The full version of the 2009 Socha-Gelbmann Electronic Discovery Report was finally published in December 2009 after exhaustive work by George Socha and Tom Gelbmann. It is the largest ever Socha-Gelbmann report; a compendium of trends, charts, and results spanning over 600 pages. The findings are fascinating and worth discussing, but so far surprisingly few in the industry have really given it much comment.

Once again George and Tom provide the 35,000 foot view of the industry and a detailed market analysis.  The hotly contested vendor rankings have now been replaced by 250 pages of additional content.

2008-2009 Market – In-source / Out-source / Right-source

Overall, the e-discovery market, like everything else in 2008, shrunk quickly and significantly.

This is not surprising given that many law firms and corporations did cut back on their spending levels due to the recession. However, Socha-Gelbmann survey respondents felt the industry may be starting its recovery.

“Despite the market slowdown in 2008, consumers and providers continue to tell us they expect this market to expand by … about 25% in 2010.”

While the market as a whole did shrink, the report shows that larger providers actually gained market share (Tier 1 up 16%) vs. the mid-size providers (Tier 2 down 14%) and smaller providers (no growth for Tier 3). There was also growth shown in the DIY segment, comprised of those corporations and law firms that like to manage their own internal efforts.

In-sourcing

The Survey reports that client control of the e-discovery process is finally reaching its long awaited tipping point:

“Who Buys; who should control – After years of disparity with law firms favoring law firms, companies favoring companies on this question, I am seeing agreement with the consensus showing 60/40 in favor of the client.”

“Moving Electronic Discovery In‐House – Companies, law firms, and providers all report new or expanded efforts to move electronic discovery activities in‐house, with a strong emphasis on legal hold, litigation preparedness and compliance.”

I am heartened by the survey’s positive outlook for the industry, but I am skeptical that corporations’ in-sourcing of ESI management will be the primary factor in dampening the impact of growing volumes of ESI. I believe that proactive creation of and adherence to document retention policies will have the most profound effect on the volume of ESI that makes it out of the email, file or document management system and into a collection.

I believe that the more expertise clients bring in house, by recruiting experts or through closer relationships with vendors, the more they will understand the rather arcane and mysterious process of processing and producing ESI. And the more they will see that the ultimate cost savings is in efficiently storing only what is necessary for business record keeping and compliance.

The combination of storing less unnecessary information and in-house ESI management should lower the cost of managing ESI from collection through review  more significantly so than the mere reduction in processing unit costs, data culling, or lower rates for offshore attorney review.

We must remember, however, that there are significant risks for organizations who bring ESI management in-house (recall In re Fannie Mae Securities Litigation, in which the Office of Federal Housing Enterprise Oversight hired 50 contract attorneys and spent $6 million, or 9 percent of its annual budget, only to be held by the court in contempt for failing to meet its e-discovery deadline). Many corporations and law firms prefer having an outside vender act as a buffer between them and potential concerns about production of data.

The report mentions that not everything can be moved in-house and that for those types of activities, “companies and law firms alike are expressing a growing desire to be able to work with a single provider.”

Out-sourcing

In the 2009 report, we see just as many clients are outsourcing ESI work. Hosted review is one of the solutions in highest demand of all services and software. Two other solutions cited as highest in demand are data analytics and early case assessment, which are important trends that I will cover in a later Integreon blog post.

Outsourced attorney review receives its first analysis in this year’s report. This probably reflects a growing acceptance and trust in legal process outsourcing (LPO) services, as well as demand for contract attorney and staffing services too.

Software-as-a-Service (SaaS) rounds out the new out-trends that are profiled in this year’s report. The cloud computing debate around SaaS is just getting started as it populates the blogosphere and Twitter-verse. It is still much too early to determine the ultimate ramifications to privacy and discovery due to porting applications and data to a third party.

SaaS, outsourced attorney review, and hosted review are all identified in the report as the three fastest growing services in e-discovery, which illustrates that many organizations do see outsourcing as a very compelling method for lowering discovery costs and risks.

Right-sourcing

Keeping ESI close-to-home by in-sourcing may offer tighter risk management and cost control, however the findings from Socha-Gelbmann suggest that in-house departments and applications may be strained by large or exotic data sets. The report made a point of warning readers about recent marketing of some applications as “silver bullet” solutions. It may be tempting to bring an application in house that processes, analyses, produces and even convection grills in order to eliminate the need for vendors. However, there will always come a time when the software or hardware platform cannot keep up with the data volume or unusual data types or even unique production requirements. Simply put, it is always risky to have only one tool in the tool box.

Relationships with vendors should be put in place, even if only as a fall-back position, so that the vendor is prepped with knowledge about the client’s information architecture, data types and litigation requirements. Pre-existing rate agreements and communication protocols can make the client’s life much easier when having to find a vendor to handle an avalanche of data or technical issues at the eleventh hour. Careful consideration must be made to right-source the best elements for a comprehensive and defensible discovery process that will include the most effective in-sourced and out-sourced components.

