in or out of scope; Resolving issues effectively and learning from them so they don t become recurring problems; Making sure we re getting what we paid for; Delivering up against ambiguous expectations; Preserving institutional knowledge; Building and maintaining alignment with varied stakeholders; Helping the organization deal with changes (in how services are delivered, how internal teams spend their time, and the roles both retained and transferred employees play); and Managing cultural differences that can get in the way of collaboration. tivities or sub-tasks. Make sure to pay as much attention to key enablers of savings as to the rate card. For example, if one LPO provider were offering to do discovery-related work at half the hourly rate of another, but its output would be in a format that required twice as much outside counsel time to use in preparing for litigation, the total cost of using that provider could be much higher than the cost of using one whose output did not impose additional costs. Substitute format for any number of factors that can increase your total costs of working with a provider, or of your outside counsel working with that provider, and you begin to see why the non-rate terms of the deal are also important. Further, be sure to ask potential providers about productivity measures, matter-specific training time and costs, and quality assurance load factors (i.e., For each hour of review, how many hours of QA are expected, by the LPO and by the law firm?). As with any commodity for which providers frequently compete on the basis of price, variance in rates in LPO has been narrowing significantly, at least for the most often quoted activities, e.g., an hour or a full time equivalent (FTE) of document review time. Indeed, the difference in pricing among providers is less significant than the difference in their ability to manage conflicts, protect confidentiality, recruit and retain good staff, or provide good reporting. Service level agreements and other contract terms should be oriented toward desired outputs and their enablers. You should model not only the direct costs of the services against your base case, but also all the ancillary or related costs of managing the three-way relationship among your team, the LPO provider and outside counsel. You should also make sure that key drivers of that model are reflected in a scorecard that all three of you review regularly. The substantive risks are all manageable, provided that you think carefully about why, to whom and under what terms you should outsource particular tasks. Approach the question of whether and how to outsource as you would a significant strategic decision about how you will help the organization manage legal and regulatory risks. But what about the relationship risks involved in a decision to outsource? There are at least two categories of such risks: (1) those concerning your relationship with the new provider(s); and (2) those concerning your relationship with the outside counsel, who might have previously performed some of these tasks as part of a broader service they still provide to you. Poorly managing the relationship with the new provider Although outsourcing has come a long way over the last 20 years, the reality is that most outsourcing relationships whether in IT, HR, finance and accounting, customer care or others functions face some difficulties. Clients and providers both complain of expensive and time-consuming challenges like those depicted in the sidebar. The research, albeit based more in IT and business process outsourcing than LPO, suggests that these challenges collectively can eat up as much as 30 percent of contract value. 3 One thing is clear after 20 years of outsourcing experience: The right governance model, if well implemented, cures many ills of an outsourcing deal; and the lack of one can result in disappointment and lost value. Good governance in an outsourcing relationship means smooth decision making and issue resolution; effective communications (even across great distances, time zones, and cultures); and a process to measure and monitor the right indicators. LPO is a delicate three-way relationship when outside counsel are not directly involved in the day-to-day functioning (e.g., in a contract review type engagement), and especially when they are (e.g., in a litigation-related or M&A due diligence-related document review). Protocols for decision making among clients, LPO providers and outside counsel should be put in place; expectations about how the three parties will work together, safeguarding confidentiality, need to be made explicit. Further, a scorecard promoting accountability but also opening communication and effective problem-solving must be developed. ACC Docket 58 October 2010

5 ACC Extras on Outsourcing Legal Processes ACC Docket The Benefits of Legal Process Outsourcing (July 2009). As companies get creative about financial solutions, the concept of taking business to offsite legal professionals is becoming more popular. This article discusses the development of legal outsourcing and its benefits. InfoPAK SM Outsourcing Transactions (Jan. 2006). This InfoPAK discusses the various legal documents that typically guide an outsourcing transaction; presents recommendations for planning and conducting contract negotiations to facilitate an orderly negotiation process; and identifies and explains many of the critical legal and business issues the parties must address and properly document in an outsourcing agreement. Quick References How to Reduce Energy Costs in IT Outsourcing and Data Centers Through GreenTech (Feb. 2009). This presentation is about reducing energy costs in IT outsourcing and data centers. Informal Outsourcing Checklist for In-house Counsel (Oct. 2008). This checklist provides a guide and management tool with legal terms and conditions that should be in an outsourcing agreement. Top Ten Reasons for Corporate Counsel to Outsource First-pass Document Review (Nov. 2007). Here are our top ten reasons for corporate counsel to outsource first-pass document review, an increasingly popular practice for in-house counsel. Articles Risk Management in Next Generation Outsourcing (April 2008). This paper explores established