Legal Economics
Posted by Ron Friedmann on Monday, January 24, 2011 · Leave a Comment
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.
Posted by Ron Friedmann on Tuesday, January 4, 2011 · 1 Comment
Bruce MacEwen, a highly regarded law firm consultant and legal market thinker, wrote an excellent Adam Smith, Esq. blog post, The Boundaries of the Firm, and Constraints (28 Dec 2010). In it, he discusses Nobel Laureate Ronald Coase’s The Nature of the Firm, a seminal work that explains why firms (companies) exist and limits to their size. MacEwen also has provocative observations about large law firm management.
The blog post summarizes Coase:
“The balance between which activities should be inside, and which outside, a firm is constantly subject to refinement, adjustment… The evolving boundaries of the firm are, by their nature, growing and shrinking as technology (particularly telecommunications) advances.”
This is not just academic for the legal market. Thomas Friedman pointed out in the The World is Flat that low cost fiber optic cables allowed India to participate more fully in the global economy. That phenomenon gave rise to legal process outsourcing (LPO), which had its start in India, though today occurs from multiple countries, including low cost US and UK locations.
MacEwen focuses on another factor that can change the boundary and size of an organization: management. He writes
“One of the resources inhibiting the indefinite expansion of firms–or rather, a resource whose scarcity inhibits that expansion–is management talent.”
That observation leads him to consider law firm management. On the plus side, MacEwen notes that large law firms, unlike corporations, fully align ownership and management. And they are good at recruiting outstanding legal talent. On the minus side, however, they do poorly with professional staff. MacEwen writes:
“When it does come to ‘non-legal staff’ (an insulting and crabbed formulation in itself), we do not remotely place the value on them that we should, which means that we:
- Select from an insular and often poor talent pool (‘I see that you haven’t worked for a law firm before…..’);
- Aren’t willing to pay them what they’re worth on the free market;
- Tend to ignore or downplay or second-guess their advice once they’re on-board.”
I agree that partners often under-value those without a JD and second-guess staff advice. I disagree that firms are insular. Firms are more open today to hires from outside the legal market; indeed, some specifically seek talent not from a law firm. I also disagree about compensation. Senior law firm managers I know talk about “golden handcuffs:” their sense that no other industry would pay nearly as well as their firm.
In my view, the biggest impediment to more effective law firm management may well be distraction. From below, daily operational distractions are endemic: make sure secretaries are properly assigned for the day, supervise basic accounting and billings tasks, update mailing lists, organize an event, and answer questions about benefits. All necessary but for reasons I cannot explain, way too many quotidian issues regularly rise to senior levels in law firms. With all the daily distraction of operations management, senior managers lack the time to focus on strategy and planning.
From above, frequent unreasonable demands from a small minority of partners are a major distraction. Owners as managers may indeed align interests but also create problems. In many firms, senior staff spend too much time placating a small percent of overly demanding partners. Management is compelled to provide service above and beyond the reasonable, for example, laboriously producing reports that will not change any decisions or frantically marshaling an army to meet a demand that lacks solid business justification.
In Coase-ian terms, “drawing the organizational boundary in a different place” can mitigate distraction. Specifically, outsourcing the middle office – functions such as marketing support, business research, word processing, IT, and finance & accounting – frees senior law firm staff to serve as real managers.
By outsourcing higher volume tasks, management no longer needs to spend so much time fussing over operations. That becomes the outsourcing provider’s problem. The provider runs much of the daily operations under the guidance of senior staff. Of course the transition to this model takes time, but once it happens, senior staff are freed to focus on planning and strategy.
Working with a third-party provider can also reign-in inappropriate partner requests. Effective outsourcing agreements establish service level agreements (SLA), metrics, and a governance procedure. This systematic approach to providing service identifies partners who, for example, always request last-minute, in-depth business research for a pitch…. but never win the business.