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.

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

The news of Rio Tinto’s Legal Process Outsourcing (LPO) initiative has been widely reported. For a detailed report, I recommend Richard Susskind’s interview with Leah Cooper, the Rio Tinto General Counsel behind the initiative.

The number of major outsourcing arrangements between leading LPOs and blue chip global law firms, banks and corporations has increased but the topic is rarely discussed publicly.  The Rio Tinto arrangement is one of the very few widely publicized.

Cooper’s approach to her challenges (as well as her messages to the industry) will resonate with GCs around the globe, who face similar pressures of increased workload but constrained budgets. LPO enables law departments to meet rising workloads whilst reducing costs. It opens up a “new way of working” where quality can be achieved at reasonable cost by reallocating legal tasks to partner providers.

Indeed, as I listened to this interview I kept coming back to Cooper’s notion of “a new way of working”.  Whilst I do largely agree with her comments, I have a slightly different take on how GC should think about legal outsourcing.

The “P” in LPO: Process is Not a Dirty Word

Cooper doesn’t like the “P”. She sees her LPO team as a genuine extension of her in house team, contributing to the overall workload and undertaking tasks that a junior lawyer within the in house team might otherwise undertake. She rightly points out that the “P” downplays or downgrades the importance and nature of the work.

I agree that LPO is not about administrative form filling. Nor is it restricted to organizations with massive volumes of standardized documentation.  Process, however, is integral to LPO: it  is core to the how LPO lawyers perform tasks, even complex ones.  Moreover, process should be core to lawyers everywhere but typically is not.  The legal market finally seems to be waking up to the importance of this.  Law Firms Look at Process Management in The Legal Intelligencer (20 Oct 2009) discusses project management and process, including law firms that are now adopting Six Sigma, a tool some LPOs, Integreon included, have used for some time.

The benefits of process include consistency, predictability, quality, productivity and defensibility – these benefits apply across many legal tasks of varying complexity, not just tasks which by their nature are substantively straightforward, standardized and routine. For example, one of our current projects involves a multi-national corporation with a suite of 20 “medium complexity contracts” used regularly in its business. The company has different attorneys around the world following different processes using different templates in different locations, accepting different edits with different results. The LPO process brings a method which is common, documented, repeatable and scalable. Beyond labor cost savings, working with an LPO helps the company reduce work volume plus improve consistency and therefore decrease risk.

Smart buyers of LPO services are not simply looking for Day 1 cost savings – they demand long term transformation and improvements. A key value add of LPO is creating these longer term productivity and efficiency improvements by combining process expertise with legal know-how. It’s the same core task but delivered in a more modeled and structured fashion.  Richard Susskind discusses this in detail in his recent book, The End of Lawyers?

“Process” captures implementation and transition planning, workflow, performance metrics capture and tracking, communication, and reporting. All of these are not ends in themselves – they are genuine tools for improving performance.

So if you don’t like the word “process” then call it “method” or “systemization”. Whatever we call it though, it’s an essential ingredient to delivering and managing legal services – whether from an LPO, law firm, or law department.

The “O” in LPO: “O” Means Outsource, not Offshore

“O” is for Outsourcing, not Offshoring. Outsourcing is about an approach, not a location.  The offshore element of the Rio Tinto deal is what grabbed the headlines, but Cooper explains that quite a few projects have actually been performed onshore in the US, and are still achieving cost savings when benchmarked against the cost of the law firm model.

LPO is not exclusive to India, nor those tasks which are suitable for offshoring. The “new way of working” is broader than that. We believe that outsourcing is a global phenomenon and LPO should be no exception. Outsourcing could be onsite at the customer’s office; it could be onshore, multi-shore or offshore.

Offshoring to India is highly successful and can be a great way to reduce cost and create efficiencies, but it’s not the only way. Organizations want the right fit for their requirements, not a one dimensional solution.  Different locations offer different attributes and mature LPOs offer law departments and law firms an explanation of the differences and a choice.  One size does not fit all; one shore does not fit all.

So What about the “L” You Ask?

The “L” of course is for Legal, which should not be confused with traditional business outsourcing, such as commonly associated with offshore technical support or call centers. Legal outsourcing requires domain expertise. So for example, Integreon’s legal outsourcing services are supported by our staff of full time, licensed lawyers, who can work on-site at client or law firm offices or at any of our secure facilities located onshore, including in such familiar places as midtown Manhattan and London, or in equally secure and lower cost offshore locations.

“Legal Process Outsourcing” therefore implies professional, experienced legal staff delivering quality, cost effective services from the client’s choice of locations.

In 2009, FreePint and Integreon partnered to survey business research managers about outsourcing, barriers to its adoption, and the satisfaction level of those currently outsourcing. FreePint published the results in a June 2009 report called VIP Report: Survey on Outsourcing.

