Piece of the action

The legal sector has been warily assessing the possibility of outsourcing some services for several years. But with Slaughters now investigating the viability of LPOs, suddenly everyone is taking serious notice

As recently as a year ago, the prospect of Slaughter and May outsourcing legal services overseas seemed as likely as a US president winning the Nobel Peace Prize. Yet, as a new decade dawns, President Obama has his medal and legal process outsourcing (LPO), and notably offshoring, is being weighed up by leading law firms and corporate counsel alike.

‘Our position has been overstated. We are looking at the area – just as any firm of a substantial size is going to be,’ explains Slaughters practice partner Paul Olney. The firm’s dalliance with LPO is hardly a first for law firms, or even a rarity. Still, it is being seen as a sign that some of the City’s most profitable and most conservative firms are taking the possibility seriously. And while cost-saving is a watchword for clients, there is genuine appeal to a technique that offers firms a way of taking low-level legal services and cutting the expense drastically, sometimes even in half.

Overnight sensation

That offshoring and outsourcing was a hot topic in 2009 is in no doubt. From February, when Osborne Clarke announced a £50m, seven-year deal with outsourcing services company Integreon to create the UK legal sector’s first onshore shared services centre, to November, when Allen & Overy signed its own deal with Integreon to offshore basic litigation document review to New York and Mumbai, saving anything up to 50% in costs, outsourcing has rarely been out of the news.

However, the implication that this is a tipping point is perhaps a little short of the truth. Firms have been offshoring business support functions for several years. However, according to Paul McGolpin, director of legal services outsourcing at CPA Global: ‘It’s the change in tone of conversation with law firms about LPO that has been particularly telling. It’s gone from them saying “outsourcing sounds interesting” to “we need to do something”.’

‘Our position has been overstated. We are looking at the area – just as any firm of a substantial size is going to be.’
Paul Olney, Slaughter and May

The significance of Slaughters’ move is that it underlines the idea that firms and clients are taking notice and the cultural barriers that surround the concept of outsourcing certain legal services are beginning to come down. Despite outsourcing having been around for several decades, that change in the legal sector has been a rapid one.

In terms of timing, the emergence of this technique as a credible option for firms can be partly attributed to the global downturn and the emphasis on cutting the cost of legal services. Lovells partner Neil Mirchandani says: ‘Three to five years ago there perhaps wasn’t the same cost pressure, not from clients and not for firms themselves. The recession wasn’t the kick-start for outsourcing, but it certainly pushed the idea higher up the agenda.’

The rise of litigation in leaner times has also sweetened the deal for firms facing increasing document review workloads and decreasing margins.

Perhaps the demand for outsourcing services is dependent on the health, or rather the bad health, of the economy. Not necessarily, Mirchandani says: ‘LPO is here to stay. If the economy were to pick up it might make the penetration of this process a little slower, but it can’t be ignored. All the top firms are looking at the issue. It’s a case of “we have to be able to offer that as well”.’

Pinsent Masons legal director Mark Surguy agrees. ‘Its growth is not just economically driven,’ he says. ‘The upcoming Legal Services Act and the way IT is continually changing what we’re able to do are two big forces that mean we need to find new ways of working.’

Key drivers

In the summer of 2009, Rio Tinto managing attorney Leah Cooper turned heads when she moved to outsource legal work to a team of lawyers near Delhi, slicing into the company’s external counsel spend. Not only did the move cause ripples for its unprecedented scale and profile, Cooper has since been a vocal supporter and has lent credibility to what was often seen as an untested process. (To read Cooper’s view on the LPO phenomenon see The Client on page 19.) ‘Leah Cooper made a big statement, showing that LPO can be cheaper and can be better than the current way of working’, says Graham Richardson, a partner at Eversheds.

General counsel as a group have, understandably, been as hesitant as the firms they instruct to adopt an LPO option. Though with cost pressure as a driver, greater numbers are asking firms what they are going to do about it. ‘It’s quite possible that we might suggest that a firm look into it, or it might simply be something that we do for ourselves,’ says BT’s vice-president of legal Susan Sturrock. ‘Outsourcing can be an appropriate strategy for the appropriate type of work and if that’s the best option we may just go to the outsourcers direct.’

Naturally, the prospect of shedding an expensive UK workforce has its positives from a firm’s perspective. But offshoring isn’t a process that firms are eager to force on clients and the strategy itself isn’t one that firms have a history of adopting lightly.

Olney confirms: ‘We’re always looking to be responsive to our clients’ needs and the natural extension of that in the current cost-conscious environment is to look at ways of making non-legal functions cheaper.’

Undoubtedly, pressure from clients is a key factor and, if more continue to follow Rio Tinto’s example, the onus is on firms to respond. ‘There is an interesting dynamic in that law firms spend a lot of time winning the trust of their clients and outsourcing is one of those instances where some might see this as giving trust away, by sending their work to India for example,’ notes Christopher Arnull, associate general counsel at KPMG. ‘Others will see it as strengthening that bond by showing the best route to reduce their legal costs. In some cases it’s very appropriate for outsourcing to be considered, but I think the difficulty for law firms will arise when they want to use it more and more, and individual clients continue to object, meaning that they have to have different systems in place for each client.’