Firms can choose to pay for this type of over-done activity but in an outsourcing arrangement, uneconomic requests are at least documented and transparent. By externalizing costs, firms create visibility and controls which are lacking today. I suspect that the vast majority of partners who use firm resources wisely would appreciate not only reigning in some of their partners, but also service level agreements that make clear what service and turn-around-time they can expect (and what to do if they happen not to get it).
Tying this all back to Coase requires considering transaction costs. Some firms believe that the outsourcing costs are too high. But compared to what? As firms have grown in size and complexity and as the loss of pricing power has forced them to exam overhead, they have learned that their internal costs are quite high. So the case against outsourcing is not as clear as some think. Moreover, as providers gain experience, their costs go down. So “crossing cost curves” alone may drive more outsourcing.
Firms have not, however, in my view, properly considered the real cost of insourcing. By focusing only on the cost of full-time employees and on who “owns” and “controls” staff, they miss the hidden distraction costs. Were they to explicitly consider this, their views about outsourcing might well change.
Perhaps in the perfect world of classical microeconomics, firm-owned and -operated services would incur no distraction cost. But in the real world, daily distractions dull management, a cost that is real but hard to capture. Outsourcing may not be the only answer to improve law firm management, but it is certainly a good one.
Posted by Ron Friedmann on Tuesday, December 21, 2010 · Leave a Comment
by Ron Friedmann and Mark Ross
Fronterion, a legal process outsourcing consultancy, recently released Ten for 2011: Top 10 Trends in Legal Outsourcing in 2011, its second annual LPO market predictions. We comment here on these; bold headings are quoted directly from Fronterion.
1. A Fundamentally Changing Legal Profession
We agree with Fronterion that the legal market structure has changed. For example, general counsels have gained buying power. We do not expect dramatic change in 2011; rather, we think change will be incremental over the next decade. One recent change has been law departments taking more work in-house. We think this trend is self-limiting because of corporate resistance to growing headcount. As companies continue to seek legal costs savings and realize they cannot bring more work in-house, they likely will work with LPOs, either through their outside counsel or directly.
2. Enterprise Approach
Fronterion writes that “A firm‐wide approach by law firms on the use of LPO vendors will become increasingly common as LPO initiatives are led by management who use more formalized corporate structures.” In our discussions with law firms, we do see an increasingly institutional approach. Enabling partners spread across multiple offices to embrace LPO requires a truly collaborative approach between the chosen LPO provider and the law firm’s management team. Over the next five years, we expect many large law firms will have one or two preferred LPO provider relationships and better partner compliance.
3. Onshore Expansion
Fronterion observes that onshore and hybrid LPO delivery models will grow in 2011, reflecting the importance of process and technology as well as low cost labor. This is consistent with what my colleague Mark Ross and I wrote in Outsource Magazine, A Changing Conversation (Nov 2010): the question has moved from “should we outsource” to “how to outsource” and “what’s the best way to centralise non-core support functions in a low cost location?”
Both the US and UK have many lower cost locations with good supplies of lawyers and support professionals. For example, in the UK, Bristol, Wales, and Northern England offer significantly lower costs than London. In the US, many Midwestern and Southern smaller cities are much lower cost than coastal cities or Chicago. The choice of location depends on factors such as cost, ethical and legislative restrictions, complexity, amount of communication required, project duration, and comfort with a location. (The weight to give each is a topic for another day.) We think, however, that the onshore trend supports moving more work offshore longer term. As firms realize the benefits of centralizing middle office and legal support domestically, the leap to moving work offshore is smaller.
4. Expanding Client Geographic / Jurisdictional Reach
We agree with Fronterion that LPO will spread from high cost US cities to Texas, the Midwest and the Pacific Northwest and from London to other parts of England. Why? Because LPO is as much about process as it is about low cost. Many US and UK firms operate in relatively low cost areas but lack “law factory” competence: industrializing work with rigorous processes, metrics, and governance systems are not their strengths.
