How To Outsource Legal Processes

Why outsource legal processes? (Hint: If you are not sure, don t.) by Danny Ertel Even though the outsourcing underway in law firms and in-house law departments represents a very limited application of a management tool long used by other corporate functions such as IT, Finance, Human Resources, and Procurement, the discussion about whether and how to outsource legal processes has spilled into the mainstream media in the past year or so, with articles in The New York Times, The Wall Street Journal, and The Economist, to name a few. While both mainstream and legal industry media seem to treat legal outsourcing as a singular phenomenon and stake out sides in some supposedly momentous debate about whether legal departments and law firms should or should not engage in it, the reality is that outsourcing is a broad term encompassing a range of different business structures that legal departments and law firms (like any other business) may choose to implement depending on their business objectives. Somewhat more interesting than simply debating whether outsourcing is good or bad for law firms and law departments is a discussion that starts to take a more nuanced approach. For example, Mark Chandler, General Counsel at Cisco, has usefully applied to law practice a framework very familiar to those in the technology business the core/context distinction to help us think about which activities to outsource. 1 If you sort the activities of your law department into those that contribute to the company s competitive advantage ( core ) and those that don t ( context ), and further sort activities by whether poor performance would pose an immediate risk ( mission critical ) or not, then you get a 2x2 matrix. The core/mission-critical quadrant is the one to retain in-house. Everything else is fair game for some version of automating (e.g., routine transaction processing), out-tasking (e.g., high stakes litigation), or outsourcing (e.g., document review). Others, like Mark Ross and Ron Friedman of Integreon, have contributed useful discussions about the business model choices available to law firms and corporate legal departments, including limited project-by-project out-tasking, broad-based outsourcing of specific processes, captive delivery centers, and hybrid models under which a third party provides some infrastructure or other support but the delivery center is to some extent owned by the law firm. 2 In my practice, focused on helping clients make good choices that they can implement effectively, I find it useful to ask both law firms and law departments a somewhat different question: For what purpose, or with which priorities, would you consider unbundling matters or services and outsourcing elements thereof? 1 Spence, Alex. Mark Chandler: I don t know a big company that isn t doing something. Times, November 5, 2007, http://business.timesonline.co.uk/tol/business/law/ article2812342.ece. 2 Ross, Mark, and Ron Friedman. A Changing Conversation. Outsource, November 17, 2010, http://www.outsourcemagazine.co.uk/articles/item/3625-a-changing-conversation. 1

Whether you are a law department manager or a law firm management committee member responding to sales pitches by LPO providers or to queries from your own stakeholders about why you have not jumped on the bandwagon, I strongly urge you to stop and clarify your objectives. There are certainly benefits to be obtained by outsourcing, and there are risks to manage. But I find that a far greater source of dissatisfaction with the arrangement than picking the wrong provider or negotiating the wrong terms is outsourcing the wrong things for the wrong reasons. 3 Outsourcing is a management tool that can be used to achieve different management objectives. Yes, much of what is discussed is that outsourcing represents a way to reduce costs. But cost reduction is certainly not the only reason to outsource (or to undertake a related, but mostly internal, effort to relocate, consolidate, and/or streamline services into a captive shared service center in a lower cost location). If you look only at cost reduction, you also miss a significant part of the equation. If you reach for other benefits without thinking through some of the inherent trade-offs, however, you may miss out on a significant part of the savings you expected. It turns out that the possible value propositions for law departments to consider outsourcing are a bit different from those available to law firms. Let s consider each in turn. Ways that in-house counsel can achieve value through outsourcing In-house counsel facing ever-increasing pressure to do more with less have some interesting options available when it comes to outsourcing. Just make sure that you are clear on both how you will measure success and what the implications are for how you select a provider or manage your relationship with them. 1. Reducing internal headcount (by shifting activities to a third party) This is the typical way in which other business functions save money by outsourcing, and it is really mostly relevant to large legal departments. Even then, if the driving purpose of outsourcing is headcount reduction, then the scope of the LPO engagement will be relatively small, as will the overall savings, net of transition and governance costs. (Consider that average in-house legal spend is less than 40% of the company s total legal spend, and assume that most, but not all, of that is on staff; then, if you could outsource 25% of those roles and save 50% of the cost of those positions two very generous estimates your savings amount to less than 5% of total legal spend.) The implications for in-house counsel thinking about outsourcing primarily for the sake of reducing their fixed headcount costs are plain: consider alternative ways to achieve comparable savings, including automating, or just ceasing, certain legal support activities. If you decide to go forward with outsourcing, watch your business case very carefully, because any significant upfront costs will push your savings years out in the future. Pick a mature provider that has a track record of delivering on their savings commitments; ask them to bear most of the cost of mapping out how the work currently performed internally will be taken over and delivered by them, and ask them to commit to year-on-year improvements in quality and efficiency. 