Mallesons offers LPO with Integreon

Bob Gogel and Tony O’Malley

In a Boardroom Radio audio cast, Mallesons offers LPO with Integreon (October 27, 2011), Integreon’s Bob Gogel (CEO) and Mallesons’ Tony O’Malley (Managing Partner) comment about their firms’ recently announced preferred supplier agreement for legal process outsourcing (LPO) support services. Widely reported as a first for the Australian legal services sector, the agreement between law firm Mallesons Stephen Jaques and LPO provider Integreon signals a watershed in the way legal services in corporate Australia are provided.

Click here to listen.

Offshoring and Outsourcing. Report from ILTA Session

This is a live blog post from the International Legal Technology Association annual conference.   The panelists for the session Offshoring and Outsourcing are Toby Brown, Vinson & Elkins, Kevin Colangelo, Pangea3, and Jordan Furlong, Edge International.  [This is a real time blog entry, posted as this session ended; additional commentary available at Twitter #ILTA11 #INFO2]

Agenda:

• Have you analyzed your business?
• Where should you focus your energy?
• What do LPOs bring to the table
• What does this mean for you and your firm?

Jordan:  We should start the discussion by looking at what clients want.  Clients no longer just think all legal work is the same – they view it as stratified:  At the top of a pyramid is “mission critical.”  In the middle is the “ordinary course of business“.  At the bottom is “commodity.”   The amount of mission critical work is fairly small.  Clients will pay top dollar for this work.  The volume of ordinary course work is fairly high volume but it does not matter much which lawyer does the work.   Commodity work occurs in very high volume.   Most law firms say they do not do commodity work   Clients are now asking if they even need a law firm for commodity work.   LPO, for example, is an option.

Jordan: Most firms say they want the mission critical work.  But the volume available will not sustain that many law firms.  What does this mean for law firms?  Jeff Jarvis says “do what you do best and outsource the rest”.   Jarvis is in the newspaper business.  His view is that there is not point in 50 reporters each covering the same news.  Journalists need to focus on topics on which they have a unique perspective.  Jordan applies this thinking to lawyers.  [Editor's note:  see Jordan's blog post The Rise of the Super-Boutique for more details of this thinking.]

Toby: Distinguish between “core v. context“  This is from Dealing with Darwin by Geoffrey Moore.   Core is what clients hire you for.  It is any activity which creates sustainable differentiation in a target market.   Context is all other activity required to support the delivery of core activities.  Until recently, law firms did not have to think about business and practice in this way.  At one time, law firms thought that copying was the only non-core activity.  Today, many activities may not be core, for example, e-discovery.   Toby is now “Director of Pricing”.  In this capacity, he needs to think through the different elements of work and price them appropriately.

Kevin: “Current market drivers for law firm use of LPO are primarily reactive, while evolving market drivers focus on proactively growing the business and deepening client relationships.“  Cites Michael Porter’s work on competitive forces, saying that until recently law firms have not had to think about competition deeply.  Today, it is not just other big law firms that are competitors, but various alternative providers.  In early days of LPO, it was law departments that sought the service because of cost control.   Today, law firms talk to LPOs as well.  Talks to law firms about “weaponize”, meaning using LPO to improve competitive positioning.   There may be 20 firms that do not have to worry about pricing and competition.   There are also firms are actively talking to LPO about competing more effectively.   The vast number of firms in the middle have to figure out what they will do to compete.

Discussion and Audience Questions:

1. For Toby:  how, as a firm works on the different elements of a matter, should it consider outsourcing?   Toby uses patent work as an example.   Patent work falls into three tiers, from easiest / lowest value to hardest / highest value.    To succceed at each tier, firms must figure out (A) what work to do and what can be skipped altogether and (B) of the work that must be done, who should do it.   The who may be different levels in the firm or outsourced providers.