5. Progressive Value Proposition AND 6. Increasing Technology Applications
We take these two predictions together because both involve technology. We agree that LPOs will create more proprietary technology. For example, Integreon has invested heavily in proprietary platforms and third-party tools. But we think this trend has limits. Law departments, law firms, and LPOs alike must consider the pros and cons of proprietary versus 3rd-party software. Software development has become easier but the cloud computing trend works against proprietary systems. So the make versus buy decision today is no clearer today than it was 10, 20, or 30 years ago. (For provocative views on the potential move to the cloud, see The End of Corporate IT and Moving A Law Firm To Google Apps at the popular 3 Geeks and a Law Blog.)
7. Dynamic Vendor Landscape AND 9. Divergent Vendor Approach
Fronterion expects both consolidation (7) and an LPO market with many differentiated providers (9). We think these predictions are a bit at odds and that consolidation will be the dominant theme. Customers often drive consolidation because they want the efficiency and confidence of buying a range of services from a single vendor. Plus they want the benefits of bigger companies that can scale up for big projects and deliver work from multiple locations. Maybe not in 2011, but over the next five years, we expect a few dominant LPO players to emerge but to co-exist with smaller, specialized players.
8. Public Acknowledgment
We agree with Fronterion that public acknowledgment of LPO use by law firms and law departments will likely occur in 2011. Given buyer concerns, a law firm that makes clear it is using LPO services will gain favor with and ultimately greater market share from corporate clients eager for better value. Of course, after a handful of announcements, many more are sure to follow – a common legal market pattern.
10. Ethical Guidance
We agree with Fronterion that 2011 will see additional ethics guidance on LPOs. The American Bar Association (ABA) in the US and the Solicitors Regulation Authority (SRA) in the UK are now separately studying legal outsourcing intently. Both regulatory bodies have confirmed that guidance will issue soon. The ABA has posted a Discussion Draft on its website proposing amendments to Model Rules 1.1, 5.3 and 5.5, while the SRA has confirmed that it will be looking at LPO as part of its consultation on the latest draft of its handbook, which is due to be launched in April 2011.
Posted by Ron Friedmann on Wednesday, November 10, 2010 · 1 Comment
The Lawyer published a great article on Monday, Colt resolver… Robin Saphra, group GC at Colt Technology Services, uses a combination of legal models to boost service levels. It explains how Saphra has unbundled the legal services Colt buys.
Colt took a “hard look at the spectrum of legal services” and decided to use “a combination of models that takes in internal advice from a 45-stong team; panel firms; an offshore captive operation; contract attorneys; and a deal with an external firm [Berwin Leighton Paisner’s (BLP)], which is Colt’s preferred interface for a string of overseas relationships.”
BLP’s relatively new managed legal services division handles Colt’s international employment work. Colt realized that it did not have the scale to have its own employment lawyer everywhere. While it could have retained multiple national counsel, Colt recognized this could lead to inconsistency and inefficiency. In the GC’s word, BLP offers a “joined up” approach.
Colt was also attracted to cost-effective offshore lawyers. Rather than work with a legal process outsourcer (LPO), however, Colt chose to set up its own 6-lawyer captive in Bangalore. That team will work on medium-volume, reasonably complex work.
We expect that over the next few years, dis-aggregating / unbundling legal services will be the norm rather than the exception. Once unbundled, more work will move to offshore lawyers. As an LPO, we think we can compete effectively with captives.
From our perspective, the moral here is “unbundle – now”. Once a GC crosses that threshold and determines offshore lawyers should be in the mix, deciding on a captive versus a third party is relatively easy.
Posted by Ron Friedmann on Wednesday, October 27, 2010 · 1 Comment
The legal market landscape is changing. In Law Firms Feel Pressure From New Breed of Competitors (The Legal Intelligencer, October 26, 2010), Gina Passarella writes that the legal market is fragmenting, making room for a “broadening array of law firms,” legal process outsourcers [LPO] ,and other providers. That assessment is sound but we disagree with her statement that “LPOs have been created in direct competition to law firms.”
