Integreon

We recommend reading Innovators at the Barricades, a blog post last week by Bruce MacEwen at Adam Smith, Esq.  He argues that legal process outsourcing (LPO) is a disruptive force for law firms, citing Clayton Christensen’s The Innovator’s Dilemma.  We agree with most of his analysis though take issue with a couple of points.

MacEwen notes that “Outsourcing is here to stay” and describes different flavors using a 2 x 2 grid: location on the x-axis with offshore or onshore (”foreign” or “domestic”); ownership on the y-axis with captive or 3rd-party (”owned” or “rented”).  MacEwen notes that this model is “by no means exhaustive; it’s merely indicative and representative”.  We agree this is a good model for thinking about centralizing support services though we have a small quibble.  He cites Integreon as an example of foreign / rented; we are, in fact global, and have onshore facilities in both the UK and US.

Most of the post assesses the impact of outsourcing.  “Once clients begin to get accustomed to the notion of being able to unbundle, or unchunk, legal engagements - be they disputed matters or transactional ones - there’s potentially little end to it.”  MacEwen argues that LPOs are likely to go upmarket, meaning they perform higher value work, which will threaten law firms.

In our view, there is a clear line between legal support and law practice.  We do not practice law nor is that part of our corporate strategy.  So we see a clear limit to how far “up the value chain” an LPO can go before it practices law and is therefore no longer an LPO.

In fact, we would turn the “LPO moving up the value chain” idea on its head.   The very forces that enabled the birth of the LPO industry - globalization, technology, and shifts in buyer attitudes - continue to push legal work toward standardization and systemization (as Richard Susskind discusses in The End of Lawyers?).  That means work once done only by associates will flow to new and more efficient operating models offered by alternative sources such as LPOs, contract attorneys, virtual law firms, online legal resource providers, and still-to-be-invented providers.

So we do agree that lower value, repetitive tasks once the exclusive domain of partner-track associates will continue to be unbundled and move to more cost-effective approaches.  Document review in litigation is the classic example.  Even without LPOs, law firms’ ability to offer this service at associate billing rates is already threatened by corporate clients contracting directly with contract lawyer staffing agencies.  This is why we think one successful “new model” for the delivery of legal services may be an amalgam of law firm and LPO working together in a collaborative fashion.

Given this shift, MacEwen questions the fundamental premise of large firms, citing Ronald Coase’s Nobel Prize winning The Nature of the Firm. He suggests that LPO-enabled unbundling calls into the question the “why” of law firms: “Why create the management overhead, bureaucracy, and administrative friction entailed in any firm of scale? Why not just purchase whatever is needed, when it’s needed, on the open market?”

That is a good question indeed, but we view LPO as symptom, not cause.  The cause is corporate client price sensitivity and quest for value.  These have changed buyer (general counsel) behavior, which in turn has propelled  growth of law firm alternatives.  We think that smart large firms can still profit from their scale.  For example, they can

• Coordinate across practices and geographies to serve global clients.  Cross-selling is not only a profit lever, done correctly, it is a service enhancer.
• Assemble large teams of highly skilled and experienced lawyers to work on tough, big cases or deals.
• Serve as expert general contractors with project management skills to ensure the swift and cost-effective resolution of client matters.  Many general counsels will happily delegate that function.

With these market shifts, firms must consider not only revenues, but also costs.  More firms now outsource significant portions of their middle office to companies like Integreon.  That allows them to focus on law practice, reduce costs, and maintain if not improve client service and partner profits.

MacEwen raises provocative questions that large firms need to consider carefully.  Those that adopt sound strategies and execute effectively will continue to thrive.  Those operating on auto-pilot may indeed lack a good answer to the question MacEwen / Coase asks.