2. Reducing external spend (by shifting activities from outside counsel to an LPO provider) This objective represents a much larger opportunity for savings and is indeed what has driven the majority of legal process outsourcing to date. In-house counsel achieve savings by requiring their law firms to transfer some tasks from comparatively expensive law firm or temp agency resources to less expensive LPO providers that are advantaged by a combination of their investments in technology, development of more efficient processes, and access to a global talent pool. But shifting tasks from counsel to outsourcer on specific matters by definition happens sporadically. Savings are realized on a matter-by-matter basis (and sometimes these savings will actually come out of business unit budgets, rather than the legal department s budget), but Legal will incur additional costs as overhead in order to manage a process that is more like serial out-tasking than traditional outsourcing. The most common example of this sort of outsourcing (which, incidentally, represents about 50% of the work of many pure 3 Hefferan, George, Ganesh Natarajan, and Danny Ertel. Looking Beyond Your Backyard: Outsourcing Legal Processes. ACC Docket 28 (2010): 52-62, available at http://www.vantagepartners.com/researchandpublications/viewpublications.aspx?id=4916. 2

play LPO providers) involves sending initial document review work to a provider but having outside counsel provide supervision and quality assurance. This kind of outsourcing raises for many the specter of making sanctionable errors if the LPO provider is unable to meet the quality standards that the law firm would have met, if adding another link to the chain breaks down communication, or if something else goes wrong. Law firms certainly will raise objections to being held accountable for the work of others. The implications for in-house counsel considering leveraging LPO offerings to reduce external spend are straightforward: given that the potential savings are significant, you should prioritize quality assurance and invest in good governance of the three-way relationship among client, law firm, and LPO provider. This means that due diligence will be especially important in selecting an appropriate provider, as will careful mapping of roles and responsibilities during the ramp-up period for a particular assignment. In most cases, in-house counsel should select just one or two preferred providers and develop the protocols and communications channels they will use to manage the relationships, as well as the specific projects, with these providers and their preferred law firms. 3. Shifting internal resources to more valuable work This objective does not really save much money, though it could be thought of as a way to avoid the cost of hiring additional staff. It does, however, deliver a very real benefit: making sure that in-house lawyers are spending their time productively. Consider the value of freeing up legal staff from reviewing every routine change proposed by a counterparty to the thousands of non-disclosure agreements a technology company signs every year, where most of those proposed changes fall into one of a handful of predictable (and acceptable) requests that can be described in an outsourcer s playbook. Freeing up their time from mundane tasks is important to retaining motivated professionals and making sure that the company is realizing a return on its in-house legal talent. This kind of outsourcing can sometimes be hard to defend internally because it seems to run counter to the current mantra of do more with less and rather suggests that the legal department accomplish the same things with more (even if not very expensive) resources. Yet general counsel often say that they are looking urgently for ways to get their staff to spend more time getting to know and understand the business units they support and building relationships with key executives in those businesses. That time has to come from somewhere. The implications for any such effort are two-fold: Internally, to gain approval for their outsourcing business case, general counsel will have to be able to articulate what priorities are currently underserved because of such unavoidable but lower value tasks; also, because change management is always a challenge, they will need to have a plan to make sure that internal resources will be redeployed accordingly. Externally, with the LPO providers, in-house counsel will have to devote some time and effort to making sure that the transition is a smooth one and that the outsourced tasks are being delivered well enough that that the business is well served and in-house counsel are not dragged back into those activities. 