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    What Law Firms Think about Legal Outsourcing

    By Liam Brown, Matthew Banks, and Ron Friedmann

    Introduction

    A ValueNotes May 2009 report, Legal Services Outsourcing: What Do Law Firms Think?, provides insight into what large US and UK law firms think about offshoring and outsourcing.  ValueNotes (“VN”) is a respected analyst firm that has followed legal outsourcing for several years.  Many VN findings match our own market assessment, our customer feedback and recent broader trends we see in the LPO industry.  We do, however, have differing views on some of the VN findings.  This post highlights key report findings and shares our perspective on them.

    How ValueNotes Conducted the Survey

    VN conducted online and telephone surveys of both firms that offshore and those that do not.  In all, about 100 lawyers responded with about 30 from firms with over 1000 lawyers, 50 from firms with between 300 and 1000 lawyers, and 20 from firms with fewer than 300 lawyers.

    ValueNotes Findings and Integreon Comments

    LPO Penetration is Low.  VN found that offshoring still has fairly low penetration among law firms; less than 3% of firms in a random sample had tried offshoring.  On the one hand, low penetration is not surprising given that the LPO industry is still nascent.  On the other hand, 3% seems very low to us.  We wonder whether this finding is an artifact of asking individual lawyers rather than institutions.  Already four years ago, The American Lawyer reported that 6% of AmLaw 200 firms offshored work (see Law Firm Leaders: Conservatively Optimistic, Dec 2005). While it is understandable that only 3% of lawyers offshore, based purely on Integreon’s own customers, we know that many US and UK law firms do offshore.

    Onshore Outsourcing is More Common.  Though the volume of offshoring VN found is lower than reported in other surveys and than many may have expected, the report notes that total outsourcing volume is higher because onshore outsourcing is more common (especially if one considers use of contract lawyers as outsourcing, which seems sensible to us).  We think onshore outsourcing is a key point.  Take document review for example, where outsourcing is well established onshore. Integreon currently has as many onshore review projects running as we have running offshore.

    Our view is that LPO is a global phenomenon. Customers consider project complexity, availability of talent, business continuity, degree of real time communication, cost, and scalability in deciding on location.  In our experience, only a small portion of the market is dogmatic about location; the vast majority let business requirements drive the location decision.

    Cost Savings is the Main Driver. For those firms that do offshore work, VN found that cost savings is the main driver, followed by client pressure.  VN notes that these two factors are, by and large, the same.  Our experience is that pressure from corporate law departments has historically been the overwhelming driver for law firms. Until now, the typical law firm response has been to react to a request from a client.   Some progressive law firms, however, are now proactively assessing and engaging LPOs so that that they can present alternative delivery and cost models to their clients.

    We also see that many of our customers, both law firms and law departments, focus on more than just cost savings.  VN also found that firms that do offshore recognize offshoring benefits beyond cost savings, including satisfying client pressure and improving turnaround time.

    What Customers Seek in an LPO.  VN found that customers of offshore services seek a provider with deep management and domain expertise, good references, end-to-end services, the ability to scale, and onshore / global delivery capability.  These findings are consistent with our own experiences.

    We think it is also important to note that legal outsourcing works best when it is not about “lifting and shifting” a function from a high cost location to a lower cost location.  That is, the benefits are not merely labor cost arbitrage.  A mature LPO operates based on established processes that provide a consistent, repeatable framework for quality and workflow, performance measurement and continuous improvement.  Lawyers are, in our opinion, too quick to overlook or discount the “process” component of “legal process outsourcing”.  Clearly not all legal work is suited to a process orientation.  Much is, however, and we find lawyers tend to under-rate the value of process engineers, Six Sigma Black Belts and technology experts that are integral to mature an LPO offering – until they’ve worked with us.

    Lack of Awareness is Biggest Reason Not to Offshore.  The biggest reason law firms cite for not offshoring – 85% of firms – is lack of awareness of offshoring or no perceived need to do so.  We find that hard to believe.  LPO has been around for 5 years and there’s been plenty of hype (including many articles about LPO in both the legal trade press and mainstream media).  The economic dynamic started to change a year ago and major corporate clients have been banging the drum for efficiencies for a considerable time.  That said, it can be dangerous to assume lawyers are informed because of the volume of articles.  For example, even today many US litigators remain under-informed about modern e-discovery rules and practice, a widely reported topic.

