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June 18, 2018 Insights

Should a Law Firm Invest in Creating a Captive or Low-Cost Center? 3 Top Considerations Before Making the Investment

By: Vince Neicho

With the unbundling of legal services and increasing client reluctance to pay their lawyers top-dollar rates for lower-end legal work and repetitive tasks, many law firms have looked into setting up captives or low-cost centers to provide their services with lower overheads. But is that what the client really wants? Also, is that what best serves the law firm?

First, let’s understand what we mean by “captive” and “low-cost center”. “Captive” usually relates to a separate entity which is owned by the law-firm and which often undertakes back-end administrative functions and sometimes low-end legal functions. In respect of the latter, the captive might be a profit-center in its own right and have its own budget and targets. A “low-cost center” is usually simply another office in the law firm network that is established in a low-cost area, away from the glitzy, expensive prestigious addresses that the core offices occupy. It might have a similar workload to a captive. Both will be staffed by either contract attorneys or the law firm’s own fully trained staff – or perhaps a combination of the two.

Below are some of the high-level considerations law firms should have uppermost in their minds before embarking on a substantial investment, like setting up a captive or low-cost center.

1. Set-up Costs and Scalability

Setting up either of these “cost-saving” operations can be a significant expense. When you add in ongoing maintenance costs, such as payroll, insurance and other overhead expenses, it can be hard for a law firm to see real ROI on these centers for several years.

Another consideration is the natural ebb and flow of incoming work and how that can impact resource downtime. Is the firm prepared to meet client demands or to have idle resources at a moment’s notice? The ability to scale up quickly when a new matter comes through the door and estimating the size and rate of that growth is a mammoth task. Equally important is the rate at which the team, equipment and supporting elements can be decommissioned when a major matter disappears unexpectedly – perhaps a settlement.

As options grow for clients, they are more frequently taking the lead on deciding who to engage with for various parts of the legal process.

2. Client Trends

Having committed to the cost of the operation, the law firm will expect a certain amount of work to make the business model sustainable. It will be all the more frustrating if and when clients dictate that they expect their advisors to work with other established partners for parts of the process (for example, the document review or analysis), thus depriving the law firm of the opportunity to use its own resources. As options grow for clients, they are more frequently taking the lead on deciding who to engage with for various parts of the legal process.

3. Talent Acquisition and Retention

Often, the best talent recruited into a law firm’s captive or low-cost center is looking for a career progression within the firm. Unfortunately, this may be unrealistic, which can lead to unusually high attrition rates – disappointing when the law firm has invested in recruiting, training, office space and materials. The temptation is to move the work undertaken by the operation up the food chain, to provide more “interesting” work. However, the result of this approach will create a void for the low-end work these operations and teams were originally set up for.

As with any large investment, it helps to be fully informed before making the choice between investing in a proprietary captive or low-cost center versus partnering with other providers that may better match your cost and scalability needs. We encourage law firms to connect with an experienced consulting partner to help benchmark and gauge the right choices for your firm. A company like Integreon can assist with the evaluation of all major decisions and provide details of our own experience in this market, in terms of recruitment, processes and management. We often work with, support and empower a law firm’s low-cost center or captive.

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