Prize fight: Get ready to face LPO providers as competitors

 

Legal service outsourcing ( LSO), which is also know as legal process outsourcing (LPO), has been big news for several years now. The premise upon which it is based is simple: much of the legal needs that clients have involve straightforward tasks that do not need to be addressed by (expensive) lawyers, whether practicing in-house or in law firms providing external legal advice.

Even when those needs are more complex and do undeniably require the attention of an experienced and skilled lawyer in order for the client to be properly served, the process of developing and delivering the service can be broken down into multiple tasks or steps, some of which are similarly simple and straightforward.

LSO providers claim (with considerable justification) to be not only cheaper than traditional law firms, but also more efficient and reliable in their service delivery, especially at the more commoditised level. This message plays very clearly to general perceptions that legal costs are opaque and that practices employed by conventional law firms are outmoded and inefficient.

Reports of major ‘wins’ being achieved – most famously, perhaps, Rio Tinto citing saving $17m (about £10.8m) in legal costs through the use of an LPO provider – have fuelled the fire. LSO has become a billion-dollar business that is set to quadruple, some say, to $4bn p.a. by about 2015.

However, given that the total global market for external legal advice is today estimated at roughly $500bn p.a., a $1bn market share suggests that LSO providers currently occupy only about 0.2 per cent of the market. Even were this to quadruple, by that logic, more than 99 per cent of legal work would still go to ‘conventional’ law firms.

Of course, LSO providers are not growing market share evenly across the globe. They are focusing on the mature markets of Europe and North America. Their market share and threat to law firms in those jurisdictions is therefore greater.

A survey of in-house counsel conducted by the International In-house Counsel Journal revealed furthermore that, in 2012, nearly 80 per cent of the general counsel polled said that they did not outsource legal work to non-law firm legal providers. Roughly ten per cent of respondents said that they gave up to ?ten per cent of such work to non-law ?firm legal service providers and only ?a tiny minority said that they were sending more than 20 per cent of legal work to such providers.

All of this sounds immensely comforting until one realises that, at one time, music streaming constituted only one per cent of a market dominated by CD manufacturers and, before that, similar imbalances existed between CDs and LP records. History is full of stories about leading businesses that could not transform themselves in response to changes in the market and whose pre-eminence was taken up by others.

In his book The Innovator’s Dilemma, Harvard Business School professor Clayton Christensen showed how the more successful a company was and, often, the better managed it was, the more difficult it was to sustain that success when new technology emerged that displaced the one that had made it successful.

There seems little doubt that we are witnessing a similar phenomenon in the legal profession. LSO providers can position themselves as new and unconstrained by the traditions and baggage of mature partnerships. They can start from scratch with new processes and approaches that optimise technology and other efficiency drivers in delivering selected services.

Not all LSO providers operate the same way, though. Those that rely upon labour arbitrage rather than process improvement for their competitive advantage sometimes have business models that resemble the worst of the excesses for which law firms have been criticised, including high leverage, poor supervision and high staff turnover. These companies will not remain competitive, except perhaps for the most rudimentary of legal processes.

Some law firms are adopting similar techniques by simply relocating some functions like document review to cheaper centres, but (importantly) without sacrificing quality of supervision. However, such strategies can deliver only transient competitive advantage if not accompanied by thoughtful and radical process reinvention in their mainstream practices. This is difficult, both technically and because of pushback by lawyers who do not want to abandon work practices that they find comfortable, but it must be done if the firm is to retain its market position in the long term.

Some key differences between the business models of conventional law ?firms and LSO providers are illustrated ?in Figure 1.

 

Current approaches

The strategies that law firms currently tend to adopt in response to client demands to use LPO providers can broadly be categorised as:?

1. defensive: “these are our tactics if we are forced to use an LPO”;

2. copycat: “we can beat the LSOs at their own game”;

3. creative: “we’ll build our own model”; and

4. disruptive: “we need to reinvent ourselves”.

 

1. Defensive

The law firm develops a set of procedures to use, should a client demand that it uses an LPO provider. This is the least proactive approach. It involves identifying an LPO provider with which the firm feels it can work and then negotiating the practicalities and how security and regulatory requirements will be met.

The relationship is kept very much at arms’ length, with the firm sometimes even insisting that the client appoint the LPO provider separately. This means that, on a transaction, the client may actually have to accept a slightly higher risk, as the law firm is not actually taking accountability for the entire transaction.

Law firms adopting this approach fail to understand the underlying strategic drivers of the trend towards LSO. Typically, they are not adapting their own business models at all but merely finding ways to accommodate LSOs, somewhat begrudgingly, as a defensive tactic.

2. Copycat

Some law firms have tried to compete with LSO providers by building low-cost capabilities themselves through establishing their own captive (onshore or offshore) centres to make their services cheaper. Their rationale is that, by moving to new locations, a law firm can use labour arbitrage to deliver low-end services less expensively.

Making intelligent use of locations ?to reduce the cost of delivering a service is sensible. But, it is misguided for a law firm to believe that it can become more efficient simply by transplanting outmoded processes to cheaper areas of the world.