4. Providing new, heretofore unaffordable services to the business This objective is a bit different from the prior one, and it falls squarely on the side of do more rather than with less. Companies face ever-increasing risks in global markets; outsourcing can enable a legal department affordably to provide new or added risk management services to the business. The availability of lower cost resources, managed to a well-run process and supported by effective technology, can enable legal departments to provide support that might otherwise be unthinkable; for example: provide more detailed, market-by-market guidance to a business about the legal and regulatory risks facing their distributors; extract key terms and conditions data from thousands of license agreements; review every piece of advertising copy for potential truth-in-advertising violations; conduct due diligence reviews on every major customer contract for an acquisition target; and more. The value comes from reduced risks elsewhere in the company rather than savings in the legal department. In some ways, this is the most exciting and innovative way to leverage an LPO provider s capabilities; yet it can 3

also be the most challenging to get right. Sometimes the service is a relatively standard one that the LPO provider has delivered many times before, like contract data extraction. But in other instances, these will be services that have not previously been offered inside the company, or perhaps anywhere. Imagining and defining what those services should look like, identifying what reasonable expectations should be about quality and service levels, and determining what those services should cost all require client and provider to work closely together. This means that the selection process must be one that takes into account how well the two organizations can work together, from an organizational and cultural fit perspective. It also requires that contractual terms and financial incentives be structured to promote trust and openness. Finally, it requires a governance model that allows the parties to experiment a bit, learn from their experience, and make adjustments so that the services the client can comfortably buy from the provider deliver greater and greater value over time. Ways that law firms can achieve value through outsourcing Outsourcing by law firms is something that has to a large extent been driven by clients whether directly, as in the case of document review, or indirectly, through client demands for lower and more predictable fees. While many law firms have feared outsourcing and the disruption it brings to their business model, there is also a great deal that law firms can gain. But once again, it is critical to understand the business and professional objectives and consider potential trade-offs that may be required for a successful implementation. 1. Reduce overhead costs through back office outsourcing Although some will debate whether outsourcing a law firm s administrative or technical support services such as word processing, finance, or IT should really be considered a form of LPO, the reality is that many law firms speak of it that way and use many of the same providers for back office activities as well as other more typical kinds of legal process outsourcing. This kind of outsourcing has long been available to the larger legal departments and law firms, especially those with offices in some of the most expensive cities in the world. But how much can be saved after transition costs, and how much change or disruption would be required to achieve it? The answer depends on how much is currently being spent on these functions, how much room there is in operations for efficiency improvements, and whether real estate savings can actually be realized within some reasonable time period (otherwise some of the savings would remain purely theoretical). With an expansive view of the back office where many services are moved, attractive savings can be realized, as seen by: Orrick, Herrington & Sutcliffe (2010 revenue of $848.5 million), reporting savings of over $5 million per year for their move to Wheeling, West Virginia; 4 Allen & Overy (2010 revenue of 1.1 billion), projecting savings of 10 million over the first five years after its move to Belfast, Northern Ireland; 5 and CMS Cameron McKenna s (2010 revenue of 225 million) deal with Integreon, the largest one ever announced, which is predicted to save the firm 59 million over 10 years. 6 When compared to those law firms total annual revenues, however, in some cases the actual savings start to bump up against common thresholds of materiality (although, to be fair, as a net addition to Profits per Equity Partner (PEP), the savings are nothing to sneeze at). But for deals such as these to be worth the substantial effort required to transition services and change behavior, they have to deliver more than just cost savings. Well-designed deals to outsource back office services should be able to provide some greater flexibility to the firm or legal department in terms of variability (up and down) of its consumption; for deliverables, it should improve consistency and to some extent quality (and accountability for quality); and it should be able to extend hours of operations to provide 4 Regional Economic Development Partnership. Orrick Global Operations Center case study. Presentation, 2010. 5 Lind, Sofia. A&O Belfast near shoring deal shakes up template for reforming back-office functions. Legal Week, February 8, 2011, http://www.legalweek.com/legal-week/ news/2025260/-near-shoring-deal-belfast-shakes-template-reforming-office-function. 6 Lind, Sofia. Partner exits expected as Camerons conducts internal restructuring. Legal Week, February 8, 2011, http://www.legalweek.com/legal-week/news/2025277/partner-exitsexpected-camerons-conducts-internal-restructuring. 4

