Integreon

Large US law firm WilmerHale announced Monday that it is opening a new business services center in the Dayton area, which will employ “approximately 187 employees from existing WilmerHale offices and new employees from the Dayton area.”  This may herald a new chapter in law firm middle office services, that is, how large firms go about providing the support lawyers need.

WilmerHale explains that this will achieve “improved efficiencies for administrative teams and the firm, and reduce significant operational expenses.”  Only a few large law firms have so far opened support centers in low cost locations; these illustrate different operating and location options:

• Orrick has a large and established domestic low cost support center, its Global Operations Center in Wheeling, WV, which it owns and operates.
• White & Case and Baker McKenzie both have low cost offshore centers in Manila, which each firm owns and operates.
• Clifford Chance operates a center in Delhi, which Integreon advised and supported. The Integreon press release and a New York Times article, Law Firms Are Starting to Adopt Outsourcing (27 Oct 2006), tell the story.
• Osborne Clarke outsourced much of its middle office to Integreon, which built a low-cost, centralized,  shared services center in Bristol (see Integreon press release).  This innovation was recognized in 2009 by the Financial Times “Innovative Lawyers Award” and the Managing Partners’ Forum “Innovation in Practice” .

WilmerHale’s decision will likely cause many large firms to take notice and consider their strategies and costs for lawyer support.  Given the increasing price pressure in the legal market, reducing support cost may become a competitive necessity.   The list above could well grow significantly in a year or two.

From our provider perspective, we think WilmerHale’s announcement is good news for the legal outsourcing market.  Law firms that consider how they provide lawyer support must first answer “what’s the best operational model to provide it?”  We think  - and the list above supports this - that centralizing support in a low cost location is a a key part of the answer.

Whether a firm should own and operate centralized services or outsource to Integreon or similar provider is a separate consideration.   Much literature exists on on the pros and cons of a “captive” low cost service center versus working with a 3rd-party outsourcing provider; these studies largely come out in favor of third parties:

• Pros and cons of captive offshore operations (EquaTerra, 2007)
• Assessing the Role of Captive Operations in Global Services Delivery Models (EquaTerra, 2007)
• Comparison of Outsourced and Captive Solutions for Capturing Value from Offshoring (Everest Research, 2007)
• Shattering The Offshore Captive Center Myth (Forrester Research, April 2007)
• Captive 2.0: The Next Generation of Indian IT and BPO Captive Operations (TPI, 2008)
• Captives in India: Is the Honeymoon Over? (Evalueserve, 2009)

At minimum, the own and operate model requires a scale that only a couple dozen global law firms have.  Beyond scale, outsourcing to a third party offers several advantages over a captive operation:

• Better capacity utilization - By aggregating demand across many law firms, a third party is better able to manage work load variability than any single firm.   Providers also take steps to utilize staff more consistently and effectively; these include:  cross-training staff to perform different types of work; scheduling shift start and end times based on rigorous analysis of actual demand patterns; and judicious use of overtime based on real, rather than anticipated demand.
• Improved efficiency with the right processes, tools, and training – with scale larger than a single firm can achieve, providers can more readily invest in analyzing and documenting processes, acquiring specialized software, and providing appropriate training.
• Managing financial risk by converting fixed to variable costs - Law firms face challenges investing capital; providers can tap the capital markets (for example, Integreon recently raised $50 million).   Working with a third party, firms can convert fixed costs that require capital to variable ones.
• Delivering performance with service level agreements (SLAs) and metrics - Most law firms lack the metrics and formal programs to assess internal service delivery.  Many even find it a challenge to administer rigorous performance reviews or take corrective HR actions.  So internal service levels vary widely. Outsourcers, in contrast, live by metrics and SLAs.
• Assuring business continuity with multiple locations – While a central location for staff does minimize cost, it increases the consequences of a business disruption.  Working with a provider that has a global delivery platform (as Integreon does) allows splitting production between two or more countries or arranging a ‘fail over’ from one location to another in the event of a disruption.
• Operational know-how and focus - Running a central services center is not as easy as it looks.  Providers are in the business of doing just that and have learned how to optimize building and operating such centers.  Experienced providers like Integreon operate multiple low-cost delivery centers.  This means they can benefit from the “experience curve effect” in a way law firms cannot.  Moreover, providers are in the business of support services; for law firms, building and operating a center can become a distraction.

Given the lead time to plan centralizing, we don’t expect to see immediate announcements triggered by the WilmerHale decision.  We won’t know the impact on the market for at least a year or two.