Faraway, so close – two visions of nearshoring

With even Freshfields unveiling plans to put hundreds of staff in Manchester, we teamed up with Scottish Development International to assess the rush to nearshore. Is it driven by costs or a deeper rethinking of the legal industry?

To say Freshfields Bruckhaus Deringer’s launch of a support and legal services centre in Manchester was one of the biggest stories of 2015 would be an understatement. While back-office outsourcing and legal process outsourcing had legal process outsourcing had been the subject of much debate within the profession for years and the modern era of northshoring by global law firms was pioneered by Allen & Overy (A&O) and Herbert Smith in 2011, news that the 270-year-old Freshfields is to house up to 300 support and legal staff in Manchester by next year sent reverberations around the City. A&O had done that already in Belfast – and delivered significant cost savings to boot – but this was Freshfields, the most conservative of London’s Big Four.

The rapid pace of new initiatives has led, in the words of Lawyers On Demand (LOD) co-founder Jonathan Brenner, to a ‘tipping point’. With this in mind, Legal Business together with Scottish Development International hosted a debate on recent developments with nearshoring, and gathered together those with coalface experience transferring legal services to cheaper locations, chiefly focused on Belfast, Manchester, Birmingham and Scotland in the UK.

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Mark McAteer, Legal Business: How has the market for nearshoring evolved for large City law firms?

Mike Polson, Ashurst: I would make a general point on behalf of most people around the table on this term ‘low-cost centres’, which really grates. Ultimately, it is about how to make your business run better and faster, both internally and for your clients, which might then have efficiency and cost benefits as a consequence. There is a connotation that low cost equals low quality in some people’s minds. That is very dangerous. For example, if you just take an area of activity out of London and move it into Glasgow, Belfast or Manchester and do it in the same way, you have missed an enormous opportunity to make your business better. That is a starting point for all the firms, rather than simply looking at the cost arbitrage. That is too one-dimensional.

Mark McAteer: But why do it if there is no cost play involved?

Mike Polson: Ultimately, there is a cost element. Our law firms are large-scale global businesses and, therefore, efficiency has to be at the heart of the agenda. But it is all about how to run a better business.

Jonathan Brenner, Lawyers On Demand: The world of New Law is still suffering from lazy terminology. The people who are in our pool were once known as locums. When I qualified in 1988, the prospect of being a locum filled people with absolute horror, because they were normally pretty low-grade lawyers with no real career path. Now, we are trying to change the perception in the marketplace about the whole concept of freelance lawyering. Actually, it has become an aspirational way for these lawyers to work. Changing perceptions in law is remarkably slow – much slower than other professions.

Mark Heighton, CMS: My sector is real estate. It is about being competitive. We have had a team in Bristol for at least 12 years now. The way that the real estate market works is we have competition all over the UK. The only way that we can make it work is to be cost-effective, compete and win business by having alternative cost centres. It is about having high quality. It is not about describing yourself as a commodity operation. It is delivering a higher quality, a London quality, from a different location.

James Richards, Baker & McKenzie: We have a slightly different perspective, because our Belfast operation is very much a global play. There were a number of factors we considered when we looked to open our second global services centre. We looked at about 20 places across the globe, but Belfast won out in the end. It was the balance of the high-quality, well-educated workforce, good transport and technology infrastructure, lower costs, the time zone and the language. These are all real advantages for centres in the UK that ultimately outweighed other places around the world.

Mike Polson: The beauty of all this is that it is an opportunity to start with a blank sheet of paper and build something that is absolutely what your firm needs, rather than to try and change something. That is why it is beyond that cost play. You do not have many of those opportunities in life, so you take time to be very careful about what you are designing and the reasons why you are there.

Andrew Coates, Kennedys: We are looking at other offices outside London where you are just as likely to find and hire the person you want for the job you want them to do. I would be interested to hear what Jonathan says about not having to have an office at all. As a legal business with close links to the insurance industry, we have historically made a series of assumptions about needing to be in a particular location, and that we need so many seats and desks. That starts to drive costs in a ridiculous direction. Actually, if you say that you can work agilely and do not need such a large office, you start from an entirely different cost base. The question for the legal sector is whether the pool of talent that we are all chasing are still demanding an office, or will they work a little more agilely?

Jonathan Brenner: Our lawyers are driven by the desire to do really great-quality work as well as the other stuff that is just as, if not more, important to them, whether it is running a business, sailing, being a DJ in Ibiza or looking after their kids. There has been a very obvious talent drain from law firms, particularly in London, who have lost the opportunity to retain that talent. It is much better to keep somebody who is really good but can only work two days a week than it is to try to go out and invest in a brand new person. Our LOD lawyers feel really valued.

Mike Potter, Addleshaw Goddard: In terms of location and homeworking, it also depends on the level of person. If you are looking at paralegals, the level of supervision and training they need means that they often need to be in the same place, because of the way that they feed off each other. We are based in Manchester because one of our three main UK offices is there. In terms of building a team and building confidence, it is absolutely critical to us that they are in a similar place to our lawyers. It is not so much a cost play, although it is to an extent, because we could have set up in London.

