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Mark Ross on March 9th, 2010 at 1:40 pm :
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Integreon’s Ron Friedmann’s recent blog post, Estimates for Legal Work and Legal Estimators (January 11, 2010), was cross-posted at Legal OnRamp (LOR), a collaboration system for in-house counsel and invited outside lawyers and third party service providers. Several LOR members participated in a thought provoking commentary, which we reproduce below.
Ron suggested in his blog post that General Counsel should increasingly request legal cost estimates from their outside counsel for both routine and complex legal tasks:
“Consumers routinely seek estimates for many services, for example, buying a new roof, replacing an HVAC system, repairing a car, and even obtaining some medical services. The logic behind this should also drive general counsels to seek estimates for the cost of legal work.”
Legal Process Outsourcing (LPO) can facilitate the uptake of legal cost estimates and at a broader level, alternative fee arrangements (AFAs). The process driven approach to the delivery of legal support services in the LPO model supports AFAs. Integreon and other reputable LPOs take a systematic approach to delivering legal support services that blends process, technology and human resources. These techniques, however, are most effective when the legal function in question has been “unbundled”, or in other words, separated out into discrete, core, constituent tasks. Although it may seem counter intuitive to apply such a pragmatic approach to the provision of legal support, as a solutions provider, the application of a six sigma DMAIC (define, measure, analyze, improve, control) methodology ensures consistency of quality and continuous improvement, across a variety of service lines being provided from multiple delivery centers across the globe.
LPO providers are used to applying workflow analytics and a variety of project management tools to track costs, accuracy and time, while continually monitoring and repeating the process to refine estimates. Both General Counsel and outside counsel can benefit from this structured approach, which results in legal cost clarity and predictability. This in turn facilitates the implementation of legal estimates and AFAs across the board.
With the kind permission of the Legal OnRamp contributors, I reproduce here the original Legal Estimates discussion thread:
My practice concentrates on very large complex trial matters - the precise type of case that “can’t be estimated”. The solution to that “it can’t be done” problem is to divide the case into phases and to provide rolling 3 to 6 month estimates focused on discreet time frames. These estimates are very helpful to both client and trial team in the management of a complex matter.
There is a tendency to equate large and complex cases with large companies who can afford to write a blank check for those trials. Many, many smaller companies find themselves party to large, complex and costly cases where the case threatens to swallow the company. In these circumstances, even the short term budgets suggested by Judah, which work well in some circumstances, do not give the company management [over] the information it needs to make informed decisions critical to the company’s future. More is required.
I think Ron is right on the money when he suggests that “legal estimators” may be required if we are to become as proficient at estimating costs as other industries are. Our experience is that the precision of the estimate is a function of control over key factors–time to trial being one, number of parties being another and e-discovery issues being a third. But the greater the handle a lawyer has over these factors, the more precise the estimate can be. The less control over these critical factors a lawyer has, the more an estimate becomes an estimate plus an insurance policy against a runaway fee.
These estimates can be made and cases can be managed so that the estimates are accurate. Doing so may carry some risk for the client, but the client can then make decisions about whether to make additional investments in the matter, just like any other change order process. Whenever lawyers talk about how they “can’t” estimate fees, I am reminded of things I have heard from a number of GCs about how their companies do A, B and C and have to provide a guaranteed price and make a profit. The idea of bringing the skills of professional estimators to what we do seems to be a likely evolutionary step in the development of pricing prowess.
Estimates aren’t the same as AFAs. You should be able to provide an estimate for any type of work, albeit, as you point out, with significant variances. Those variances rather than the “inability to estimate” are perhaps what should drive an AFA decision.
Estimates are a critical part of managing a project. They force people to understand and challenge assumptions, to negotiate “Done,” to set targets that constrain unfocused work.
And as Samuel Johnson said, “Nothing so concentrates the mind as the prospect of being hanged in the morning.” Deadlines, estimates, and constraints matter.
I agree with Steven’s characterization of a case as “project management.” If more folks looked at it that way even the most complex case could be broken down into enough bite size chunks and some costs (+/-) assigned.
Estimating will never be perfect. But presumably you pick counsel in these highly complex cases because of their past experience. So why should anticipating the steps of the project be treated like a case of first impression?
All of us who have experience and resources upon which to draw can do this! And the better you get at estimating, the more comfortable you will become with using alternative fee arrangements (AFAs).
A properly-constructed AFA is usually a product of four variables:
(i) the company’s primary objectives in the litigation;
(ii) the definition of success;
(iii) the estimate of when the litigation will resolve; and
(iv) an estimate of the total cost of the litigation, calculated on an hourly basis, if the case were to proceed through trial.
Stay tuned for our step by step process on “Setting the AFA - Debunking the Mystery.”
