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Ron Friedmann on July 27th, 2010 at 8:16 am :
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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.
Filed under Legal Economics, Legal Outsourcing (LPO)
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Liam Brown on July 19th, 2010 at 7:28 pm :
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As the only professional services provider of legal, discovery, research, and business solutions serving clients from four continents, a question I am often asked is “what is Integreon’s global strategy?”
This seems to be a topic of interest for the market recently and has prompted me that it is probably time for a blog post about onshore versus offshore services.
Obvious reasons for a global delivery footprint include cost and availability of talent, language capabilities, disaster planning etc., which I discussed a year ago in my post Choosing the Right Outsourcing Destination in Changing Times.
Each of our locations has a role in our overall strategy. India has a large talent base of high quality, lower cost knowledge workers, especially in areas such as legal, accounting, and research, which is where Integreon originally built those professional services capabilities during our start-up years. The Philippines provides a similar talent and cost base to India, with arguably closer ties to the US, while also allowing clients to mitigate the business continuity risk of being over-concentrated in India. In China, we are able to satisfy increasing demand for knowledge and language skills that could not be gathered without local presence.
In the UK and the US, where we have most of our clients, we have found that nothing builds trust better than being served by experienced staff onshore - or even onsite. Our South Africa operations serve clients who require collaboration with people close to UK time. We are just about to open an office in Tokyo to serve our Japanese clients and hope to open in Eastern Europe and South America in the future, in response to client requests for language capabilities.
So far, this has been a hugely successful strategy, helping us grow from $19M per year in 2006, the year in which we launched our first onshore operations (we believe thoughtfully anticipating the demand for onshore capability), to over $100M this year. During the first 6 months of 2010, 64% of our revenue has been delivered from onshore operations and 36% from our offshore operations. Compare those numbers to Infosys, which has 53% of its revenue from onshore and 47% from offshore.
You can see that we are a fast growing business that invests for the future, which is the purpose of the more than $80m of equity capital we have raised to date. We believe in a “Built to Last” philosophy. That means we forward invest to meet client needs. Some of our onshore and offshore departments are still young - we do not expect immediate profitability as we invest in building infrastructure, management, human resources, training, technology, etc. We do expect, however, that all of our operations will balance out and make similar contributions to profits as they reach steady-state scale.
In Bristol, for example, in the past twelve months we have doubled the number of associates from approximately 80, when we first launched services for Osborne Clarke, to 150, just recently signing an expanded lease. We are also expanding in New York. Fargo has almost reached pre-financial crisis levels of activity and we are actively seeking another location for our next US delivery center. And we look forward to launching and growing our operations in London as part of our recently announced agreement to serve CMS Cameron McKenna.
Interestingly, our most profitable department today is onshore, where our clients have trusted us to re-engineer their processes and deploy proprietary technology. This has driven improvements in quality of services, reduced cost, and we haven’t moved a single process offshore. This kind of transformational capability is at the heart of how we make a business impact for our customers.
In short, the answer to “what is Integreon’s global strategy?” is that we are committed to delivering the highest quality services for our clients and that requires that we offer them global choice - onshore and offshore.
We are pleased that the market has taken such interest in legal outsourcing and we believe this interest is a sign that we are on the right path to help our law firm clients prosper.
Filed under Legal Economics, Legal Outsourcing (LPO), Onshore v. offshore
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Foster Gibbons on July 14th, 2010 at 7:00 pm :
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A Posse List blog post earlier this year, Computer-aided document review has arrived (12 January 2010), comments on a thought-provoking e-discovery study described in an academic journal article. The premise of the underlying study, which compares computer classification of documents with manual review, is that automated systems are capable of categorizing documents at least as well as teams of human reviewers in an
e-discovery setting. While it raises interesting points, I am not convinced that the evidence supports the authors’ conclusion that computer-aided review has arrived quite yet. It is still a stretch to suggest that human document reviewers face an imminent risk of being supplanted by artificial intelligence-based processes.
The underlying study by a trio of recognized experts in cognitive science, information management, and e-discovery, Herb Roitblat, Anne Kershaw, and Patrick Oot, is described in detail in their journal article, Document Categorization in Legal Electronic Discovery: Computer Classification vs. Manual Review, published in the January 2010 issue of the Journal of the American Society for Information Science and Technology (link is to PDF at the Posse List).