2. How should firms split out work on a single matter (to different resources or an LPO)?   Kevin:  law firms have different thinking about this.  Discusses the issue of onshore v offshore resources, time zones, and the need for both the right technology and communication protocols to coordinate work.   It’s easist for an LPO to “bolt in” to litigation because the process is well-defined.   But thinks LPO is not at the “plug and play” stage yet.   Many legal organizations are not yet ready for integrating their operations to work seamlessly with external providers.

3. Recently HP acquired Autonomy.  How do acquisitions play out in legal and LPO?    Jordan says that many big companies have ‘outsourced’ R&D by buying small companies with new technology.   He thinks that is what Thomson Reuters did in acquiring Pangea3.

4. How should firms think about outsourcing multiple functions?   Kevin says that what is hard to think about in legal market is commonplace in most industries.  Most industries have outsourced a range of functions for a long time.  In terms of job security, the real issue is that many law firms are still over-staffed in many areas.   Individuals have to work hard to make sure they focus on work that is strategic to their law firm.  Outsourcing may force everyone constantly to make sure they are keeping up their skills.   Toby:  most in law firms are not worried enough about the job they do.   Many jobs and roles are at risk because of the underlying economic pressures.  Uses himself as example: worked at a firm where he transitioned from KM to AFA because firm saw more value in latter.

5.  What percent of work is tactical and what percent is strategic?  How will this look in 3 years.    Kevin says 1/3 strategic and 2/3 tactical.   It will be a slow march.   Lawyers take time to develop comfort using alternate providers, whether it is an Axiom or an LPO.

6.  In UK, we see firms setting up their own near-shore centers.  Is that happening in US?    Jordan cites Dayton [WilmerHale], Wheeling [Orrick\, and Carrollton [Pangea3].

Both LPO and Contract Attorneys Growing in US

Two recent publications point to continuing changes in the legal market:

• Lawyers Settle… for Temp Jobs in the Wall Street Journal (15 June 2011) reports on the “growing field of itinerant ‘contract’ attorneys who move from job to job, getting paid by the hour, largely to review documents for law firms and corporate clients.”  About 10% of 2010 law graduates accepted temporary work, double the rate of 2009.  Contract lawyers earn as little as $15/hour; the highest average hourly rate is $35/hour in Washington, DC (according to the video associated with the article).
• Separately, a recently released Altman Weil report, Law Firms in Transition by Thomas S. Clay and Eric A. Seeger, finds that 8% of large US law firms used legal process outsourcing (LPO) in 2010 and 11% expect to do so this year.  That is an almost 40% growth rate.  (Note that Legal Week recently found that 15% of UK law firms use LPO.)

The global economic downturn still has law firm clients demanding better value.  Both LPO and contract lawyers lower clients’ legal costs.  Which option should they choose?  My answer turns on my suggestion last week in Explaining Onshore Legal Outsourcing Growth: lawyers must examine the process of how law is practiced.

A focus on process will favor LPO because LPO includes not just the labor cost benefit of contract lawyers, but also a managed service that incorporates automation, streamlined processes, metrics, service level agreements, and a governance system.  With LPO, clients and law firms can also keep a core dedicated team on a full time basis, which offers continuity of knowledge and staff and so supports better repeatability and scalability.  (Our November 2009 post Next Gen Legal Models: Service vs Staffing explains differences between LPO and staffing models in more detail).

The age of large law firm associates spending weeks or months reviewing documents or conducting any other high volume, routine, and repeatable work is over.  Delegating this work to technology, to contract lawyers, or to LPOs frees associates to focus on what the documents really mean and craft winning arguments.  The growth of both contract lawyers and LPO is a win for clients.

Explaining Onshore Legal Outsourcing Growth

Legal process outsourcing (LPO) has long meant “India” to many lawyers.  We have often written that LPO is about working smarter, not where the work is done.  A New York Times article last week drives home this point.  And an American Lawyer op-ed explains the “news behind the news” in the Times.

Legal Outsourcing Firms Creating Jobs for American Lawyers, a June 3, 2011 front-of-the-business-section NY Times article, describes how LPOs such as Integreon and Pangea3 are creating jobs for American lawyers in low-cost US locations. It contrasts the growth of LPO, both onshore and offshore, with the challenges US law firms face, noting that “[t]op American firms have cut hiring or moved to a lower-tier pay system for many new associates.”