John, could you expound on (iv) a bit more, “an estimate of the total cost of the litigation, calculated on an hourly basis….”
I worry that some attorneys will see (fixed-fee) AFAs as purely an equivalence mapping. “This case would cost you X if we billed hourly, so we’ll charge you X but do so in a single statement to cut out a bit of tracking-hours overhead.” It seems to me that an AFA affords the opportunity to approach the case a bit differently from a staffing perspective. “What is the most efficient way we can provide service for this part of the case?” It allows you to separate cost-to-the-firm from billing-cost, looking not just at revenue but at margin on the hours of particular providers. You can also include efficiency — attorney A costs 2x of what attorney B costs but is 3x as efficient. Or maybe it’s better to have a paralegal do a big chunk of work, or use LPO.
I’m not suggesting that having an internal hourly estimate isn’t valuable, but wondering if at the same time it can limit your way of approaching the work. What are your thoughts about this question?
Steve, somewhere I saw a quote from Samuel Johnson that you used that is so appropriate here. “Nothing so focuses a man’s mind as the prospect of being hung in the morning.”
When your profit depends on your ability to create margin between your cost of achieving an outcome and what the customer is paying you, you quickly find out how much of what you had been doing does not need to be done at all, done the same way or done by the same people who had done it before. Fred Bartlit and his colleagues have built one of the most successful firms in the country on the execution of this principal, to which we all should take heed. They do everything that is necessary to win, but only those things necessary to win.
When it’s the lawyer’s nickel at stake, it amazing how few summary judgment motions actually get filed. Project management is a damned important tool, but the thinking behind the tool is more important.
Patrick, you’ve just defined Legal Project Management: “They do everything that is necessary to win, but only those things necessary to win…. [T]he thinking behind the tool is [most] important.” LPM is neither a methodology nor a (traditional) toolset, but rather a thoughtful application of principles and techniques to the management of legal cases.
There are many different ways to devise an AFA and I do not propose to have a lock on any one method. And I certainly don’t mean to suggest that our AFAs in a fixed-fee plus bonus situation are simply a factor of what it would cost hourly without monthly billing statements. We do, however, draw upon our experience and that of our clients and competitors using an hourly model, when developing our AFA for comparison and verification purposes.
For example, we know that a client has paid, or our competitors have charged, in similar cases $100,000 for taking depositions (or 200 hours at $500/hr). However, we know that doing only the depositions which will take us down the straightest path toward success will take only half the time or be properly taken by someone who costs less. In addition, we know that when we win, we will get $X by way of a bonus. So, we may be able to take the necessary depositions for $40,000 and know that we will get our profits by way of a bonus, and fix this phase at $25,000-$30,000. This is how we have used fees calculated on an hourly basis in formulating our AFAs. It allows us to bid competitively against our hourly-fee competitors and identify those areas in which we must be more efficient to win.
Notwithstanding the foregoing, we are always open to improving our processes for devising AFAs and debunking the mystery associated with them for prospective clients.
Thanks, John. That makes a lot of sense. I appreciate the follow-up.
End of thread
To view or join in on this discussion thread, first login to Legal OnRamp and then click here. If you are not a member of Legal OnRamp and would like to join, you can submit your request on LOR’s website or feel free to send us a message at marketing@integreon.com with your contact information and we will be glad to relay your request for membership to LOR.
While on Legal OnRamp, be sure to also visit Integreon’s LPO Central (login for Legal OnRamp required) as a resource for news, insight and best practices covering the spectrum of legal discovery, contract review and middle office outsourcing for both law firms and corporate legal departments.
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Liam Brown on February 8th, 2010 at 10:14 am :
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I read with interest Matt Sullivan’s blog post, LPO Industry Consolidation Underway? He offers a useful summary and analysis of recent deal-making among legal process outsourcing (LPO) providers.
Sullivan rightly concludes that legal cost control still looms large for many corporate law departments. We hear this in many conversations we have with both in-house and outside counsel. We also agree that Pillsbury’s publicly announcing an alliance called PEARL (press release, PEARL overview) that includes LPOs is significant. In the UK, that law firms publicize working with an LPO is almost old news; the same cannot be said for the US.
We expect more US law firms to discuss LPO - and many other new ways of doing business - in 2010. The 2008-9 crisis has ended. The end does not mean a return to pre-bust levels of activities. Rather, it means that most firms have taken the necessary emergency measures to cut costs. In our view, that’s the easy part, as painful as those cuts were. Now comes the hard part - prospering in the new normal.
Pre-bust, firms moved in lockstep. I don’t mean just how they compensated associates; few large firms considered any strategy or action not already widespread. Now, just as compensation models are changing, so too are firm strategies and actions. We see some firms hunker down with no clear plan to change. Others, however, such as Pillsbury, are taking active steps to offer clients more value.