There is no question that software can detect ever-more sophisticated language patterns in documents and classify them by theme. Whether this translates readily into a persuasive argument that legal document review will be more fully automated in the near future, or even that such a development is inevitable, is a different question. And I don’t think the study provides conclusive support for the proposition that computer classification could reasonably substitute for human review.
Before turning to my reservations about the study, I want to raise a potentially bigger issue. Irrespective of advances in technology and compelling statistics, we need to ask whether courts and litigators will accept a discovery process that is ever more reliant on technology in pursuit of efficiency. I think the likely answer is, ‘only to a point.’
Right now, e-discovery professionals use many tools to filter large collections to focus lawyers’ attention on a subset likely to be most relevant. Are we missing another step? Is there a way to emulate or even exceed human review to cull the relevant from the extraneous? If so, how do we determine the “reasonableness” and “completeness” of the process? That is the multi-million-dollar question.
Courts now often accept concept clustering and searching in aid of review, but not all the time nor in all settings. For many lawyers, the key argument for using these tools is the ability to reassure courts that these tools focus or prioritize review on the most promising “clusters” of data but do not wholly eliminate review of apparently “unimportant” clusters. I disagree with my colleagues who cite clustering technology as a harbinger of full automation of review. In my experience, it is just a tool that helps humans to make decisions that are more consistent and coordinated.
I think most practicing lawyers would agree with the study’s central premise that lawyers should use technology to reduce cost. That said, often senior lawyers who ultimately decide on how to conduct a document review neither understand the latest technology nor are they - or their clients - likely to accept the challenge of having to defend an entirely new approach to discovery. And that is why I think the answer to the question, ‘will lawyers and courts accept an expanding role of technology in order to reduce discovery costs’ is, ‘only to a point.’ If that is indeed the case, how does the study advance us toward that critical point?
It raises - and partially answers - the important question whether we are approaching a breakthrough in terms of the capability of automated review tools to render ‘consistent’ and ‘correct’ decisions, as measured against an existing standard, while classifying documents in a legal discovery context. The study pitted two teams of contract attorneys against two commercial electronic discovery applications to review a limited set - 5,000 documents - culled from a collection of 1.6 million documents. The larger collection had been reviewed two years earlier by attorney teams in connection with a Second Request relating to Verizon’s acquisition of MCI. The authors’ hypothesis was that “the rate of agreement between two independent [teams of] reviewers of the same documents will be equal to or less than the agreement between a computer-aided system and the original review.”
The study set out to test whether an automated review tool would show similar levels of agreement with classifications made by the original reviewers as did the two contract teams. The two re-review teams agreed with the original review on about 75% of document classification decisions; the commercial automated applications fared slightly better. By this measure, my initial read would be that the two approaches were proven equally unreliable and inconsistent. But I concede that the study demonstrated that automated applications can match or exceed the performance of two human teams working under certain and arguably limited conditions. The question is, whether the study demonstrated more than that?
The study is properly understood as a demonstration of capability, rather than as a controlled study, which by definition, operates under controlled conditions with a constrained set of variables. Several factors could have affected the study outcome:
- The sample set was extremely small. While 5,000 documents out of 1.6 million may be statistically significant for certain purposes, it is not a big sample for a document review. Empirically, we know that a review team gains proficiency and confidence in stages during a review project, eventually reaching a ‘steady state,’ where their decisions are likely more consistently correct on first pass. The two contract teams who were pitted against computers in a test of which alternative more closely mirrored the decisions made by the original review team did not have the benefit of a warm-up, which the original review team likely did have. In addition, we do not know whether the original review team was more senior or experienced than members of the review teams in the study.
- The study write-up does not make clear whether instructions given to the original review team were provided in identical form to the two review teams in the study. In essence, what we ask review teams to accomplish is to approximate, as closely and consistently as possible, decisions that would have been made by the supervising attorney (or client’s lead counsel) had that attorney personally reviewed each and every document. (In TREC terminology, this is the topic authority.) A key to running a successful review and delivering clean and correct work product is first ensuring that counsel provides clear and complete instructions to the team at the outset and resolves questions raised in the course of review.
- We also do not know what standards of quality control were applied for any of the review processes. A well-designed and executed regime of quality control enhances the consistency of review results. Much more on this theme, below.
Although I would not hang my proverbial hat on the results of the study, it does open the door for follow-on work. We may yet see a convincing demonstration that automated systems render more consistent decisions than human review teams. The issue will remain whether any amount of proof would persuade the bar to accept use of automated review as a substitute for attorney review in the context of discovery.