American Lawyer Editor-in-Chief Aric Press’ June 2011 commentary explains both LPO growth and U.S. BigLaw challenges. In  The Am Law 200: A Chasm with Consequences, he reports “a $1.1 million gap between the average profits per partner of the top 23 firms on The Am Law 200, as ranked by PPP, and the average of the next 27 firms.”

This gap, Press suggests, stems from how the market now segments legal work, with bet-the-farm matters on top and commodity work at bottom.  The highly profitable 23 firms get the lion’s share of less price-sensitive premium work; the rest face increasing price pressure to win non-premium work. Addressing the question of whether this gap will continue, Press offers two “safe” observations:

1. Price pressure likely will continue when the economy rebounds.
2. “[W]hat’s striking about the behavior of many law firms over the past two years is that they managed their way to profitability by shedding colleagues who did not have enough work, not by examining how the work itself is done.” (Emphasis added.)

We think the phrase “not by examining how the work itself is done” links the Times and American Lawyer pieces.  We talk to many firms and law departments that now do examine how they practice.  Most conclude that old ways of working must improve.  They realize that large swaths of legal work must be industrialized with standard practices, appropriate technology, and cost-effective human resources.  Many turn to LPOs to accomplish this.  As more and more lawyers examine the process, we expect to see LPO growth continue, both onshore and off.

Insight and Innovation are the Real Drivers of Legal Outsourcing Benefits

Last month I read an insightful blog post at Horses for Sources, the advisory business of respected outsourcing analyst Phil Fersht.  In a guest post, Where have all the consultants gone?, Deborah Kops, principal of sourcing strategy firm Sourcing Change, looks at developments in the business process outsourcing (BPO) industry.  Because the roots of legal process outsourcing (LPO) lie in BPO, following the latter can help better understand the former.

Ms. Kops observes that BPO success was originally driven by consultants who had intimate client and hands-on industry experience.   She writes

“the pioneers of the outsourcing industry, primarily BPO, came out of consultancy backgrounds…  Consultants from the Big-whatever-it-was, the then Andersen Consulting and even the likes of the white shoe strategic firms, got a bee in their bonnets that their intimacy with and knowledge of their clients could be harnessed to improve and deliver business processes. They formed business lines with skin in the game, exclusively focused on doing rather than just advising, tapping not only into their own expertise, but that of their partners and colleagues.”

These BPO founders, she notes, are now exiting the business.  Current BPO managers are capable but lack “the soft and problem-solving skills that come from having the training, intellectual freedom, proximity, and the ability to connect the dots that only consulting experience allows.”  So she expresses concern that the “real sourcing benefit” will be lost because it “comes from the ability to solve a problem, the skills to develop a relationship with a client team at the highest level, and the knowledge of what drives value in an industry from the top down.”

Fortunately, LPO does not suffer this issue.  Ms. Kops’ post nonetheless helps illuminate the real benefit of legal outsourcing.  Many lawyers think labor cost savings drives legal outsourcing.  We disagree.  The real value lies in providers’ deep experience solving lawyers’ problems.

In LPO, the BPO analogue to consulting experience is a deep pool of  legal management, operations, and process improvement experience. For example, Integreon management includes former practicing lawyers who pioneered outsourcing, lawyers who managed document review for law firms or for corporations, senior law firm managers such as COOs and CIOs, and process improvement consultants.  Hands-on law firm and law department operational experience extends deep into our middle management team.  Our competitors could make similar statements.

This collective wealth of experience gives a provider deep insight into law firm and law department operations and ideas about how to improve practice and support.   My Integreon colleagues and I all feel the same sense of “there has to be a better way to do this”.   We all sought out a place where we could work closely with lawyers to help them improve what they do and reduce costs.  So reading Ms. Kops’ post triggered a very personal reaction – that’s us, without the problem of exiting experts.