My colleague Ron Friedmann wrote last November (at the Integreon blog) that Law Firms Differentiate in a New Era. The Pillsbury announcement is an example of firms differentiating. Not all firms will “do LPO” or form innovative alliances with other legal market players. We think that firms that don’t change both their client value proposition and operational model in significant ways are likely to lag behind their competitors who do innovate.
Our investors, as well as the investors in our competitors, understand this. The smart investors understood this pre-crash. Post-crash, it’s obvious of course. Outside capital will continue to flow to organizations that improve legal outcomes and reduce legal costs. In the UK, with The Legal Services Act, capital will likely soon flow directly to law firms. The combination of client demands, law firms themselves recognizing the need to change, and the availability of outside capital to support better ways of doing legal work will continue to alter the legal landscape.
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Matthew Banks on January 11th, 2010 at 4:05 pm :
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by Matthew Banks
Boston based consulting firm Vantage Partners has published a White Paper, aimed at law firms, entitled Easy Mistakes to Make When Making Decisions About LPO. The Paper contains several pertinent market observations and useful recommendations for law firms, both at a practical and strategic level. I have selected a handful for comment (text copied from the Paper is in italics):
In-house law departments are leading the way in the exploration and experimentation with LPO. And even where law firms are getting involved… Most law firm experience is centered around serving a particular client who has insisted in the use of a lower cost resource for some of the work. This is indeed true for most, but not all law firms. We are seeing more law firms folding LPO into their offerings and into their model. Recent examples include the Allen & Overy offshore document review option and the move by Simmons & Simmons to set up a core team in India. Most of this activity is from U.K. based firms. In addition, a number of US AmLaw 200 firms have set up either formal or informal LPO “investigatory committees”, as they conduct a due diligence process aimed at selecting one or more preferred LPO providers.
The LPO industry is still relatively immature, populated by many small providers who may not have significant staying power and who do not, in fact, offer the usual outsourcing benefits in terms of scale, technology investments, or process expertise. An industry that in its formative years was characterized by the emergence of numerous, boutique providers, is now beginning to scale up and consolidate in order to meet the increasing sophistication of AmLaw 200, U.K. Top 50 and Global 2000 procurement. Although the market is still comparatively nascent, a handful of leading providers has pulled away from the rest of the pack in terms of their experience, scalability and infrastructure. Maturing providers combined with increased market activity and acceptability make now a great time for many law firms, used to following not leading, to examine LPO.
Lawyers will generally be unable to shed responsibility for the quality of the work carried out by the LPO provider, even when the client has selected the provider and foisted it on the law firm. The structure for contractual relations and liability can vary. In some cases, the client will contract directly with the LPO even where a law firm is involved. In other cases, the law firm will be the aggregator who subcontracts to (partners with) with the LPO. In the latter scenario, the laws firm will have contractual recoverability from the LPO subject to any agreed limits on liability. We find that “risk” (reputational and financial) is a major part of any dialogue with law firms and should not be shied away from, but rather addressed and resolved head on. Quantifying risk (or lack of it) is very important, from the selection of suitable tasks for outsourcing through to transparency into the workflow process and quality regime. A robust documented and defensible process provides visibility into exactly what is being done, how and by whom, which means that the risk can be mitigated and managed. Risk management is something that Vantage has highlighted in their Paper.
The Paper goes on to list typical mistakes that law firms might make when they consider LPO:
Failing to understand what your clients are really asking for. Be prepared to address a client desire for strategic transformational change. Procurement departments of major corporations and banks are getting involved in purchasing legal services. We see this in more and more RFPs. It’s not just the delivery of services that is changing but the way they are procured.
Grudgingly accepting LPO when a client forces it upon you.It is easier to obtain quality outputs from an LPO provider if you enter into the relationship in a collaborative fashion rather than as the result of being coerced by your mutual client. It is even easier to do a quality job and get some credit for being responsive and innovative if, when asked by a client about LPO, you can identify some providers with whom you have already established a relationship and perhaps even have run some successful pilots. One hopes that all providers prioritize the best commercial and legal interests of the clients! Fortunately we experience highly collaborative working relationships with law firms. We also ensure that our documented process (which is approved by the client and law firm prior to project start) includes a pre-agreed communication and collaboration regime with outside counsel so this joint effort is not left to chance.
Thinking you have to “own it”.There are “best friends” relationships or networks that can serve as good alternatives and don’t require a large capital investment. There are providers who can leverage economies of scale and process expertise to deliver a reliable and more flexible managed service and do so under fairly stringent service level agreements. At any scale, there are challenges with the captive model. Ownership and control are not the same thing. The unwinding of captives in the financial services sector is a warning indicator. See blogs at http://www.integreon.com/blog/cat/captive-v-3rd-party.