A more immediate question is how can we make good use of what appear to be very capable software engines? Can we integrate automated applications to assist human review and make it more consistent? Indeed, making review more consistent has been the aim of quality control and validation processes all along.
A well-designed quality control regime makes use of intelligently-designed searches to identify likely errors and inconsistencies in a set of reviewed documents, and directs “suspect” documents to a team of more experienced reviewers for a focused re-review. This continuously re-focuses QC review toward outliers and other documents that may warrant a second look.
My reservations notwithstanding, I think there is a good amount of value in the study, which sets a stage for further comparisons of automated and human review. The best purpose, in my view, however, might not be to aim toward replacing human reviewers on a first pass review.
One possibly feasible and very attractive target is to develop a process in which we can fully leverage automation to reduce the effort (number of attorneys) required for first pass review. With the right process, fewer, more senior reviewers may need to review only a set of representative documents in a collection, while technology acts as a ‘force multiplier’ to speed review and ensure consistent coding.
Indeed, there are applications in development and commercially available which have demonstrated an ability to “crawl” a large collection of documents to identify documents with substantially similar content. If we can properly leverage that technology, in tandem with a small elite team of attorneys, we have a hybrid workflow that benefits from both human intellect and machine power. I would like to see a study proving the capabilities of such a hybrid model.
A potential hybrid model would have senior attorneys review representative sets of documents and the tool analyze features of the reviewed documents to identify and auto-tag “like” documents in the larger collection. As the review proceeded, the tool would ‘percolate’ to the review team’s attention subsets of documents from the collection dissimilar from those already reviewed. Based on the reviewers’ decisions as to these documents, the tool continues to apply tags to more of the collection.
The attraction of this approach is two-fold: human attorneys are still making initial determinations but the application magnifies the effect of their determinations by propagating decisions to similar documents throughout the larger collection. It has been suggested that, in the proper context, this approach would permit a single attorney to “review” a vast collection of documents in several hours. A test of that claim is warranted and, if the premise were proved, it would be impressive and could directly influence the increased use of automation in review, even if, for all the reasons stated above, wide adoption of such processes would take a while.
An alternate model - one more readily proven in a single study - and one that I believe holds promise as an immediate aid in improving the quality and consistency of document review as a process, would be to fully integrate available automated searching and categorization applications into existing quality control processes. So I would very much like to see a well-designed test of an automated-classification tool in that context, one that demonstrates how the model outperforms quality control processes using a series of term searches to identify sets of documents for targeted QC.
Filed under E-Discovery (EDD)
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Ron Friedmann on July 6th, 2010 at 9:21 am :
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The Lawyer reported last Friday, in Osborne Clarke’s PEP rises on flat turnover figure, that Integreon middle office outsourcing client Osborne Clarke reported significantly increased profit per equity partner despite almost flat revenue. The article notes one of the reasons: “The firm has also saved money through its continuing relationship with legal process outsourcer Integreon. The £50m deal struck last year saw around 75 support staff transfer to the outsourcing provider (2 February 2009).”
We are certainly pleased - but not surprised - that we are helping our client improve profitability. Back in November 2008, when it was just becoming apparent how bad the downturn was for law firms, I wrote here Controlling Cost to Increase Profits. In that post, I argued that the old adage ‘the only way to improve law firm profit is to grow revenue’ was no longer true.
That reducing overhead cost can move the profit dial should not be a surprise. In the US, the median overhead per AmLaw 100 lawyer in 2009 was $206,000. Compare that to almost any other business, including other high end professional services, and it seems clear that savings are not just possible but easy. (See my May 2009 personal blog post Cost Control as Part of AmLaw 200 Turnaround Strategies for my assumptions to calculate median overhead.)
Of course, by definition, one-half of firms are above the median. Firms that could bring their overhead down to the median could increase profits by anywhere from a couple percent to over 20%. That conclusion is admittedly weak because it mixes high-cost NYC firms with lower-cost-base Midwestern and Southern firms. Yet the point still stands: reducing overhead can make a big difference.
As firms consider how to reduce overhead, they need to keep in mind that legal outsourcing is not just about lower cost labor. While ‘labor cost arbitrage’ can indeed save, the process improvements are as, if not more, important.
Filed under Uncategorized
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