Testing the water

Before the outsourcers begin passing round the champagne, there remains scepticism on all sides. One general counsel at an international corporation tells LB: ‘Generally, it would be difficult to see the benefit of sending work to a different time zone. With the practicalities concerned and the potential for difficulties to arise, it might not end up saving that much money.’ Another says: ‘I wouldn’t feel comfortable with the law firm we use sending sensitive work elsewhere.’

While the market of international outsourcers is roughly 150 recognised companies, there are fewer than ten at the top that are in a serious position to compete for leading law firms’ work. Their challenge has been to overcome the negative perceptions that come attached to terms such as outsourcing.

It is, however, of interest that a few general counsel interviewees claimed they were unaware of what exactly the process involves. The major outsourcing businesses are still quite young companies, with big players like CPA Global only having moved into the field as late as 2005. Market awareness of the technique and the players involved has leapt during 2009 – though penetration is not total.

‘Outsourcing can be an appropriate strategy for some work and if that’s the best option we may just go to the outsourcers direct.’
Susan Sturrock, BT

‘Many people have the immediate association of “call-centre – not what I want to hear”,’ Richardson says. ‘We have to sell this to in-house counsel as well, and there are occasionally perception problems, but it’s often a case of trying it first. Once they do that, they realise it’s better, faster and cheaper.’

While myths surround the process, counsel are reluctant to be the first to engage with something about which they know little. ‘One of the keys will be transparency, firms need to be able to demonstrate to clients exactly what is happening with their work,’ Arnull says.

A November 2009 report from Indian information company ValueNotes on legal services outsourcing estimated that Indian LPO revenues would reach $440m by the end of 2010, a figure that seems likely to depend on counsel being able to take confidence from seeing those that have gone before, and those firms that are prepared to put their faith in outsourcing companies.

As Sturrock puts it: ‘I assume that there are no quality issues. We trust our external counsel and if they’re prepared to put their name to a piece of work, we’d expect appropriate quality standards.’

Hard sell

The US has been quicker than the UK to embrace the idea of LPO and many of the largest firms across the pond have a mixture of offshoring and onshore outsourcing strategies. But in the wider picture, LPO growth was slower than expected during this most recent recession and many Stateside counsel expressed scepticism about the process.

The main cause of concern tended to circulate around the realisation that the quality of work that firms were putting their names to was not up to scratch. Meanwhile, in 2008 the Bank of New York Mellon was a victim of a data security breach while under the responsibility of an outsourcing services company.

It’s easy to see why the UK legal market, rarely the most cavalier of animals, might be approaching with caution.

‘Law firms spend a lot of time winning the trust of clients and some might see outsourcing as giving trust away.’
Christopher Arnull, KPMG

As Arnull points out: ‘If a component in a big deal, for example, is outsourced and it comes back with mistakes or there are complications that hold up a crucial piece of work, that will most likely be damaging to the reputation of that market.’

That said, those UK firms engaging with outsourcing have been at pains to make sure they don’t repeat the same mistakes as US firms, and the increasing maturity of the elite outsourcing service providers is at the heart of the progress being made.

John Croft, president of global sales at Integreon, which in 2009 signed significant deals with Osborne Clarke and Simmons & Simmons, is keen to point out that ‘there’s real rigour in the process. It’s robust. Everything is measured and tested. Everything produced has to be consistent and defensible in court. Outsourcers have to be able to show clients exactly the process that was followed and prove our legitimacy every step of the way.’

Jack Diggle, legal specialist at OMC Partners, takes it a step further. ‘Rather than diluting quality, which is one of the first questions anyone would raise, the basis of the process should be about improving quality,’ he says. ‘There’s no real reason why that shouldn’t be part of what they’re trying to achieve.’

The success of outsourcing companies in persuading firms and corporates that they can be trusted is crucial to the progression of this market. While there are hurdles present in overcoming the perceptions that surround them, the number of voices prepared to speak positively lends credence to their cause.

Rookie woes

The removal of low-level work from these shores presents another potential problem. Those junior lawyers that would usually cut their teeth on document reviews, for example, are left without this source of training.

However, opinion is divided as to how deeply this could affect firms and how they structure their training.

Mirchandani believes that: ‘There is a threat to the training of younger lawyers, mainly in terms of the numbers of junior lawyers who might receive training. Juniors are now much more versed in manipulating data and have skills in other areas and this, combined with less available document review work, might impact the model of law firms as we know it.’

Surguy sees it differently. ‘I don’t think junior lawyers will suffer as much as some are saying. Some of the work being outsourced didn’t exist five or ten years ago. Younger lawyers who are keen on their training are also going to be more keen on getting hands-on with projects and using the skills they’ve been taught on different work,’ he says.

Richardson agrees: ‘Look at accountancy work – there are plenty of other industries that have already come up against these problems as they got to outsourcing earlier. In certain cases there may be a need to rethink training strategies, but overall it’s not a problem.’

If LPO and offshoring are here to stay, firms need to decide if and how they are going to engage with them. There is no clear message from the market saying that having LPO capabilities is a deal-breaker. However, a look at the change in scenery from a year ago shows that things are happening at a dramatic pace and firms are in a position now to ensure they are able to have a competitive advantage by the time the extent of this burgeoning market becomes apparent. LB