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Debra Rozier on January 7th, 2010 at 1:53 pm :
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by Debra Rozier
George Rudoy provides an insightful look at the issue of insourcing vs. outsourcing for electronic discovery in his recent blog post, To Insource or To Outsource, at the Georgetown Law E-Discovery Law Blog.
Rudoy writes that he has always believed in outsourcing of electronic data collection, processing, culling etc. Recently, however, “the ever-increasing pressures on the legal budgets of corporations and resulting pricing flexibility of law firms services once again raised a question of insourcing vs. outsourcing of the discovery services in general and data processing in particular.”
Rudoy cautions law firms thinking about insourcing e-discovery, noting multiple challenges such as managing processing capacity and demonstrating an ROI. We generally agree with his assessment and add two more cautionary notes of our own, one around technology, the other around pricing.
Technology Challenges
While “processing” remains a core e-discovery component, the steps to the ‘left and right’ on the EDRM model are growing in importance. For example, Early Case Assessment (ECA) technology to perform data analytics (culling and finding the “right” documents for review) is rapidly growing ‘on the left’.
A combination of economics and the advantages of proximity to data storage devices likely will drive processing and ECA technology towards convergence in the form of tools that many companies will likely adopt in-house. For example, a blog post by the CEO of Clearwell, Not Yet A Gartner E-Discovery Magic Quadrant, But Still A Gartner E-Discovery MarketScope on 29 Dec 2009, discusses a recently released Gartner report. Gartner suggests that companies will increasingly bring e-discovery in-house.
But law firms that invest in bringing e-discovery in-house today could find that they do not achieve sufficient volume over the next couple of years to earn a return because their clients will increasingly rely on corporate resources. If not today, that risk will certainly exist by when the time arrives for the law firm to make further investments to keep its technology up-to-date.
Likewise ‘on the right’ of the EDRM, the tools to review documents after culling are also becoming more sophisticated. Vendors regularly upgrade the products they use and sell.
The history of technology in law firms suggests that firms usually lag behind in making upgrades. This is because firms often have their hands full and budgets maxed-out, which means they typically find themselves managing infrastructure as is. Investing in in-house e-discovery tools may commit these firms to technology platforms that quickly become obsolete.
If in spite of these challenges law firms do want to bring technology in-house, then they should strive to invest in technologies that offer both internal deployment opportunities and a service based model. This integrated approach will enable the firms to manage smaller cases internally as they want to, and then as cases grow, they can then choose to leverage the same solution into a more highly scalable service-based (hosted) model. The firms will benefit from greater flexibility by utilizing the same application provider for both the internal and hosted solutions. The provider can also offer such firms a greater level of support infrastructure than the firms might be willing to invest in on a purely internal basis alone.
Pricing Challenges
Our anecdotal sense is that some firms are also investing in in-house e-discovery platforms as a way of providing clients with “hidden discounts”. By absorbing a cost that would otherwise be a third-party disbursement or explicit line-item charge, firms can lower client costs without seeming to discount their rates. We’ve heard our friends in firms talk about offering their clients that “something extra”. But is this a good and a sustainable strategy?
Is the “something extra” really just a price mechanism? Or does it commit a firm to a new set of deliverables that then brings up a set of risks independent of the legal advice clients seek? Bringing technology in-house can enhance service; but it can also create a new service level to meet, one that is prone to many known risks and one that the firms may not be fully equipped to handle. For example, consider the possible impact to project deadlines. Service providers usually have more products in their arsenal and can also scale their staff and infrastructure quickly as project needs increase. Will the law firms maintain this same level of efficiency? What starts as a pricing strategy can spiral into a big operational challenge.
Even aside from potential operational issues, firms may not reap the anticipated ‘price benefit’. Clients may not realize they are receiving a hidden discount. Even if they do, they may none-the-less bargain hard for rate caps. Firms could be at risk for giving away a service and still having to discount or cap their rates.
Perhaps a bigger pricing risk is the move to alternative fee arrangements (AFA). In the AFA world, many fees may be fixed. With fixed fees, discounts are moot and firms will want to go with the lowest cost option, which usually means outsourcing.
A move to AFA also will lead to more unbundling of services, which means pricing components of matters separately. Smart clients will unbundle some components of matters such as e-discovery. If companies bid out e-discovery and document review separately, then an “in-house hidden discount” strategy just will not work.