better service to fee earners. By moving services from a back office to someone else s front office, you should expect, and insist on, initial and ongoing improvements in service delivery as they continue to invest in technology and process across a broad client base in ways that didn t make sense for you to do for yourself. 2. Improve productivity and marketing capabilities through middle office outsourcing By comparison, middle office outsourcing, usually meant to encompass knowledge management and business development activities (e.g., library services, conflict checking, business research), can rarely be thought of as delivering substantial savings. Few law firms, at least in the US, actually spend enough on such activities that even 20% or 30% savings could easily pay for the cost of defining the services to be outsourced, drafting RFPs, assessing responses, engaging with providers sufficiently to select a provider and negotiate the design of and contractual terms for an appropriate solution, and then dealing with the change management issues involved with the transition. To be worth doing, middle office outsourcing has to deliver significantly more value at an affordable cost than what the law firm had been or could reasonably expect to do for itself. Service providers that want to be successful in this space have to be able to demonstrate to prospective clients that they can do the following: By taking over knowledge management, substantially improve fee earner productivity. By taking over client and competitive intelligence work and business research, significantly advance the ability of law firm partners to understand their clients and the opportunities in the market so they can seize them, thereby growing the top line. The value proposition for middle office outsourcing has to be a variant of more with less, where transition pains are eased by the excitement of new capabilities obtained rather than by management s exhortations to accept the disruption in order to achieve some limited savings. 3. Improve the firm s own market positioning and value proposition through front office outsourcing Last but not least is front office outsourcing what most people think of as LPO which includes functions such as document review, due diligence, limited research and drafting, and some administrative and research work related to patent claims. The value proposition for outsourcing these activities is often framed in terms of cost savings which can be substantial but those savings are almost entirely for the benefit of the client rather than the law firm. The focus on such savings, to the exclusion of other ancillary benefits, may explain why law firms have been weary of and reactive about LPO adoption. From the law firm s perspective, LPO can and should deliver different kinds of benefits: When well designed and implemented, an LPO program can offer law firms greater visibility into and predictability of the cost of key components of the services they deliver to a client critical to a firm working under fixed fee or other alternative fee arrangements. Partnerships with LPO providers can give firms the ability to take on large matters without being permanently staffed for peaks in volume. Well-delivered and more affordable services from an LPO can allow a firm to reconsider what diligence is due on a deal and whether diligence deliverables could be more comprehensive or useful post-closing for implementation of the deal. Blending in lower cost delivery models for the commoditized parts of a matter with premium-priced services for the higher value portions of the work can enable a firm to pitch for business it might otherwise be priced out of. In a world of unbundled legal services provided by multiple vendors, some law firms will be able to develop capabilities to fill a void in the integration of those services and vendors, something they will be able to do more effectively with some well-developed relationships with a few preferred suppliers. It is true that no one would outsource without the promise of some efficiency gains be they achieved through technology, economies of scale, labor and overhead arbitrage, or process improvements. But those comparative advantages can and must be marshaled to deliver more than just some cost savings. At least at the moment, the activities thought to be amenable to outsourcing are still limited enough that overall gains from even a substantial 5

percentage of cost savings in those activities may not be worth the disruption to the firm as a whole, unless there is more to be gained from the exercise. If you are considering outsourcing some legal processes, you should do so with a clear set of objectives in mind so that you can design an engagement that is fit for purpose and select a provider with the right capabilities. Careful mapping of processes, thorough due diligence in selection, effective quality control, and robust governance of the relationship all represent additional investments required to outsource successfully. Achieving real return on those investments requires starting with a clear picture of what success looks like and what trade-offs may be required to get there. About Vantage Partners Vantage Partners leads the field of relationship management, building on more than 25 years of research and consulting experience with the world s leading companies. A spin-off of the Harvard Negotiation Project, at Vantage we help our clients and their partners and providers enter into, manage, and (when necessary) remediate working relationships. For more information, please visit www.vantagepartners.com. 6