Integreon is making available a free copy of the report; click here if you would like to download a copy.

Summary and Findings of FreePint Report on Business Research Outsourcing

The survey targeted managers of knowledge and information services but also included managers of document preparation (word processing, etc.), legal support, and pitch support (graphics, presentations, etc.). The majority of respondents were senior-level decision-makers spanning a range of industries, including legal, financial services, management consultancies, and pharmaceuticals. A total of 71 managers responded with nearly 40 percent from corporations with more than 1,000 employees.  About one-third were in the US, one-third in the UK, and one-third elsewhere in the EU, Australia, Canada, or other countries.

The findings reveal disparate views about quality and the cost of outsourcing. On the one hand, the 40 percent of organizations that do outsource are satisfied with outsourcing quality and cost effectiveness. On the other hand, the 60 percent not outsourcing cited quality and cost concerns as the most important factors influencing their choice not to outsource.

We can’t explain this seeming contradiction though suspect it says more about outsourcing perception than reality. It may reflect negative perceptions of offshore outsourcing. Some recent surveys (e.g., see our blog post Cost Arbitrage is No Longer Enough (Black Book of Outsourcing Rankings and Findings)) suggest that customers look for high cultural compatibility, which typically favors onshore outsourcing.  The survey was not designed to tease out differences in onshore and offshore outsourcing. We welcome reader views on other explanations for the seeming inconsistency.

One other result particularly intrigued us: Among those who outsource, the majority of the work continues to be done in-house; respondents who outsource report that over 75 percent of the work remains in-house. This finding supports a key outsourcing benefit, namely, to free high-end professionals for their “highest and best use.” Outsourcing is ideal for handling important but routine tasks that can otherwise overwhelm more valuable strategic work.

Overall, the survey results suggest that organizations considering outsourcing may gain benefit from reviewing the upsides reported by those already engaging in outsourcing. With 2010 budget planning just around the corner, this may be the right time for those organizations to take a fresh look at how outsourcing can facilitate achieving their quality and cost efficiency goals in the new year.

Download a copy of the report from Integreon.

How should knowledge process outsourcers (KPOs), their clients, and their employees respond to current crisis in financial markets?

Client Perspective

Choose your vendor carefully –  If there was ever any doubt, the current turmoil shows that that service quality and price should not be the only factors customers consider .  Long term vendor financial stability is critical as well.  Vendors with only a few hundred employers who depend on a handful of clients may find it difficult to survive even a single client loss.   Depending on how much business they lose and their financial backing, a key client loss can put at risk continuity of service to remaining clients.   Buyers should seek vendors with scale, good financial backing, and a broad customer base.

Outsourcing as a survival tool –  Outsourcing is not just about cost savings – it can be a company’s lifeline too. Unless you remain competitive, you may not survive as a business. You may be able to save more jobs (and create new ones) by outsourcing if done smartly and with the right vendor.  Choosing the right vendor will help you improve business economics, achieve flexibility, innovation, and help create growth (jobs).  The downturn could last quite some time so it is important to consider both your cost basis and operating efficiency, even as your deal with what may be emergency circumstances.

Vendor Perspective

Reduce client concentration - While it’s always good to get more business from existing clients, look to balance the client mix. Otherwise, if your biggest client accounts for 40% of revenues and suddenly disappears (which seems to happen very often these days), you may not be able to survive the impact. Diversify into more verticals and geographies.  Winning new business in this economy may be hard, but point your sales team in the right direction now.

Enhance capital –  Clients will start asking more probing questions about the financial stability of your business and access to capital. Cover your financial bases. Work towards moving to profitability and get an investor who can be there to support you on your long term business plan/strategy

Leverage opportunities to consolidate /buy cheap assets -   A major economic downturn is a time to be simultaneously conservative and bold. Be conservative in managing operating costs but be bold in buying good assets (companies, people), especially when many outstanding properties are available at the lowest price in years.  Tight operations coupled with strategic acquisitions will pay handsome dividends when the economy eventually turns around.

Employee Perspective (for India-based personnel)

A downturn is not the end of the world. It’s not first time it’s going to happen. The economy will recover and KPOs will grow again at a rapid clip.  This is perhaps first time that global events have had a direct impact in India, specifically immediate job losses.  Previously, these types of incidents were limited in scope and barely would even be covered in the press. Now, however, the impact has been pronounced, both in captives and third party vendors. KPOs are not the only ones affected by the global turmoil; many other sectors have shared in the turmoil (e.g., consider what has happened with domestic Indian airlines).  The pervasive impact of the Western downturn on the Indian job market shows that the Indian economy is now more tightly integrated into a US/global environment.  So it is natural that Indian jobs in many industries will rise or fall based on events in US/global markets.

But, there is hope among this bad news. Outsourcing is expected to pick up even more strongly in the months to come and that should drive new job creation.