Conclusion
We agree with George Rudoy and believe that the concept of law firms completely insourcing e-discovery ultimately lacks a sustainable ROI. A combination of scarce investment capital, technology challenges, capacity and resource utilization management, and pricing risks will drive the majority of firms to instead rely on outsourced solutions as the optimal and most sustainable approach for addressing the full range of their clients’ e-discovery requirements.
Integreon’s LPO experts, Matthew Banks, Ron Friedmann and Mark Ross take a look at what to expect in the LPO world in 2010.
Someone once said that less happens in a year than you might think but more happens in a decade than you might think. That’s the way we feel about the legal profession and LPO. So rather than offer a list of dramatic and sweeping 2010 predictions; we tender below some likely developments consistent with broader trends that will continue to play out over 2010 and beyond, bringing significant growth to the LPO industry. We also break with traditional year-end predictions because our list exceeds the customary ten items.
LPO is part of the bigger picture of evolution of legal services. Legal organizations are now, more than ever, actively trying many new and related approaches: technology, back office restructuring, process improvement, LPO, alternative fee arrangements, and better knowledge management, among others. So, in that context, here is what we think 2010 will see:
1. More organizations will outsource more work to more LPO providers.
2. The third party provider model will dominate. We don’t expect to see many captives in the legal market; it’s too difficult and they fail.
3. In the U.S., expect the ABA to provide more detailed guidance on how to outsource legal services ethically. While in the U.K., the Law Society, to date silent on the subject, will publically comment for the first time.
4. There will be lots of talk about alternative offshore locations to India but none will yet emerge of such scale. Onshore and near shore will be the main alternative and could grow as quickly as offshore.
5. LPOs, which are already good at what they do, will get even better. More experience brings better service.
6. LPOs will expand what they do — more capabilities and services inching a little higher up the value chain but still based around the core services available today: discovery, contracts, compliance, research, and IP. In addition to moving higher up the value chain, LPOs will also expand into consumer related and high volume legal services such as conveyancing, personal injury, wills and probate.
7. Document review however, will retain its #1 spot as the service most often outsourced, at greatest volume, and by far the greatest revenue generator for the LPO industry.
8. Organizations will start to develop multi-functional teams on an FTE basis, rather than single function transactional work. For example, corporations will engage core teams to handle a variety of legal dept work such as contract management, compliance, etc. The underlying economics of a dedicated team is better both for customers and providers.
9. LPO pricing will be stable.
10. Revenue growth for the LPO market will be rapid and some providers could double in size over the next year or two.
11. The biggest LPOs will reach 500+ lawyers working on document review, contract management, and due diligence projects. While concurrently, some smaller providers will exit the market altogether.
12. We will see more Rio Tinto type publicity, but less than you might expect because law departments have no vested interest in making public their private outsourcing arrangements with third party providers. Law firms, in contrast, are more likely to publicize outsourcing because, as service providers in a competitive market, they may see it as a competitive advantage.
13. Generally, law firm activity will be reactively driven by clients. Although a number of major firms will cement “preferred LPO provider” relationships. However, many or most top law firms will have had exposure to LPO one way or the other by end of 2010. That said, the first few firms to do something new are always long in coming; once a handful have acted, the market can tip quite suddenly.
14. U.K. law firms will continue to be more active in offshore outsourcing than US law firms. US law firm activity will more likely be a mix of offshore, near shore or onshore.
15. Recent blog posts have debated whether process is the future of law. In part, yes, but there will be a polarization between what clients are prepared to pay premium rates for and what the market will force into new models. Not all law will be process driven but LPO will help to increase the scope of what can be process driven.
16. Procurement will drive more law department purchase decisions. Their drive to efficiency will push more work to LPO; their drive to systematize purchasing may slow down sales cycles.
17. The biggest LPO single client contract value will exceed $10M annually.
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Ron Friedmann on December 15th, 2009 at 8:08 am :
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We recently came across a fabulous video (a Flash animation) by Beaton Consulting, which is “Australia’s leading B2B services research and consulting firm, providing insights to drive business performance.”
In just under three minutes, “The Big (Legal) Picture” provides a great perspective on the current and future global legal market, including legal process outsourcing (LPO). We think this illustrates graphically that the LPO trend is just beginning.
This is a ’must see’ for anyone in the legal profession. Beyond the content, we have seldom seen such high ‘production values’ in the legal market. (Click on the arrow in the video box below to watch.)
As a quick side note, we have observed that in the last couple of years, video and animation have evolved into a major phenomenon for the consumer and business markets. In keeping with this trend, we have recently set up our own LPO channel on YouTube: http://www.youtube.com/user/IntegreonLPO.
A dynamic legal landscape. Economic pressures and the changing regulatory environment will continue to put pressure on organisations to turn to outside vendors.
Alternative legal delivery. Traditional delivery of legal services are unbundled allowing firms to offer clients new, streamlined services and create greater efficiencies.
