Outsourcing the law gets new look

Originally a cut-price option based on off-shoring back-office functions to lower-paid lawyers or paralegals, legal process outsourcing has evolved from its traditional business model, writes Peter Archer

As with so many other things, the “Great Recession” has proved an engine of change in legal services. Along with government-driven market liberalisation, pressure on prices from clients has caused many law firms and legal departments to look again at outsourcing legal processes.

Traditionally a cost-saving initiative involving off-shoring basic legal functions, such as large document review projects for litigation disclosure or transactional due diligence, to lower-paid providers, legal process outsourcing (LPO) has matured and diversified.

The global LPO market is currently estimated to be worth more than £1.5 billion and is tipped to continue growing. Providers based in India lead the off-shore surge with more than a million lawyers and around 130 outsourcing law firms. The Philippines, often considered the second largest LPO off-shore destination, has some 40,000 lawyers.

But as well as sub-contracting to off-shore lawyers, there are other ways of outsourcing legal work, including to regional law firms who take on routine work from more expensive City firms at more attractive rates.

LPO business model

Alternative LPO

Contract lawyers, such as Berwin Leighton Paisner’s Lawyers on Demand and Eversheds Agile, represent an additional and innovative alternative by offering temporary support services – sort of locum lawyers – to law firms and in-house teams that need to cope with fluctuating workloads.

Obelisk Support, a legal outsourcing business that uses former City solicitors to provide temporary services, hopes to have 1,000 lawyers on its books by 2015 and last year grew by 400 per cent.

Such temporary external support is a flexible way of extending a legal team, usually on a project basis, with locum lawyers either working on-site or on-call and online.

A UK-based LPO company is NewGalexy, which has offices in Glasgow, London, Chicago and Mumbai, and is financing expansion plans using the crowdfunding website Crowdcube to raise more than £200,000. NewGalexy started seven years ago with teams of lawyers in India, but has since added on-shore lawyers in the UK to meet clients’ wishes.

Advances in computer software and technology, as well as improved communications, have further aided increased collaboration between firms, legal departments and outsource providers, wherever they are in the world.

If legal process outsourcing follows the same trajectory as other forms of business outsourcing, it is set to move up the value chain

Greater focus on unbundling legal services has enabled benefits from economies of scale and some clients now request or require the use of external providers to minimise the cost of routine legal work. LPO providers taking on this kind and quantity of work tend to manage processes and apply technology efficiently. Pangea3, for example, point out that they help transform how work is done in large law firms and legal departments by introducing and deploying contract management lifecycle systems to boost efficiency.

Outsourcing routine or repetitive work allows in-house lawyers to concentrate on high-value core activities which, in turn, further boosts a firm’s productivity and profit margins or limits a legal department’s costs.

However, LPO does present challenges which have further accelerated its evolution. Control has become a critical consideration and some UK firms wishing to enjoy the advantages of outsourcing also want to own the outsource provider.

Looking off-shore

Baker & McKenzie, one of the world’s biggest law firms, claimed to be the first to launch an off-shore base when it opened its Manila shared services centre in the Philippines in 2000, which now supports the firm’s 75 offices globally on a 24-hour basis.

Gary Senior, a global board member and former London managing partner, says it’s in Baker & McKenzie’s DNA as a worldwide law firm to work with people in different countries as a team. “It’s not just about cost,” he says. “There are also issues about quality of service and economies of scale.”

Cost was one benefit, but off-shoring has also been a business enabler allowing work to be serviced faster and more efficiently by the appropriate person in the appropriate jurisdiction.

Clifford Chance, one of the UK’s “Magic Circle” or big-five law practices, established its own off-shore centre in India in 2007.

Amanda Burton, Clifford Chance global chief operating officer, says: “The Global Shared Service Centre provides research, analytics and administration services to all Clifford Chance offices and personnel, as well as supporting the firm’s finance, IT and HR functions. Based in New Delhi, it is part of the firm’s plan to provide a more flexible cost model, increased efficiency and a better business continuity capability.”

Also in 2007, Clifford Chance established a Knowledge Centre, again based in New Delhi, where consultants are trained to provide support services specifically to Clifford Chance lawyers outside India on routine tasks, such as research and analysis, and discovery of documents.

“It enhances the firm’s flexibility and helps us to offer clients greater value for money,” says Ms Burton. “In the 2012-13 financial year, our Knowledge Centre supported Clifford Chance lawyers globally on 1,300 client projects for 263 partners, across 26 offices, across all practice areas.”

Other large firms may have shied away from operating overseas and have instead set up their own near-shore regional centres, such as Herbert Smith Freehills in Belfast, CMS Cameron McKenna in Bristol and Addleshaw Goddard in Manchester, offering clients better value for money because of the marked regional variation in salaries compared to London.

Top 10 countries where law firms prefer to outsource

But the salary differential and therefore potential for savings are greatest off-shore. For example, a fully qualified lawyer in India, with a law degree from the respected University of Delhi, can expect to earn an average of £12,000 a year, compared to a lawyer at a national practice in the UK who would start their career on £40,000 and aim to earn an average £100,000 as a salaried partner.

Less legally qualified and dealing with more routine work, paralegals in London earn between £30,000 and £44,000 a year compared to £5,000 to £8,000 in the Philippines.

But LPO providers in India and other relatively new frontiers are increasingly using UK-based lawyers as part of their outsourcing offering to ensure quality control and instil greater confidence in the ethical treatment of client-sensitive data, as well as further expand into more sophisticated business areas.

Integreon, widely regarded as an LPO standard-bearer, with major law firms and companies in the pharmaceutical, technology, energy and financial services industries among its primary clients, opened an LPO delivery centre in Bristol in 2012. The leading LPO provider recognises that, as the delivery of legal services evolves, most law firms and corporate counsel require a mix of on-shore and off-shore support.

According to Integreon client Microsoft, its outsource provider increased contract turnaround by 20 per cent and on-time delivery of contracts to 99.5 per cent.

Long-term relationships

As with outsourcing in any sector, success depends on establishing a good working partnership. So before entering into an outsourcing deal, firms or legal departments should ensure the provider understands exactly what is needed. They should never hire an LPO provider without visiting the site where their work will be delivered and meeting the managers. Communication is key.

But what of the future? If LPO follows the same trajectory as other forms of business outsourcing, it is set to move up the value chain to incorporate more complex, high-value tasks. And as clients and LPO providers build long-term relationships based on trust, transparency and collaboration, clients are more likely to engage providers for more end-to-end projects.

Enterprise partnerships may even become popular where the client and provider create a jointly owned enterprise that both services the client as well as seeks external customers.

Looking at patterns in IT and business process outsourcing, it could also be expected that the increased mergers and acquisitions activity within the LPO sector will gather pace. So, outsourcing may yet take over where many previously thought it would never catch on.