and emerging risks that may arise from next generation outsourcing models, and highlights best practice techniques that help organizations better mitigate risk. A Practical Guide to Outsourcing Legal Solutions Offshore (Aug. 2008). This article provides a list of legal solutions that can be outsourced offshore, checklists for selecting a LPO (legal process outsourcing) provider and items for the outsourcing contract. ACC has more material on this subject on our website. Visit where you can browse our resources by practice area or search by keyword. Damaging relationships with outside counsel The importance of an effective three-way governance model leads directly to the final risk to consider: embarking on even selective outsourcing can damage your relationship with outside counsel. Whether it is because of the hit to their pocketbooks, or because they perceive outsourcing as something that inherently devalues the services they provide, some outside counsel will feel attacked by any discussion of outsourcing. How you explain your thinking and characterize their role going forward can do much to mitigate the adverse impact of your decision on the relationship. To prepare for such a conversation, take a moment to put yourself in their shoes. What concerns will your preferred outside counsel have with your decision to outsource some activities? They are likely to be worried about how the quality of the LPO provider s work, its protection of confidentiality, and its compliance with ethical rules will impact what the law firm needs to do and what they are held accountable for. This includes outcomes of transactions or disputes, and the management of legal and regulatory risks. They are likely to be worried about communicating with, and integrating the work product of, the LPO provider. Will it be harder to make sure the right terms are being used for searches or to incorporate evolving theories of the case? They may also be concerned about how the LPO provider was selected. Are they being asked to manage the low-bid subcontractor? How much additional work will that require and will they be fairly compensated? ACC Docket 60 October 2010

6 They are likely to wonder whether they will lose critical training opportunities for their junior associates. They may be concerned about how far you will go with unbundling tasks and activities, and what pieces could go on the block next year something that will raise both ethical (aiding the unauthorized practice of law) and economic issues for the firm. 4 These are just a few examples, and you should spend some time thinking through what their other concerns might be. Ask yourself what you can do to help mitigate some of their concerns. For example, how can you help them address their training needs? How can you ensure that the LPO provider s processes are transparent enough that counsel can exercise sufficient supervisory authority? How can you give them a window into your thinking about whether and what to outsource, while inviting their input on potential challenges? You may also want to share how their help in such problem solving will impact your view of their innovativeness and creativity. How can you give them a window into your thinking about whether and what to outsource, while inviting their input on potential challenges? What you cannot outsource At the end of the day, this new and somewhat unfamiliar relationship needs to work for all three parties. It is easy to imagine that you can just hold counsel accountable for everything: from the accuracy of the work that has been contracted out, to the smooth management of the interactions among the three (or more) entities involved. And perhaps you will be able to do so if you are working with a firm that is sufficiently adaptable to changes in the profession, and that has invested in the necessary capabilities to manage such projects and third-party relationships. But even then, they cannot do it all on their own. They need you to clarify your objectives and to base your selection of a third-party provider as much on their ability to deliver and to manage relationships as on their pricing. Further, they need you to partner with them in shaping an engagement that plays to the strengths of the different members of the team. The bottom line is that it is up to you to ensure that any outsourcing initiative delivers the value you seek from it. One thing you cannot outsource is ultimate responsibility for ensuring you get the right substantive solution, and the working relationships to make it work for your company. Care to comment on this article? Visit ACC s Blog at Notes 1 While there is limited research on how much work general counsel are sending to LPOs, data about the size of the industry is indicative of the trend. ValueNotes, an India-based analyst, has predicted the market to grow in India from the $146 million estimated in 2006, to $440 million this year and $1.1 billion by Passage to India, The Economist, June 24, There are more than 140 LPO providers in India alone, with competitors also in the Philippines, South Africa, Israel and Australia, as well as onshore both in the United States and the United Kingdom. Taking ValueNote s projection of $440 million in India, the LPO industry revenue for 2010 (see note 1, supra) as fact, and recognizing that a handful of these firms are significantly larger than their competitors, means that the vast majority of these firms have less than $3 million in revenue and some may not have reached seven digits. 3 Ertel, Enlow & Siddall, Managing Outsourcing Relationships to Maximize Value: Evolving Relationship Management Practices, (Vantage Partners, 2010). See also, Cullen & Wilcocks, The Power of Relationships (Warwick Business School, 2005); Corporate Leadership Council, Maximizing Returns on HR Outsourcing Investments: Strategic HR-Vendor Relationship Management (2005). 4 See, e.g., James Dean, Law firm conservatism slowing LPO market growth, Law Society Gazette, (July 8, 2010); David Hechler, Some companies see big savings in offshoring legal work. But how s the quality? Corporate Counsel (Jan. 1, 2009); and Julie Kay, Outsourcing No Longer a Dirty Little Secret, National Law Journal (Dec.10, 2008). ACC Docket 62 October 2010