Shift in focus. Legal organisations will take a more strategic approach to their outsourcing arrangements as opposed to an ad hoc, cost-focused approach.
Expanded work flow. Projected increases in litigation and rising economic activity will prompt organisations to source more work to LPO vendors.
A proving opportunity. In 2009, legal outsourcing caught the media limelight. 2010 will be the acid test for the legal outsourcing industry, when it must prove its value to new consumers.
Engagement structures. For 2010, the primary avenue for law firms and corporate legal teams to participate in outsourcing arrangements will be through third-party vendors and virtual captives.
Emerging sourcing destinations. The leading LPO location India, will face competition from emerging nations like South Africa and the Philippines.
Dynamic vendor landscape. Increased competition as traditional business process outsourcing (BPO) providers ramp up their LPO capacity. Mid-size LPO providers face a choice between consolidation and specialisation.
Talent Development and Migration. As legal outsourcing vendors gain prominence in 2010, they will have much greater access to talent as more lawyers consider outsourcing as a genuine career path.
Industry Transparency. 2010 will mark an increased focus on transparency that will result in more efficient markets and heightened credibility of legal outsourcing initiatives for both buyers and vendors.
By and large, we agree with these predictions. We have discussed many of these trends and reasons behind them in prior posts so will limit our comments here to one point. On the prediction “Emerging sourcing destinations”, I would add onsite and onshore destinations to the list. From the our vendor perspective, we see strong interest, in both the US and UK, in a mix of destinations, including onsite, onshore, offshore, and multi-shore.
Out only a few days now, Fronterion’s predictions have already garnered press coverage:
On a related note, Michael Bell of Fronterion, the author of this list also wrote a recent major LPO study, Implementing a Successful Legal Outsourcing Engagement, published by Managing Partner, an Ark Group property. This is in-depth study provides extensive background on outsourcing considerations and practice and contains numerous helpful case studies. My colleague Mark Ross and I each contributed short sections; in addition, Integreon client Osborne Clarke is the topic of a case study.
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Ron Friedmann on December 2nd, 2009 at 10:24 am :
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In November, I spoke at the Ark Group Conference on Alternative Fee Arrangements (AFA). My Unbundling Repetitive Aspects of Large Matters presentation tried to de-mystify and simplify AFA, which has become a very hot legal market topic. Here are the presentation highlights.
Inside and outside counsel would find AFA easier if, instead of thinking about entire matters, they considered the components of big matters. By big matters I mean single large matters such as major litigation or an M&A deal or “portfolio” matters such as real estate transactions, sales contracts, or NDAs.
These big matters typically include high volume, repetitive elements that can be treated as fairly discrete activities and therefore costed and priced separately. Here are some examples of common “discrete activities:”
Matter Type
High Volume Elements
Litigation
- -Document review
- -Motions
Deal
- -Due diligence
- -Employment contracts
Real Estate
- -Environmental review
- -Lease agreements
Sales contract
- -Drafting and execution
- -Manage rights and obligations
NDA
- -Standard language
- -Managing
The key to achieving workable alternate fees for both clients and firms is to unbundle these and other high volume tasks and treat them as discrete activities. Doing so can lower the cost and improve the predictability. All that’s needed is to apply the appropriate mix of process, technology and human resources:
By unbundling - that is, by separating matters into discrete “chunks of work” - and using the tools above, tracking costs and effort, and monitoring and repeating the process to refine estimates, clients and lawyers likely will find that they reduce cost and, as important, make cost more predictable. That in turn should make AFA much easier.
I was not ‘wearing my vendor’ hat when presenting so mentioned legal process outsourcing (LPO) only in passing. Of course, I do think that lawyers will increasingly turn to LPO services as they move to alternate fees. Lower cost is only part of the inevitable attraction. The process, QC, and predictability of LPO services also support AFA. In fact, the process approach of LPO may end up informing how lawyers think about the work that they only they can do.
This post originally appeared at my personal blog, Strategic Legal Technology. For recent news and blog posts on AFA, see the following:
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Mark Ross on November 30th, 2009 at 1:20 pm :
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Last week saw the release of the latest ValueNotes report, Legal Process Outsourcing:Crisis Creates New Opportunities for LPOs (November 2009), regarding the state of the LPO industry and representing the analyst firm’s third detailed research publication on this now fast maturing market. Following the predictions and postulations recorded in their prior reports, Offshoring Legal Services to India (2005) and Offshoring Legal Services to India, an Update (2007), what can we glean of Value (pardon the pun), from their most recent biennial LPO coverage? Here is my assessment of the report’s findings.
