Home and away

Key messages from a recent meeting hosted by the Society to discuss the potential for outsourcing as a means of improving business efficiency

19th April 2010 | Craig Watson

During the recent recession, solicitors’ firms across the country faced difficult decisions over working hours, overheads and, in some cases, redundancy. However, if the downturn focused minds on short-term cost cutting, the recovery, however sluggish, is the time to consider longer-term options for efficiency. According to industry specialists who attended the Society’s latest meeting of the big firms, outsourcing legal work could prove an effective response to market pressures long after the recession is over.

David Ellis, a partner with OMC Partners management consultancy, which advises solicitors in private practice and in-house counsel, says: “There is no single answer for firms but legal process outsourcing (LPO) is certainly a rapidly emerging market that offers great opportunities. It’s a potential solution. Some of the recent responses of law firms to market pressures addressed the short-term over-capacity brought about by the recession. But the need for operational efficiency is enduring and so there is an increasing focus on strategic transformation.

“People are looking at it in a much more structured fashion – how can they re-engineer operations to most appropriately meet clients’ differing needs? Every one of the top 25 law firms in the UK is examining this pretty rigorously.”

Law firms, while defined by the quality of their service, are facing increasing cost and talent pressures to maintain profitability, Ellis adds. Also, reform of legal services provision throughout the UK could bring new entrants to the marketplace. At the same time, consumer demands and technological advances provide ever-changing challenges as well as opportunities. Throughout the industry, solicitors are confronting the need to be more innovative and transparent in pricing, to improve customer services and to ensure work is performed by the right person at the right price.

“Captive” market

Scottish practices have so far been reluctant to indicate publicly their enthusiasm or otherwise for outsourcing. Less so south of the border. Magic circle firms Linklaters, Clifford Chance, Allen & Overy and Slaughter & May are known to outsource legal work, as are those with a cross-border presence, such as Eversheds and Pinsent Masons, each using one or more of the three main LPO structures.

Baker & McKenzie and Clifford Chance, for instance, have their own so-called “captives”, a new capability built in a low cost jurisdiction, delivering non-advisory work. Eversheds and Lovells use their network of alliance partners, while Allen & Overy and Baker & McKenzie outsource work to third parties. The latter is a good example of a firm using multiple models. The work carried out is often standardised or commoditised but the scope is expanding to include other areas of legal services.

Ellis continues: “Although the big firms are the early public adopters, the smaller firms are also taking advantage as the strategy matures. On the whole, I am surprised how quickly firms are doing this and how quickly they are expanding the range of services – not many practice areas are now completely untouched. There isn’t a fully integrated front-to-back office provider yet, but good quality work is being delivered to an increasing range of clients. In the end, it’s all about getting greater efficiency. That involves more than just outsourcing – other levers such as adapting business practices and improving use of technology are also important – but outsourcing has a big place among a range of strategies.”

Learning curve

A former partner at McGrigors in Glasgow and London, Robert Glennie co-founded NewGalexy Partners Ltd to build on previous experience as chief executive of KLegal International, the grouping of law firms from different countries which formerly sat alongside KPMG and was working towards using lower cost-base member firms to carry out work for higher cost-base members. Also giving a presentation at the meeting, he described NewGalexy as a “quasi-legal firm” with a growing overseas presence.

He says: “NewGalexy is different from many other enterprises in that we are all lawyers. While we do what I would call real legal work, we don’t offer back office support. All UK firms carry out some work, often loss making, just to get business that is more profitable from clients. Taking the cost out of that provision was one of the drivers behind this.

“We set up in Mumbai because it is an established centre for business and legal process outsourcing. India has a background of successful legal ‘captives’ with an availability of bright new lawyers from university. In Mumbai, we can hire and retain good quality lawyers with English language skills at a competitive cost base.”

He explains that law firms are currently choosing to outsource work such as legal risk management, commercial contracts, legal due diligence and litigation support. Although an even broader range of services is offered, there appears to be a reluctance to fully realise the potential of outsourcing. With that in mind, and aware that many firms want more control over outsourced work than conventional providers allow, NewGalexy has introduced the option of managing ‘captives’ on behalf of firms and legal departments. With a new base expected to open in New Zealand, this could involve taking on former employees who have returned to their home jurisdiction – at lower salary costs than the UK but with no loss of legal expertise.

Glennie says: “It is a learning curve for those involved and there can be regulatory issues, but these can be worked through without falling off the end. The benefits are many – reduced cost, increased competitiveness and, at least for now, the advantage of being an early mover.”

Scotland as provider

Neil Stevenson, the Society’s Director of Representation and Professional Support, also emphasises the benefit of considering outsourcing at an early stage. He says: “This is something I believe every firm should be considering. It may not be the right option for everyone, but there is a real danger that if this is not on a firm’s radar, they will be disadvantaged when others move first. It would be fantastic for Scottish firms to take a lead in delivering legal services more creatively, rather than the driver coming from in-house counsel.”

He adds that there are opportunities for Scotland as a jurisdiction itself to develop as a centre for outsourcing. “When the economic downturn first hit, the magic circle firms suddenly found competition from the next tier of practices outside London, including Scotland. Scottish firms should definitely be considering the opportunities around providing outsourcing services to others.”

David Ellis agrees: “Discussions are already taking place with some London firms that are looking to get a price differential by partnering firms elsewhere in the UK. We are going to see a lot more of that and I fully expect Scotland to be a player. But it won’t be the only one. If there is a structured approach, I think you would find there is a big appetite down south.”

Craig Watson is a freelance journalist with a special interest in legal affairs

Which firms are outsourcing legal work?

In-house counsel have been greater adopters of legal process outsourcing than law firms due to greater comfort following wider use of outsourcing in other departments.

Law firms/in-house legal departments using (or who have announced they will use) legal process outsourcing:

Corporates