Client market power means continuing cost-cutting

Until recently, corporations had two ways to meet their legal needs through in-house law departments and outside counsel, typically the top 50 UK law firms. That worked well for many years, but the legal market boom from 2000 to 2007 planted seeds of change.

During the boom, law firms raised billing rates well in excess of inflation, leading to growing partner profits. A few entrepreneurs saw the opportunity to do well by offering lower legal costs.  They created legal process outsourcing (LPO) companies.

Well-established LPOs, such as CPA Global, Integreon, Pangea3 and United Lex, perform high-volume legal tasks, including document review, contract management and due diligence. They can achieve a saving of as much as 50 per cent compared to law firms’ costs.

Much of this saving comes from using lower cost lawyers in India. Some of it comes from the efficiency of applying industrial techniques, such as process improvement, metrics, formal governance and detailed playbooks.

The biggest share of LPO business is from disputes that involve high volumes of documents, including e-mail, word processing files and pdfs. Reviewing these documents requires large teams of lawyers. A big team, operated with industrial precision in Mumbai, costs much less than one operated in London or Birmingham.

The 2008 crash boosted legal process outsourcing, but also spurred entrenched and new players to develop other cost-saving approaches

Indeed, the early buzz – and also skepticism – about LPO centered on sending legal work to India. However, after a few years, many legal buyers realised that offshore lawyers provided high-quality work, and that ethical and security concerns were readily addressed. But just as LPO was becoming established, the economic crash of 2008 brought much of the business world tumbling down.

The crash put severe and ongoing pressure on corporate legal budgets. That boosted LPO sales, but also spurred entrenched and new players to develop other cost-saving approaches including:

  • New options under legal reform. With UK legal reform and alternative business structures (ABS), ownership of law firms is no longer restricted to lawyers. The ABS story began in 2012 and so is still unfolding, but the corporate market has already seen new, low-cost entrants. For example, both Carillion and BT offer legal service delivery models with lower costs than traditional law firms.
  • New model law firms. The large law firm business formula is simple: bill clients dearly, by the hour, to cover enormous overheads, hefty partner profits and high associate compensation. But a new class of law firms is emerging that reduces overheads, eliminates most partners and offers fixed-fee service. Fixed fees motivate cost-saving automation and improvements in processes. Prominent examples include Wirral-based Riverview Law.
  • Captive low-cost corporate and law firm centres. Many large law firms and a handful of corporates operate their own low-cost legal centres for high-volume legal work and support. Clifford Chance has had a centre in India since 2005. More recently, Herbert Smith and Allen & Overy have opened Belfast centres. Other firms have centres in the north of England.
  • LPO partnerships. A handful of large law firms have partnered with LPO providers to reduce client cost. Examples include Simmons & Simmons and King & Wood Mallesons.
  • Lawyers at lower cost. For over a decade, Axiom Law, which is not a law firm, has been placing ex-large firm lawyers in law departments for fixed duration, well-defined projects, at much lower cost than firms. More recently, firms including Berwin Leighton and Eversheds, have been offering lower-cost staffing options.
  • Process improvement. Seyfarth Shaw has received wide and positive publicity for its Seyfarth Lean programme for client work, modelled on the managerial efficiencies of Lean Six Sigma.
  • Alternative fee arrangements. Clients increasingly demand fixed fees or other arrangements where law firms bear the risk of overworking. As firms adopt this model, to make a profit they must learn budgeting and project management to optimise resource allocation and control cost. This is slowly rationalising how traditional firms deliver services and is reducing cost.

What do these developments mean for the legal landscape? Although LPO providers continue to grow, with so many other options, they remain a small percentage of the corporate law market. LPO in India faces challenges because although lawyers in Northern Ireland, Scotland and the north of England cost more than in India, they cost less than in London, and do not create any time-zone or cultural challenges. Consequently, some LPO providers now have onshore operations.

We are likely to see an ever-more complex and nuanced legal landscape. Even the United States, with its restrictive, 19th-century world view of legal market regulation, is seeing rapid growth in alternatives to large firms. In the UK, market reform will undoubtedly yield ever-more new and more cost-effective approaches.

The future that legal expert Richard Susskind describes, when the bespoke work of the large firms is limited to a shrinking number of matters, is now arriving.

The wild card in predicting the future landscape is the general counsel. Complaining about cost accomplishes little; changing buying behaviour accomplishes a great deal. If clients exercise their market power to obtain better value, we are likely to see a very varied legal landscape.