Impact of the Financial Crisis
The 2009 report’s release, and no doubt the time period during which the research was undertaken, coincides with a period of financial turmoil in both the wider global economic community, and of course the legal profession. When the 2007 report was released, Bear Stearns and Lehman Brothers were apparently in robust financial health, and the term “subprime” was hardly commonplace in day to day business speak. Profits per equity partner were at an all time high, new associate starting salaries at the AmLaw 50 were knocking on the $200,000 door and the concept of deferred start dates was simply unthinkable. How times change.
Without proffering novel information, the initial section of the report succinctly condenses the major changes affecting the global legal marketplace as a direct result of the great recession. Major corporations across a wide variety of industries have seen profit margins decline dramatically which in turn has impacted negatively on the world’s leading law firms. Certain practice areas have been harder hit than others:
“The number of global M&A deals in the first quarter of 2009 witnessed 5,914 transactions valued at $978.9bn, a decline of 41% and 48% respectively for the same period in 2008.” (ValueNotes Legal Process Outsourcing, November 2009).
I recall reading an op-ed piece over a year ago now in TheLawyer.com. In Law firms need to take advantage of tough conditions, Tony Williams, a former Clifford Chance managing partner, highlighted the example of a firm with a 25 percent profit margin with a fee income that fell just 20 percent, entirely plausible in the recent financial climate. This firm would witness its profit fall by 80 percent in the short term as costs simply could not be adjusted quickly enough to offset the revenue reduction. Add into the mix horrendous rises in indemnity insurance premiums and the tightening of credit witnessed over the last 18 months and one didn’t need to be Nostradamus to predict bleak times ahead. ValueNotes comprehensively details along a time continuum, the layoffs of partners, associates and support staff at the largest U.S. and U.K. law firms. In order to survive now, and hopefully thrive in the future, the report comments that law firms are,
“actively re-looking at their business models and developing strategies to remain profitable. Firms are offering alternative billing models, making technological improvements and entering partnerships with local and offshore service providers.”
Slowdown in LPO Revenue and Manpower Growth
In 2007 ValueNotes predicted revenue generated from the LPO industry in India alone to reach $640m by 2010. These estimates have been revised downwards substantially. Revenue is estimated at $320m for 2008, $370m for 2009, and expected to reach $440m by the end of 2010. The report rightly reminds us that these figures and others quoted in the report pertain solely to the Indian LPO industry. Clearly, although India is the dominant offshore destination, others such as The Philippines and South Africa cannot be discounted, and perhaps more importantly, these figures do not reflect the substantial legal outsourcing engagements to onshore destinations both in the U.S. and U.K.
In addition to slower than originally expected revenue growth, the overall manpower employed by the LPO industry (again, only in reference to India) has also witnessed sluggish growth. With the wonderful benefit of hindsight, forecasts a few years ago of 32,000 employees working within the LPO industry by the end of 2010 now appear wildly optimistic. The revised prediction for 2010 stands at 15,400. The LPO and KPO industries have not been immune to the global economic downturn. However, as the global economy continues along the path to recovery, while concurrently LPO becomes both an increasingly desirable strategic option for major corporations and law firms, the report anticipates that the there will be an upswing from the currently plateaued manpower levels towards a more consistent period of stable growth.
The report then proceeds to list each and every vendor (many of whose names my colleagues and I do not recognize) alongside estimates of their current manpower levels. Clearly these figures have been supplied by the vendors themselves and prospective customers would be wise to seek independent corroboration. However, immediately apparent on perusing the list is the wide variance in manpower levels, ranging from several LPOs with ten or fewer employees, to the larger, scale players with headcounts in the several hundred.
Changing vendor landscape
The report comments that for the first time in the lifecycle of the industry a number of service providers have withdrawn from the market and closed shop. The formative years of the industry, from 2005-2007, witnessed aggressive expansion, with numerous start-ups appearing on the scene. ValueNotes comments that in excess of 20% of the total number of service providers have now ceased operating altogether or at a minimum closed down their LPO operations. I was interviewed for this report and, as I state in it:
“The coming 12-24 months could prove to be tough for many of the smaller LPO providers, several of whom may simply give up the chase and withdraw from the market altogether. Others will look for an opportunity to achieve the scale increasingly viewed as a prerequisite by potential clients, by either merging with a competitor, or selling to a larger, more stable provider. This activity, together with consistent growth by the leading, large-scale providers of legal and knowledge process outsourcing services will continue to push the industry as a whole further down the path towards consolidation.”