    Security Concerns.  Other reasons for not offshoring include satisfaction with onshore outsourcing and prior unsatisfactory experience with offshoring.  Also, about 8% of firms cite data security and confidentiality concerns for not offshoring.  In our view, firms can easily allay these concerns by assessing a provider’s facilities, security, and procedures.  VN notes that firms with more extensive offshoring experience say that “client confidentiality and client conflict are not major concerns.”  The recent ABA Opinion Formal Opinion 08-451 [see our blog post ABA: Legal Outsourcing is Salutary and Ethically Allowable] bears this out. VN notes that firms with more extensive offshoring experience say that “client confidentiality and client conflict are not major concerns.”

    Separately, Integreon, along with other reputable LPOs, meet stringent ISO information security standards.   Many LPOs (well over 100) have sprung up over the last few years since barriers to entry are low.  Only a few, however, have the process expertise, management systems and security infrastructure to support demanding legal work.  So it is no small wonder that law firms that may not have conducted careful provider due diligence would have had a bad experience.

    Quality Concerns.  Some firms that tried offshoring were not satisfied with the quality.  We suspect that most of these instances were ad hoc, projects that were not properly planned or executed. Deep domain expertise is a critical component of most successful outsourcing, wherever the location. Most of the major activity in the LPO market is a result of long-term strategic decision making; these customers recognize the investment to be made and value to be extracted from proper and thorough documentation of workflow, quality testing, implementation and transitioning, to set the strongest foundation for success.  [For example, one of our multi-year agreements with a client supports multiple litigations with as many as 100 offshore lawyers working on their matters at any one time]

    In our opinion, the “quality issue” is a perception not grounded in fact.  Quality should, of course, be at the top of every diligence check list. Saving 50% on cost is false economy if the quality is not right. A reputable LPO should be able to demonstrate understanding of the components of quality.  And not just with a blanket statement about “US or UK lawyers checking the work” but with a commitment to quality and a culture of quality from recruitment to process to audit to management, etc.

    Customer due diligence should reveal whether it’s real. There are many ways to test quality – thorough diligence, references, tests (pre-pilots), and pilots to name a few. And a reputable LPO should be able to demonstrate that it has auditable, defensible documented processes and a performance metrics system which accurately monitors and ensures quality.  It’s also important to remember that quality is a moving target; for that reason, we have a formal Six Sigma process.   We note that every LPO pilot we have run met the pre-established quality standards.

    Document Review Dominates Offshore Work.  For firms that do offshore, VN found that document review is the most popular function to send offshore.  This is consistent with our experience.  We continue to see document review driving LPO – offshore, onshore and dual shore – from both law firms and corporations. Many major law firms have experienced offshore document review, not as direct customers but at the insistence of their corporate clients. Many have seen it first hand and have become convinced of its efficacy because of what they see in their own layer of quality control.  Some of our law department customers have directly compared our reviews with their outside law firm on a blind basis and found ours  superior.  Obviously it’s not because we have better lawyers offshore than the law firms do onshore, but because we have a proven, repeatable, measured industrial process to recruiting, training, performing and auditing the work, including implementing technologies, which assist or automate the work.

    The Conclusions We Draw

    We find the ValueNotes report to be very useful.  While we take issue with some of the specific findings, the report certainly raises many of the issues lawyers should consider in offshoring.

    And any quibbles notwithstanding, it is certainly true that many lawyers are skeptical about both offshoring and outsourcing.   We think this will change.  Our management team has decades of experience managing within large law firms and corporate legal departments and know that in the legal market, any new way of working takes years to penetrate.  Firms take time to gain comfort with new ways of working; indeed, it takes time to use those ways effectively and achieve the desired quality.   For example, for many years in the 1990s, a majority of lawyers and firms either did not understand why e-mail might be useful or actively thought it was not required.

    Times change and eventually so do firms.  The economic reality today creates huge external and internal pressures for law firms.  Clients demand better value, which puts pressure on rates and revenues.  This squeezes profits, which puts the high overhead of law firms under the spotlight, perhaps in a way not seen previously.   Offshoring / outsourcing commoditized aspects of law practice is among the easier ways law firms have to improve their value proposition.  Similarly, outsourcing middle office operations is an effective method to reduce cost.

    The legal market is slow to “tip” to a new way of working.  But when it does, it tips quickly.  We think in the current environment, the tipping point is upon us.

    [ Update 29 June 2009: The PosseList blog also commented on this subject. PosseList is a thoughtful and insightful blog focusing on contract lawyers in the US and often comments on broader legal market trends. ]

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