Of course access to teams of associates in low cost locations is an important benefit for our clients.  The real value, however,  is our ability to improve how lawyers work and how law firms operate through process improvement and technology.  Fortunately, as a still-growing industry with a plentiful supply of experienced legal managers interested in outsourcing, we do not face a brain drain.

New Legal Week Survey Finds 15% of UK Firms Use LPO

Legal Week just published No LPO Rush Despite Cost Pressure (Legal Week, 5 May 2011),  an in-depth look at the UK legal process outsourcing (LPO) market that includes in-depth analysis, numerous charts, and a key findings summary.  It is based on a 575-lawyer survey by Incisive Media Research that Integreon co-sponsored.  We present some highlights and comments here.

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LPO Penetration is Up and Rising. The survey found that LPO penetration in law firms is up substantially from other recent reports.   For example, in a June 2009 blog post, we reported on surveys that found only about 5% of firms had used LPO.   Now, Legal Week finds 15% of UK law firms use LPO services.  Furthermore, over half of respondents – both LPO users and non-users – believe that law firm use of LPO services will grow over the next year.  Given another trend the survey identifies – growing cost pressure – it is reasonable to conclude that LPO penetration will continue increasing.

On the law department side, 6% report using LPO.  We think this lower penetration reflects a client preference that law firms partner with LPOs.  The survey results support this view:  both firms and departments “give the biggest vote to a solution where the law firm supervises the outsourcing. Amongst law firms, the vote here represents nearly 52 per cent of respondents. In the inhouse sector, nearly 29 per cent support this approach.”

Work Suitable for LPO Spans Several Practices. The survey provides insight on the areas most suitable for LPO work.  Scoring highly among both inside and outside counsel were litigation document review, e-discovery (e-disclosure), and contract management .   Significant minorities also believe compliance, library/research and know-how, debt recovery, and conveyancing are suitable for LPO.

Using LPO is Not a Risk to Law Firm Brands. Some law firms seem to worry that using an LPO might send clients the “wrong” signal.  The survey show this fear is unfounded.  A vast majority, about 75%, of both inhouse and firm lawyers believe using an LPO “does not diminish the brand.”   The article also notes that some of the largest and best-known UK law firms use LPO and so observes   “If the leading firms are using LPO, it is difficult to see LPO as a sign of weakness.”   This is consistent with our view, summed up by my colleague Matthew Banks in the article, saying

“Rather than see their brand diminish, those law firms that embrace LPO will gain a competitive edge. What we term ‘LPO 2.0’ involves close collaboration between law firm and LPO provider. The LPO provider’s solutions are so closely integrated into the firm’s overall value proposition that they are simply viewed as part of the suite of solutions the firm provides to its clients. The firm’s brand is enhanced.”

The Real Issue is Lower Cost, Not LPO. We recently suggested that the question is no longer “outsource or not” but rather “what’s the best way to centralise non-core support functions in a low cost location?” (See Legal Outsourcing – A Changing Conversation by Mark Ross and Ron Friedmann in Outsource Magazine, 17 Nov 2010.)  Legal Week reaches a similar conclusion:

“Outsourcing is typically seen as the relocation of repetitive work to India. But LPOs can take many different forms…  LPOs are being developed by many firms in the UK. Some are doing forms of it by outsourcing routine work from their City offices (where salaries and other costs are higher) to regional offices where they can offer lower charge-out rates. Other firms – particularly the big name international firms – are working with regional law firms to outsource those processes on which they can add little extra value.”

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We think the results confirm our view that lawyers have become comfortable with LPO and that market pressures will continue to favor LPO adoptions.   We understand, however, that not all share this view.   For those who remain skeptical about LPO, the article does a nice job presenting contrasting opinions.

Integreon Launches “Top 5″ Podcasts, First 3 Cover E‑Discovery Need-to-Know Tips

Integreon has launched a new program to provide informative podcasts covering “Top 5” tips on a range of topics for legal, business, and technology professionals. The first three podcasts feature Integreon’s Jeff Fehrman, VP of consulting and forensics, on the following e-discovery topics:

 

Top Five Things You Need to Know About Social Media and e-Discovery

Complying with current e-discovery rules is challenging enough, but social networking sites are creating new headaches for corporate compliance and legal departments. This podcast offers advice for how to incorporate social media into your e-discovery strategy.