It is also highly unlikely that even the largest law firm can really challenge companies like Infosys in terms of economies of scale, resources, best practice and career opportunities for those staffing such offices.

Captive centres aimed at substantive legal services – as opposed to business service functions – may prove difficult to sustain in the long term.

3. Creative

Some law firms have taken a slightly bolder approach and created new entities that can operate independent of the parent firm, and therefore become more agile without the baggage of the traditional law firm.

Berwin Leighton Paisner, for example, created its Lawyers on Demand business and DLA Piper created LawVest. It is quite likely that, in England and ?Wales at any rate, more firms will ?explore this avenue using alternative business structures.

In isolation, however, these are all tactics that law firms use to deal with the symptom – that LSO providers will continue to take specific work away ?from them. They fail to address the underlying cause.

In doing so, the danger exists ?that, as client demands for cost ?savings and efficiency increase and ?the abilities of LSO providers become more sophisticated, the work that law firms lose becomes increasingly specialised until their core businesses become threatened.

4. Disruptive

The most forward-thinking law ?firms understand that LSO is gaining traction only because the traditional ?legal processes are outdated. They recognise that this, rather than LSO ?in itself, drives the risk to their ?business. They know that they will ?require a proper strategy for staffing ?and delivering their legal services to clients in new ways.

Future approaches

So, how can law firms reinvent themselves to deliver legal services to clients in new ways? They will need to:?

1. properly understand their legal processes and be able to disaggregate them;

2. have the right sourcing strategy for each disaggregated legal process;

3. have the right systems and processes in place to manage these more effectively;

4. have the right people strategies in place; and

5. reinvent their client relationships.

 

1. Legal process disaggregation

All but the most commoditised legal transactions are ultimately bespoke, it is true, but this applies only to specific steps in the service delivery process. Other steps are far more routine, with conditions, steps, documents, legal and commercial risks, and skill types that have been used before. It is the skill of the lawyer to understand which components are required for each specific transaction and be able to configure these components in the best way to meet clients’ needs.

2. Sourcing strategy

An effective matter sourcing plan covers the appropriate use of technology using LSO-style services for specific components and using the right mix of experience and expertise that is available within the firm, while making flexible use of talent that is known to the business. It is important to be able to understand when to use each of these techniques to deliver specific areas of the legal service.

3. Systems and processes

It is essential for lawyers to become better skilled at managing more complex projects. They need to manage increasingly-complex supply chains, including the delivery of services where they are not in direct control of some of the components. They need to be able to deploy consistent processes in such ?a way as to manage quality and risk. ?They must get better at sharing information and collaborating across ?their organisations and with clients. ?They need to develop better ways of retaining, analysing and systemising knowledge and information, so that it can be used across the organisation in ?a consistent and effective way.

4. People strategies

In the traditional law firm pyramid structure, trainees did repetitive commoditised work to learn their profession, graduating to more complex and bespoke work as they became more experienced. In a world where that rump of commodity work no longer exists, law firms need to have effective talent management strategies in place to ?ensure that:

• fee-earners at all levels are deployed effectively on matters;

• key talent is retained within the firm as it transitions business models and beyond; and

• the firm can train its young lawyers properly, without charging high fees for them while they learn.

5. Client relationships

The most forward-thinking firms know that technical expertise alone is not enough of a differentiator to win client loyalty. They recognise that they need to find new ways of differentiating themselves from their competitors and to build closer and deeper relationships with their clients. This is not just a business development issue.

The redesign of a firm’s processes to deliver more for less to clients cannot sensibly be done without working closely with those clients. Taken a step deeper, process redesign offers opportunities to integrate the firm’s processes with the client’s processes in ways that would never have been contemplated before.

Adapting legal service delivery so that it supports a client’s business model rather than simply providing external advice as a standalone service holds great potential for increasing the depth, breadth and lifespan of the firm’s relationships with that client.

Aligning business models

Delivering greater value to clients at ?lower cost is not so much about the ?nature of the legal service provider as it ?is about the business model that it employs in rendering those services. That, in turn, is largely a function of the nature of those services and the provider’s willingness to embrace new practices that drive efficiency.

In the years to come, will the legal service providers who dominate the market be today’s law firms that have successfully and radically evolved their processes and practices in the same way as accountants, stockbrokers and many other professionals have done? Or will they be entirely new businesses that have their roots in today’s LSO providers? Will they perhaps be something different to either of these? It is impossible to foretell.

But, these questions are far less important than the question of what law firms need to do, right now, in order to balance their short-term need for profitability with their longer-term need to align their business models with what clients are demanding.

The market is as brutal as any jungle and the penalty for failure to adapt to changing circumstances is as dire ?in both.

Tim Hanson, Rob Millard and ?Simon Thompson are partners at ?Venturis Consulting Group ?(www.venturisconsulting.com). ?Tim and Rob were formerly senior members of Linklaters’ strategy and business transformation team and Simon was formerly global COO at Linklaters.