David Crook, White & Case: I go back to what was said earlier about this being an opportunity to create something from scratch that actually works. It is naturally a hybrid solution, because you need a core team – there are certain tasks for which you need a team to be physically there, because of the nature of supervision required – but it then also encourages you to think more flexibly about your resources. There are lots of alternatives available now, in terms of both employees who have flexible working and outsourcing opportunities. That hybrid solution, where you use a centre as a way of managing that flexible resource, is quite an attractive idea.

Mike Potter: I agree with that. We are a team that promotes flexible and agile working. We are the team who have the most people returning from career breaks, for example, and are looking for a foot back in the door or want two or three days a week. You are saying it is a hybrid model, but it is a different level of seniority.

Mark McAteer: To what extent are we now in a perfect storm? You have client demand for external lawyers to work in a cost-effective manner. Marry that to Generation Y wanting greater flexibility and you have ideal conditions for nearshoring.

Mike Polson: All of these things are coming together. We have technology that has been around for a while suddenly becoming very usable, in that people are able to deploy it readily into their businesses. You have a massively fragmented market, which creates an opportunity for new entrants. Then you have the client dynamics, which have changed forever in terms of where the power sits in the relationship. Then there is globalisation and the changing needs of our people. All of those dynamics are coming together. Even in the two years that we have been open, the pace of change has accelerated. Our thinking is well beyond where it was two years ago, in terms of what we need to do. For us, Glasgow is just one small part of the jigsaw.

Alan Greenough, Hogan Lovells: A client won’t necessarily say, ‘If you do not have a legal centre, we are not going to instruct you,’ but you will be asked what is different and innovative about you. ‘What can you do for us on cost?’ There is a demand for more from less, which we have all heard. Having a legal services centre like this enables you to answer a lot of that, but also put better pricing together.

Olivia Balson, Freshfields Bruckhaus Deringer: We think of it as having two types of client: the external client and then our internal client within Freshfields. For employee engagement reasons as well, it is fantastic and exciting to have the legal services centre providing a high-quality and flexible service to our internal clients globally. That then allows them to provide different high-quality and efficient services to the external client. Those two things come together quite nicely.

Mark McAteer: Why was it this year for Freshfields?

Olivia Balson: Freshfields had been thinking about doing it for quite some time and did not want to do it in a rush. We wanted to ensure that we thought about all the different priorities of the business. It is not just legal services in the Centre; there are other functions as well. We wanted to make sure that we did it right.

Alan Greenough: It took about two years for us. We had a big decision as to what we did with business support, which is now in Johannesburg. There was a lot of debate as to whether to have that in the same place as the legal services centre. That thought process before being able to open in Birmingham took about two years.

Mark McAteer: How much are clients demanding that you provide this option?

Alan Greenough: I do not think they are that concerned about how it is done, so it is up to you to get it right. We agree the price and make sure that is delivered. When actually doing the work, we have not seen a lot of client interest in how the job is done, but a lot of interest when doing the pitch.

Jonathan Brenner: In the LOD lifecycle, when the GC [general counsel] started talking about needing to be more innovative, about seven years ago, ‘innovative’ just meant cheaper. Now, it has so many more connotations. They want their work done efficiently. They are very happy for law firms to make a profit, but not necessarily at their expense. They are really interested in working with organisations that display proper innovation, because they need to look good when they are reporting to their CFO and COO. One of the interesting discussions is that GCs are asking the law firms on their panel to collaborate with each other, rather than compete. What is the point of getting five law firms to deliver a different knowhow solution, when they can say: ‘You deliver the knowhow solution; we are going to get the implementation from somebody else.’

David Crook: The point about firms co-operating takes you to a related topic, which is project management. There is an opportunity for the major law firms because, quite rightly, clients are expecting you to disaggregate the larger jobs and look not only at what you can do more effectively in a different part of your own business, but possibly who you can co-operate with to get the best solution overall. That means the project management of the whole matter is at a premium.

Simon Konsta, Clyde & Co: I agree with you over project management. Litigation represents a substantial proportion of our business. Over the last two to three years, in the larger litigation and arbitration, we have seen instances where some components of the litigation work stream, which were historically core, and confined, to the firm instructed are now being tendered to other providers more broadly. That represents a threat of sorts, but also a significant opportunity to take our capabilities in areas such as substantial disclosure and document management, and to select an appropriate office in the UK to be a nearshore centre for those activities at a competitive price – a centralised production centre if you like.

Mike Polson: It is also disaggregating skills. Part of the issue with project management is that we expect our lawyers to be project managers, as well as doing the complex technical legal work. Actually, the clients increasingly see the benefit of specialist project management in the middle of that delivery chain. The project manager role is different from the lawyer role – each needs to know a bit about what the other does, but it is skills recognition. You have lawyers who are very good with technology and you can develop them to have much more of a technology-focused role. It is almost unbundling the traditional career and giving people clearer ways that they can develop.

Jobs will emerge in the legal services market that have not been thought of today. We need to recognise the skills that we need in our business and develop them.

