A wake-up call?

My first business ended in disaster in 1997. We’d set out with the dream of enabling Scotland’s businesses to make money via the world wide web. As dotcom evangelists we would demonstrate the huge opportunities available and then provide the tools for them to conquer the online world.

The reluctance to change surprised our youthful minds, but looking back, the conversations with the bookshops John Smith and James Thin were typical of the response we got. My partner and I explained to senior managers about a business called Amazon, located in America, that posed a mortal threat to any traditional bookseller. More importantly, we emphasised the opportunity if they adopted an online strategy to go after the global market, well beyond the high streets of Scotland.

Needless to say, they didn’t buy our services, we went bust after two years, and later James Thin did the same and John Smith had to radically realign in order to survive.

I had strange flashbacks to that period when RBS announced that they were only going to appoint law firms which had an LPO strategy. As an adviser on LPO strategy, the news reminded me of how little attention I’d seen Scottish firms pay to LPO. In theory, here was a Scottish bank that would not be able to appoint Scottish law firms to its panel.

In reality, there will always be work that RBS chooses to have done in Scotland, but the threat is real. The line that RBS is taking is similar to that of many large corporates across all services: they want suppliers to demonstrate that they use the most cost-effective delivery mechanisms.

Today’s market

For Scottish law firms who want to supply to such clients – in Scotland, the wider UK, or globally – the question is going to come up more and more often: “Do you have a strategy for using LPO and do you embed LPO in your daily business practices?”

If RBS is asking that question this month, it will soon be followed by Lloyds, Standard Life and Barclays, and outside of finance by companies such as Aggreko, Weir Group, Scottish & Southern, John Menzies or Wood Group. And don’t forget the research presented by Brodies two years ago that even the public sector saw law departments as being a priority to outsource.

This is confirmed by our research. Recently my team has been analysing the state of the global LPO market in 2012. At headline level, the market has grown faster than anyone expected, adding 25% in each of the last three years. But the most important point for Scottish law firms is this: the research also shows suppliers switching focus from working for law firms to working for general counsel. This trend is most marked in the US, but the warning is there. Instead of using law firms with LPO suppliers, the GCs are taking law firms out of the equation and choosing to manage the work directly with the LPO. It’s a sea change that impacts revenues and PEP.

Public announcements of redundancies in Scottish law firms are augmented by private conversations about how difficult it is to go head to head with specialist legal suppliers. Just ask any of the traditional firms how difficult it is to win business against low-cost operators such as My Home Move.

Four-way split

The good news is that taking the right action is not difficult. A wide range of options is available, from buying ad hoc LPO services through to selling transactional activities to an LPO supplier.

We can divide firms into four quadrants:

• Passive: They do not have an LPO strategy and are unlikely to suggest the use of it to a client. When any partner is asked about their LPO strategy, they will not have an clear and pre-agreed approach to articulate.

• Reactive: Some partners and assignments use LPO, but there is no firm-wide LPO strategy or practice. Any two partners will respond differently when asked about LPO strategy by a client. It is unlikely to provide a competitive edge in a bid situation.

• Progressive: The firm has evaluated its options and adopted a standardised approach to LPO in specific practice areas. There are one or more strategic partnerships in place with LPO suppliers used for those areas, unless the client requests otherwise. It is an easy “tick in the box” when responding to tenders.

• Aggressive: The firm has recognised the value of LPO and carved out a layer of existing activities that it no longer wishes to invest in. These are hived off to a strategic LPO vehicle (separately run internal operation, sale to third party or joint venture). For these firms, LPO is seen as a revenue generating opportunity, while a separately valued commercial entity focuses on transactional legal delivery.

Looking back, it is pretty obvious in which quadrant the Scottish book trade sat when it came to the internet. The question for the Scottish legal profession in 2012 is: “In which quadrant does your law firm sit when it comes to LPO?”

Edward Brooks is the founder of The LPO Program (www.thelpoprogram.com) and, in the interests of full disclosure, is a recent investor in the Legal Services marketplace LLegaLL.com