While the media and some of the blogosphere seem to treat “outsourcing” as a singular phenomenon and stake out sides in some supposedly momentous debate about whether law firms “should or should not” engage in it, the reality is that outsourcing is a broad term encompassing a range of different business structures that law firms (like any other business) may choose to implement depending on their business objectives.
- Mark Chandler, General Counsel at Cisco, and Jean O’Grady, of Dewey B Strategic, among others, have usefully applied the core/non-core distinction to help us think about which activities to outsource.
- Others, like Mark Ross and Ron Freedman, have contributed useful discussions about the business model choices available to law firms (and corporate legal departments), including limited project-by-project out-tasking, broad-based outsourcing of specific processes, setting up captive delivery centers, and hybrid models under which a third party provides some infrastructure or other support but the delivery center is to some extent “owned” by the law firm.
- In a prior post, I discussed some of the thinking and practice out there about the location of such delivery centers should be, regardless of who owns them.
In this discussion, I want to address another question which I think adds a useful dimension or layer to the picture: what kinds of objectives or value proposition can one reasonably expect from outsourcing different kinds of services or activities?
Most law firms would not even be thinking about outsourcing if not for the pressures placed on them by clients to bring down legal costs. So, without a doubt, part of the business case for outsourcing (or, alternatively, for relocating, consolidating, and/or streamlining services into a captive shared service center in a lower cost location) has to be cost reduction. But if you only look at cost reduction, you miss a significant part of the equation.
“Back office” outsourcing
Consider “back office” outsourcing, a term typically understood to focus on administrative or technical support services such as word processing, finance, or IT: this option has long been available to the larger law firms, especially those with most of their offices in some of the most expensive cities in the world. But how much can you save after transition costs, and how much change or disruption would be required to achieve it? It depends on what you are currently spending on these functions, how much room there is in your operations for efficiency improvements, and on whether you can actually realize the real estate savings within some reasonable time period (otherwise some of your savings are purely theoretical). If you take an expansive view of the “back office” and move a lot of services, you can come up with attractive savings. For example:
- Orrick, Herrington & Sutcliffe (2009 revenue of $847.5 million) reported savings of over $5 million per year for their move to Wheeling, West Virginia;
- Allen & Overy (2010 revenue of $1.1 billion) is projecting savings £10 million over the first 5 years after its move to Belfast, Northern Ireland; and
- CMS Cameron McKenna’s (2009 revenue of $353.1 million) deal with Integreon, the largest one ever announced, is predicted to save the firm £59 million over 10 years.
When compared to those firms’ total annual revenues, however, in some cases the actual savings start to bump up against common thresholds of materiality (although, to be fair, as a net addition to Profits per Equity Partner or PEP, the savings are nothing to sneeze at). But for deals such as these to be worth the substantial effort required to transition services and change behavior, they have to deliver more than just cost savings. For example, well-designed deals to outsource back office services should be able to provide some greater flexibility to the firm in terms of variability (up and down) of its consumption; for deliverables, it should improve consistency and to some extent quality (and accountability for quality); and it should be able to extend hours of operations to provide better service to fee earners. By moving services from your back office to someone else’s front office, you should expect, and insist on, initial and ongoing improvements in service delivery—as they continue to invest in technology and process across a broad client base—in ways that didn’t make sense for you to do for yourself.
“Middle office” outsourcing
By way of comparison, “middle office” outsourcing, usually meant to encompass knowledge management and business development activities (e.g., library services, conflict checking, business research, etc.), can rarely be thought of as delivering substantial savings. Few firms, at least in the US, actually spend enough on such activities that even 20% or 30% savings could easily pay for the cost of defining the services to be outsourced, drafting RFPs, assessing responses, and engaging with providers sufficiently to select a provider and negotiate the design of and contractual terms for an appropriate solution, and then deal with the change management issues involved with the transition. To be worth doing, middle office outsourcing has to deliver significantly more value at an affordable cost than what the firm had been or could reasonably expect to do for itself. Service providers who want to be successful in this space have to be able to demonstrate to prospective clients that they can do the following:
- Substantially improve fee earner productivity by taking over knowledge management.
- Significantly advance partners’ abilities to understand their clients and the opportunities in the market so they can seize them, growing the top line rather than reducing SG&A costs by taking over client and competitive intelligence work and business research.
The value proposition for middle office outsourcing has to be a variant of “more with less,” where transition pains are eased by the excitement of new capabilities obtained rather than by management’s exhortations to accept the disruption in order to achieve some limited savings.
“Front office” outsourcing
Last but not least is “front office” outsourcing—what most people think of LPO—which includes functions such as document review, due diligence, limited research and drafting, and some administrative and research work related to patent claims. The value proposition for outsourcing these activities is often framed in terms of cost savings—which can be substantial—but those savings are almost entirely for the benefit of the client rather than the law firm. The focus on such savings, to the exclusion of other ancillary benefits, may explain why law firms have been reluctant and reactive about adoption of LPO. From the law firm’s perspective, LPO can and should deliver different kinds of benefits:
- When well designed and implemented, an LPO program can offer law firms greater visibility into and predictability of the cost of key components of the services they deliver to a client—critical to a firm working under fixed fee or other alternative fee arrangements.
- Partnerships with LPO providers can give firms the ability to take on large matters without being permanently staffed for peaks in volume.
- Well-delivered and more affordable services from an LPO can allow a firm to reconsider what diligence is due on a deal and whether diligence deliverables could be more comprehensive or useful post-closing for implementation of the deal.
- Blending in lower-cost delivery models for the commoditized parts of a matter with premium-priced services for the higher-value portions of the work can allow a firm to pitch for business they might otherwise be priced out of.
- In a world of unbundled legal services provided by multiple vendors, some law firms will be able to develop capabilities to fill a void in the integration of those services and vendors, something they will be able to do more effectively with some well-developed relationships with a few preferred suppliers.
It is true that no one would outsource without the promise of some efficiency gains—be they achieved through technology, economies of scale, labor and overhead arbitrage, or process improvements. But those comparative advantages can and must be marshaled to deliver more than just some cost savings. At least at the moment, the activities thought to be amenable to outsourcing are still limited enough that overall gains from even a substantial percentage of cost savings in those activities may not be worth the disruption to the firm as a whole, unless there is more to be gained from the exercise.