In our July blog post, LPO as a Driver of Law Firm Innovation, we wrote that a flat legal market and general counsel demand for better value are forces that “push legal work toward standardization and systemization.” Because LPO services are optimized for routine work, the client drive for value does favor LPOs.
That does not mean, however, that LPOs compete with law firms. As we wrote in July, “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.” LPOs are simply a beneficiary of underlying legal economics. Also, though LPOs can provide important legal support, they cannot practice law and must operate under the supervision of a licensed lawyer.
Rather than view LPOs as competitors, firms can partner with them. For example, in the US, Pillsbury partners with Integreon on e-discovery and document review services (see Pillsbury Launches Pearl to Contain Companies’ Litigation Costs and Improve Results). In the UK, Simmons & Simmons uses Integreon for a range of LPO services (see International Law Firm Simmons & Simmons Signs Agreement with Integreon for Legal Process Outsourcing (LPO) Services).
Firms have other options as well. For example, Passarella quotes K&L Gates chairman Peter Kalis: “If you, within your platform as a law firm, can localize a lot of back office services and more routine-type services for clients in low-cost venues, you can achieve the same sort of outcome” as LPOs. Kalis contrasts his firm, with lawyers and staff in some low cost locations, with major New York and London law firms that have ‘grotesquely swollen’ overhead because of the high cost of those cities.
The UK’s Berwin Leighton Paisner (BLP) offers another example of how a firm can adapt to the new economics: it has a “legal services division” for high volume work. (See IT and telecoms firm Colt hands BLP outsourcing arm its second deal, Legal Week, 20 September 2010).
What BLP is doing, however, is unusual and may be hard for most firms to manage. As I note in my personal blog post, Can Law Factory and Bet the Farm Co-Exist Under One Roof?, managing high-end (bet the farm) and low-end (law factory) work under one roof presents challenges.
Until recently, the “corporate legal ecosystem” lacked diversity. Big companies hired big firms; medium companies hired medium or large law firms. Diversity is a key element of a healthy ecosystem. As a result of economic trauma, we now see a more diverse – and I would argue – healthier legal ecosystem. Firms, even BigLaw, are differentiating; virtual firms pop up regularly; and alternatives such as Axiom are gaining new traction. I expect that LPOs will indeed thrive in the new legal ecosystem but despite all this, I also expect law firms will continue to dominate the market.
Posted by Ron Friedmann on Tuesday, July 27, 2010 · Leave a Comment
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.
Posted by Liam Brown on Monday, July 19, 2010 · Leave a Comment
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.
Posted by Ron Friedmann on Monday, May 17, 2010 · Leave a Comment
Recent evidence suggest that the new normal for large law firms will differ from the pre-crash legal market. Two weeks ago Hildebrandt Baker Robbins released its Peer Monitor Economic Index (PMI) for Q1 2010, which is flat – at the same level as 2009 Q4. PMI is a function of demand (billable hours), productivity (hours per lawyer), rates, direct expenses, and overhead expenses. Three components were down; the two that were up do not signal an upturn. Rates were up but reflect only a change in mix, meaning lawyers with higher rates did more of the work. Productivity was also up but reflects fewer lawyers doing what work is available. Hildebrandt concludes:
“It is increasingly apparent that the fundamental economics of legal practice are undergoing a significant and permanent shift…. With slow revenue growth, firms will continue to focus on cost‐cutting to bolster profitability, and consequently aggressive cost controls are now the norm, no longer simply a short‐term response to weak demand and pricing….. The strategic emphasis is shifting toward a different imperative: the need for greater efficiency in the delivery of legal services.”