Listen to the podcast

 

Top Five Tips for Reducing the Cost of Discovery

Many organizations still find it difficult to efficiently uncover relevant data for legal cases, resulting in rising costs. This podcast offers tips to help organizations rein in cost by better managing the discovery process.

Listen to the podcast

 

Top Five Things to Consider Before Your Meet-and-Confer

Under the Federal Rules of Civil Procedure, the first 120 days of litigation are the most critical in the lifespan of the case. You have a small window of opportunity to leverage the meet-and-confer requirements to your advantage or lose the opportunity to collect the data required to effectively litigate your case. This podcast offers suggestions to help maximize the effectiveness of meet-and-confer.

Listen to the podcast

Defining Good Support for Lawyers

I frequently discuss with law firms and law departments how best to provide lawyer support, including outsourcing as an option.  Inevitably, the conversation turns to support quality.  I am surprised how few have defined what “good support” means.

Defining good lawyer support was a big part of my presentation last week at the Ark Group conference Best Practices & Management Strategies for Law Firm Library & Information Service Centers.  Jean P. O’Grady, Director of Research Services & Libraries at DLA Piper LLP (US) and I presented the keynote panel, Outsourcing: Outrage or Opportunity.  Marsha Pront, Senior Library Consultant, IMS Legal Research Services moderated.  In the audience were 45 people from 35 mostly large US and Canadian law firms.

I said that defining good support requires metrics, service level agreements (SLA), and a governance structure.  Without these, managers cannot assess if they provide good service, where improvement opportunities lie, or the viability of alternative support approaches.  When I asked for a show of hands of who had instituted metrics or SLAs, few hands went up.  This is pretty typical in law firm audiences.

We did not have a chance to discuss what metrics to track but “core” support functions cry out for metrics.  Jean, citing Jim Collins in Good to Great, defined core as follows (1) “Good to great” companies focus on what to do and (2) they also put equal focus on what not to do and what to stop doing.  She surveyed attendees in advance, asking  which library functions respondents consider a core business activity of the firm.  She reports the results at her Dewey B Strategic blog post, Outsourcing, Outrage or Opportunity? What is Core?

Once you know what to measure, you have to define the right service level to offer.  For libraries that might mean, for example, categorizing research requests by complexity and, for each complexity level, specifying a turn-around time.

A governance structure is also key.  One element of governance is a process to recover from errors.  Another is articulating criteria for when the SLA applies.  For example, appropriate governance might limit in-depth business development research to partners with a demonstrated track record of winning new business.

As for the question of “Outsourcing: Outrage or Opportunity,” many seemed skeptical that outsourced service could be as good as what they provide internally.  To understand this view, I asked two questions.  First, did the audience believe that every support function in their firm was “good”.  The looks and comments confirm what everyone in a large law firm knows: some support functions just are not that “good”.  But of course, not mine!

And second, I asked how many had work experience in an organization that provides outsourced services.  Only a couple of hands went up.  I then pointed out that every law firm employee, in fact, works for an outsourcing organization.  In-house counsel can “make” legal services or “buy” them from law firms on an outsourced basis.

I hope the audience left with the message that metrics, SLAs, and governance are key both to judge quality and know where to draw the make / buy line.  To optimize lawyer support, law firms must adopt the right evaluation framework.  That is true whether they choose to work purely internally or to outsource.

[Update March 3, 2011: Steve Levy of Lexician wrote Outsourcing: Bad Word or Wrong Word? that comments on above. He suggests that managers focus on who is doing the work, not who employs the worker, and that the issue is more one of delegation. I agree.]

US Legal Market Trends Favor Law Firms Working with LPO

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

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

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

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

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

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

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

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

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

Integreon Comments on Report

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

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

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

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

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

Middle Office Outsourcing and Large Law Firm Management

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.