US Legal Market Trends Favor Law Firms Working with LPO

Hildebrandt Baker Robbins and Citi Private Bank recently released their 2011 Client Advisory, which finds the legal market is flat or declining.  It makes clear that for large law firms to prosper, they must differentiate and offer clients better value.  This post reviews report highlights and explains how its findings suggest growth in legal process outsourcing (LPO) and middle office outsourcing.

Highlights of Hildebrandt Baker Robins / Citi Private Bank 2011 Client Advisory

Since 2009, demand for AmLaw 200 services has been flat or declining.  Moving forward, many firms anticipate “a protracted period of sluggish demand and mounting client pressures for enhanced value in the delivery of legal services with only modest rate increases.”

Clients will continue to seek law firms that “are more focused than ever before on efficiency and cost effectiveness”.  Consequently, “many firms are racing hard just to stay even – i.e., to maintain an acceptable level of profitability to satisfy their partners and to maintain stability.”

Driving this trend is a shift in client spending.  “[F]or the first time in memory, law departments reduced their total spending for  outside counsel – by 5 percent in the US and 6 percent worldwide – during 2009″   Much of this decline is a result of law departments hiring more lawyers.

With flat or shrinking demand, law firms must adjust.  In the boom years, even firms not “strategically focused could manage to snag  enough new business.”  Today, firms need to differentiate to gain market share.

What are the implications?  First, downward rate pressure will continue.  Second, legal process outsourcing (LPO) and alternative staffing and delivery models will continue to grow.  And third, work will continue to shift to smaller firms.   In fact, firms are already responding, with 81% expecting to invest in efficiency, 61% increasing the use of contract lawyers, 55% using project managers, and 43% increasing outsourcing.

Already, LPOs “have garnered a significant share  of the market for e-discovery, document review, and due diligence work (all work previously performed by law firms).”   Moreover, law firms themselves now compete in new ways.  For example, the report cites the eData Practice at Morgan Lewis for its EDD and litigation management, even where the firm is not serving as trial counsel.  This and other alternatives such as Axiom

“reflect well-planned efforts to enhance  value for clients by providing traditional legal services in more efficient ways and on a more cost  effective basis. They also reflect how firms, rather than simply viewing the entry of low-cost providers into the market as a threat, have seen the emerging new business models as an opportunity to re-think the ways a traditional law firm might operate. They are precisely the kinds of approaches that will be increasingly necessary for  firms seeking to capture market share in the current environment.” [emphasis added]

Integreon Comments on Report

The emphasized quote is on the money.  A few years ago, most LPO business came from law departments.  Today, large law firms cooperate with LPOs because clients  (1) demand that firms not handle every element of every matter;  (2) accept a mix of onshore and offshore lower cost legal support; and (3) recognize that the LPOs, which focus on process, technology, and low cost operations, are the best choice for “industrial” elements of legal support.

Innovative law firms such as Integreon clients Pillsbury, Allen & Overy and Simmons & Simmons find that working with an LPO offers their clients the best of both worlds.  Clients get top-notch advice from a premium firm plus the lower and more predictable LPO cost without needing to vet or manage an LPO.  In this new partnership model, the law firm plays the leading role with multi-shore LPOs like Integreon serving as the “engine room” for high volume, repetitive work.  This frees partners and associates to concentrate on law practice and client service.

In the partnership, everyone wins.  Law firms increase efficiency and cost-effectiveness without investing more capital; they gain share from competitors still trying to protect the now-dying golden goose.  LPOs gain increased and steadier revenues.  And corporations reduce legal cost with one-stop shopping.

Firms have to do more than grow revenue – they also need to control cost.  We were a bit surprised the report focused much more on associate compensation than on overhead.  Unless a firm is shrinking, slashing overhead further is not feasible.  So more firms are exploring innovative ways to manage support, for example, evaluating outsourcing their middle office (e.g., word processing, marketing support, IT, HR administration, and finance support).   We expect more firms will follow Osborne Clarke and CMS Cameron McKenna in middle office outsourcing to control costs and free firms to focus on advising and serving clients.

Times are tougher today for law firms than the last decades.  Smart firms, however, can gain share from less nimble competitors.  Firms that control their overhead and deliver more value to clients will prosper.  And that bodes well for these firms, clients, and LPOs.

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