Other signals also point to a new normal. For example, Alternative Billing Arrangements Putting Down Deep Roots General Counsel Say (National Law Journal, 17 May 2010), reports that “costs to U.S. companies have risen 20 percent over the past decade. During the same time period, however, legal costs have risen 75 percent.” In reaction to ever-increasing costs, GCs increasingly use alternatives to the billable hour. “[M]any companies and law firms now report that as much as 40 percent of their work is billed on alternate billing arrangements that include flat fees, phased billing and contingencies.”
The need to control cost, increase efficiency, and improve the value of legal services is turning new attention to law firm costs for lawyer support. With AmLaw 200 median lawyer support cost at $170,000 in 2007, there is room for savings. (See my personal post, Cost Control as Part of AmLaw 200 Turnaround Strategies, for how I estimated this. For 2008, the latest year available, the same assumptions and method yielded median overhead of $180,000.)
Two recent announcements will likely catch the attention of many law firm managers as a way to control and decrease this very high overhead. As I discussed in my recent post here, WilmerHale Reduces its Middle Office Costs, US-based WilmerHale announced at the end of April that it will soon move about 200 staff positions to a low cost operations center near Dayton. This move is initially only for staff support but will include a more cost-effective approach to high volume, routine legal support: WilmerHale moving support staff to Ohio in the Washington Post (3 May 2010) reports that the “business center will develop the resources to provide on-site document review as well.”
On Friday, UK-based Cameron McKenna announced a major middle outsourcing deal with Integreon. The Integreon press release explains that the firm has signed a 10-year agreement with the company for outsourced Middle Office services, including portions of accounting and finance, HR and training, marketing and communications, learning and development, library and information services, research, information technology, and facilities. The deal value is £583 million. “By outsourcing non-billable tasks to Integreon, CMS Cameron McKenna can focus on its core competency – providing high-end legal and tax services. CMS Cameron McKenna’s decision to outsource its Middle Office is part of its ambitious and progressive strategy to create a new model for law firms.”
Like WilmerHale, this deal does not initially include legal process outsourcing (LPO) services but a Legal Week article, Camerons set to outsource entire back office with Integreon deal (14 May 2010) , notes “Camerons will also review future legal process outsourcing opportunities with Integreon, but no legal services have been included in the initial deal.”
I was surprised that WilmerHale’s announcement garnered little legal media or blog attention. My recent Google search “WilmerHale dayton ‘business services’ ” yielded only three dozen hits, few of which comment on the firm’s move. That’s not much discussion about what strikes me as a momentous decision. If Hildebrandt is right about the new normal, more firms should consider this type of move. It will be interesting to see if the CMS Cameron McKenna announcement generates more coverage and discussion in the coming weeks.
I wonder how many more quarters of bad index readings will it take before we see more such announcements? WilmerHale illustrates the ‘captive’ route to reducing middle office costs and CMS Cameron McKenna illustrates the outsourced approach. Firms that figure out how to support lawyers at lower cost and let lawyers focus on practicing law and client service will have an advantage in the new normal.
[This post is an extension of my May 10th personal post, BigLaw New Normal Looks Bad – More ‘WilmerHale Moves’ Coming?)
Posted by Ron Friedmann on Thursday, April 29, 2010 · Leave a Comment
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:
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.
Posted by Ron Friedmann on Wednesday, April 14, 2010 · Leave a Comment
We read with interest a recently published Hildebrandt interview of Georgetown Law Professor Milton C. Regan, Jr on Outsourcing and the Impact on Legal Work.
Professor Regan has thought long and hard about the future of law firms. He co-organized the recent Georgetown Law conference on the future of law firms, summarized in our recent post Law Firm Evolution or Revolution. At the conference, he presented ideas from a forthcoming journal article (details and link at end).
The interview, like his presentation and paper, is thought-provoking. We agree with much of it but take exception to a crucial point. We disagree with his view that legal process outsourcers (LPO) can substitute for law firms, especially his view that LPOs can advise clients. We start with this disputed point and then comment on several on which we do agree.