The report correctly identifies scalability and multiple service capability as a prerequisite for attracting business from major corporations and the U.S. and U.K.’s leading law firms. A rapidly globalizing legal profession has reached a tipping point where legal outsourcing is now recognized as a viable and efficient option for the delivery of certain types of legal services. As major law firm and corporate procurement of legal outsourcing services becomes increasingly the norm, LPOs without the scalability to match both the increased demand and sophistication of the buying community will suffer. Purchasers will be inclined to opt for providers who can offer scalability through a global, multi-shore delivery platform. While there may remain certain niche areas of demand that the boutique, one geographical delivery center providers can satisfy, for larger scale projects or enterprise wide engagements, multiple locations, backed by access to a scalable workforce will become a prerequisite.
In order to achieve both the requisite scale and end to end capability identified as desirable by those procuring LPO services, the report identifies an upswing in M&A and strategic partnership activity within the LPO industry. Integreon’s recent acquisitions of ONSITE3 and Datum Legal are highlighted as activity enabling the provision of an end to end enterprise solution all under one roof.
ValueNotes comments that over the course of the last 3 years several of the largest U.K. law firms have announced outsourcing initiatives. On review of the dates of these public pronouncements, it is readily apparent that the pace of these declarations is picking up. 2009 will be viewed as the tipping point year, when major law firms were let loose from the shackles of reticence and began to acknowledge that their public embracing of outsourcing was clearly viewed by clients as indicative of being forward thinking, innovative law firms of the future. The report references Integreon’s recent deals with Simmons & Simmons and Osborne Clarke, as well as Pinsent Masons’ South African initiative with Exigent and CPA Global’s Rio Tinto engagement.
Key Takeaways
In an economic climate where numerous industries have taken a backward step, the slower than originally expected growth within the LPO industry should not be viewed as disheartening. In the early days of the industry, backed by a vigorous entrepreneurial spirit, the vendor landscape mushroomed dramatically. The last 12 months have witnessed the first signs of contraction. It has taken Integreon over a decade to achieve the scale, infrastructure, and end to end operational capabilities which affords us the position of now being the largest provider of Legal KPO services to major corporations and global law firms. As ValueNotes correctly comments, it will be those LPO companies that are able to acquire scale and provide operations from a multi-shore global base, as well as satisfy the desire of clients by providing a full suite of legal support services, which survive and subsequently thrive. Over the coming 12-24 months many of the smaller players will struggle to remain in the game, as client requirements become ever more sophisticated, and the move from piecemeal, short term projects, towards longer term, multiple FTE contracts, picks up pace.
by
Matthew Banks on November 19th, 2009 at 4:49 pm :
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In a move that reflects long time practices in the US legal market, interest is apparently growing amongst UK law firms for use of temporary project based staff. Leading City firms in talks to bring in teams of contract lawyers (LegalWeek, 29 Oct 2009) prompts us to consider the differences between the legal process outsourcing (LPO) and local temp staffing models.
The article reports that major UK law firms may consider using temporary lawyers for more of their routine legal tasks. After the significant lay-offs over the last year and the change in the economic landscape, law firms are naturally apprehensive about venturing back into the full time recruitment market, at least until there is a sustained upturn in the volume of legal work (and even when that happens, many analysts feel that firms will not return to those old recruiting methods).
Beyond market conditions, clients demand greater efficiency. Sound familiar? Temp staffing in the UK is another example, along with LPO, of alternative models for delivering certain legal tasks. For perspective on the LPO approach, see our post earlier this week, LPO - No Longer a Case of ‘If’ but ‘When’.
Providers of project based staffing used to be called “temp agencies”; now they are labeled as “virtual law firms”. Same service, new name? No doubt they take away the strain of sourcing and vetting, take permanent staff off book, improve utilization numbers and no doubt they are capable attorneys who are offered quickly and locally…… but that is where the benefits stop. Relative to legal process outsourcing, temps lack several important benefits, some of which can truly transform the strategic approach of law departments and firms:
Even if a provider is sourcing and vetting the lawyers, the team must still be project managed by the purchasing law firm.
The purchasing law firm still carries the cost of infrastructure (facilities and IT).
Lacking in this approach are any inherent process efficiencies (and improvements), metrics, continuous improvement methods, documented procedures, or quality control systems. This is contract staffing, not the offering of a methodology or a best practice operation.
Integrated technology is not part of the offering.
The temp lawyers are not dedicated full time staff. With the advent of LPO, purchasers can retain a core dedicated team on a full time basis at such savings who bring continuity of knowledge and staff, which in turn brings repeatability and scalability. That team can be ramped/flexed up and down.
I see the benefit in some cases of embedded, local teams. That is why we and other outsourcing companies provide onsite services, embedded into clients’ teams but managed and part of the LPO best practice process.
In short, my perception is that the LPO is a service and temp staffing is temp staffing. I’m sure there’s room for both but LPO likely will have the bigger long term impact on making law practice more cost-effective.