Jim Mason, Scottish Development International: We are recruiting a lot of graduates in business administration, project management, financial services and accountancy, and most of them would probably never have thought of having a career in the legal profession. The message we have today is that there are opportunities because things have changed. Delivery models have changed.

James Richards: It is a really good point. Suddenly law firms have been shaken up by the financial crisis. Actually, this is an enormous opportunity for everyone. This is probably the first opportunity there has been in my career when people are thinking, ‘We can completely reconstruct how law firms and other organisations provide legal services and ancillary services.’

One of the things that I found exciting about Belfast is that it has been a catalyst for lawyers around the world to look at what they do. It is about starting conversations around the firm, internally and with clients as well, about what we can do. If we all come back here in five years, the landscape will be completely different.

Jonathan Brenner: We have reached a bit of a tipping point. It is not just the Generation X, Y and Z lawyers who are demanding change. There is a growing cohort of partners in their 30s and 40s, who have grown up professionally in a very different environment from those who are a couple of generations ahead. They are experiencing great pressure to deliver their work much more efficiently and they are the ones who are so willing to be engaged in new ways of delivering their services.

Mark McAteer: Chantel, are you receiving many enquiries from members who are based in London about their options back in Scotland?

Chantel Gaber, Law Society of Scotland: The majority of members who I spoke to intend to be here for two or three years. They will cut their teeth in a legal firm, get the brand and move back. They are most interested in making sure that, if they move back, they can be seen at the same level. They look at it as a way to keep all those experiences and be valued.

Mark McAteer: Why are clients turning to their law firms to provide these facilities? Why are they not building this themselves in-house, having this pool of legal talent?

Mike Polson: You need scale to make it work and a lot of in-house teams do not have that scale. Banks have had documentation centres for some time, but there are many in-house teams who do not have that sort of scale or need in their operations. There is also an in-house challenge about whether that is actually the sort of work that you, as an in-house team, should be doing. Is that the most effective way of delivering those services?

Jonathan Brenner: The banks’ demand for free secondees to the law firms has been a real driver for change, in the sense that the law firms are now feeling powerful enough to push back and say: ‘That is a really expensive and unsustainable way of resourcing our business. You may not realise, but in the four or five years that we have been on your panel, we have got rid of most of the senior associates whom we would normally put on secondment. We will only give you a junior.’ Actually, the return on investment is not guaranteed now, which has been a driver for law firms to come up with lots of more creative ways to do it.

Mark McAteer: You spoke of a tipping point. How far can it go?

Jonathan Brenner: The trend that we are all experiencing is that the shape and structure of law firms is changing. Providing that the front end is delivering the quality product to the client, the client does not really mind what is under the bonnet. The better law firms will be the ones that bring in expertise that they cannot grow themselves, whether it is a flexible lawyer pool, project management or account management. We will see quite a dramatic change in the way law firms are structured. If you look under the bonnet of a top-of-the-range car, a lot of the parts are made by other carmakers. They do not necessarily shout about it, but what you get is a great end product that looks good and works really efficiently.

Mark Heighton: There is an issue in terms of brand. For the law firms that are headquartered primarily in London, how much of your business do you want to be seen as outside London? If you are one of the big regional firms, you already have offices in Manchester, so your brand is different.

Olivia Balson: It comes back to your question earlier about what clients are demanding. They are just expecting you to get on with it. They just expect that we will provide the same high-quality service, in the best, most efficient and flexible way.

Simon Konsta: The majority of our corporate clients have been through cycles of very profound change and challenge: the global financial crisis, restructurings, merger, consolidation, redundancy programmes and cost-saving steps. They look rather curiously at legal providers who agonise over how their efforts to right size and shape their businesses might be perceived.

No client has ever been critical of an attempt of our own initiative to develop our model into something more effective, flexible and proximate to where they want us to be. The fact that we are sitting around this table as some of the major national and international law firms demonstrates that the needle has shifted irreversibly. The cat is out of the bag, as far as sole City branding is concerned. Our perception is that few if any of our clients would look ill on an organisation that has moved production or support to somewhere else on a nearshore basis.

Mark McAteer: Will we get to a situation where capacity will be an issue in these alternative centres? Is that talent pool going to dry out?

Mike Potter: It depends on the level. At graduate level, yes. We have recruited hundreds of graduates and probably half of them are not from the North West. They have relocated to these regions because it is a big city, because it is a big law firm and they want to get their foot on the ladder on their route through to becoming a lawyer, or just to do something different. We and others coming in do not find any issues whatsoever in attracting talent of that level. It would be different at the lawyer level and the more senior you go, but for graduates, not at all at the moment.

James Richards: For somewhere like Belfast, where historically the indigenous legal sector has been relatively small, having other players move in makes people want to stay to pursue their careers. More firms arriving and training people for these roles will grow the talent pool by itself. It is widely recognised that there are more good law graduates being produced than there are roles for them in Northern Ireland. It is not a limitless supply, but there is a large group of people graduating every year. There will be a bit of a talent war for the more esoteric roles, but the market will develop to increase the number of people available. LB

mark.mcateer@legalease.co.uk