Advice. Regan observes that once clients break down work into components, they “can find lower cost providers, either domestically or abroad, lawyers or non-lawyers, [and this] could hollow out a good portion of a firm’s operations… Right now, the standard distinction is that LPOs do routine work and law firms provide strategic advice.” As LPOs understand their clients better, he suggests they will be “in a better position to provide advice.”
As an LPO, we neither can nor should provide advice. We cannot provide advice because we are not licensed to practice law; our providing advice would violate the unauthorized practice of law rules. Moreover, we should not provide advice as a strategic business imperative. Specifically, we work with law firms (and law departments). So it is not in our interest to compete with firms. Instead, we seek to free-up outside counsel to provide more and better advice.
Rather than represent a competitive threat, LPOs allow firms to offer clients better value by outsourcing repetitive and routine work. LPOs, with their expertise and investment in process engineering, quality control systems, and technology are well-positioned to perform these tasks. But we are limited to tasks that lawyers can, practically and ethically speaking, delegate and supervise.
Project Management. Relating to the topic of high-volume work, Hildebrandt asks Prof. Regan about project management. He suggests PM is increasingly important for law firms. We agree that firms need people “who can analyze the different steps involved in providing a service” and “to do cost accounting in a reasonably precise sort of way.” Hiring the right personnel to decompose work into steps and analyze profitability accurately will allow firms to identify routine, high volume tasks.
Once firms identify these tasks, they can apply technology and processes to improve efficiency or they can retain an LPO to help them do so. Smart firms thus choose LPO providers that offer more than just simple staffing. For example, Integreon’s Legal Operations Consulting practice collaborates with our LPO clients to assist them in this analytical process.
Lawyer Training. We also agree with Prof. Regan’s skepticism that outsourcing high-volume tasks adversely affects lawyer training. He questions whether repeated work on routine tasks is essential to training. We have never been persuaded that, for example, associates need to spend months or years on document reviews to be good lawyers. To be sure, training new lawyers is a key industry issue. The training challenge, however, does not turn on LPO. Rather it turns on failing to train new lawyers on many important skills such as project management, practical client interviews, networking and rainmaking, running a law firm, communication, or negotiation
“LPO Reputational Signal”. The interview also explores why firms might be reluctant to outsource. Prof. Regan says that, at one time, firms may have believed outsourcing would have “signaled” low quality. He questions this assumption now: “I think now there are law firms that are looking more closely to see if outsourcing some tasks sends a different sort of signal. It suggests the firm is willing to be flexible and innovative in trying to provide more efficient services.”
We agree. In our view, using LPO now signals transparency on quality, productivity, and cost. Leading LPOs use defined and documented processes, incorporate advanced technology to support these processes, and regularly measure and report on performance and cost. For example, Integreon has conducted a double-blind study to compare two approaches to document review. The repeatable, tested, and technology-driven processes of an LPO are more likely to deliver consistency and accuracy than one-off, artisan approaches.
Recent news supports that “the LPO signal” is positive. Many major law firms outsource to LPOs or work cooperatively with LPOs at the behest of their corporate clients. And several major corporations – Microsoft, BAT, and Rio Tinto – have recently publicly stated that they use LPOs. (See also the list at Prism Legal of companies that send legal work offshore or outsource it ).
Conclusion. In sum, we interpret Prof. Regan’s remarks as very supportive of legal process outsourcing but would not go as far as he does in suggesting that LPOs may compete with firms in offering advice.
[End Note: In connection with the Georgetown Law School conference, Law Firm Evolution: Brave New World or Business As Usual?, a pre-publication copy of Prof Regan's paper is available: Milton C. Regan, Jr., Professor of Law and Co-Director of the Center for the Study of the Legal Profession, Georgetown University Law Center & Palmer T. Heenan, Georgetown University Law Center, Class of 2011, Supply Chains and Porous Boundaries: The Disaggregation of Legal Services, 78 Fordham L. Rev. 101 (2010) (forthcoming) (MS Word doc).]
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