Feature

posted 28 Sep 2006 in Volume 9 Issue 5

Changing attitudes to outsourcing

Law firms have traditionally kept their distance from outsourcing functions, perhaps dismissing the idea as somehow beneath them. It can save time as well as money, though, and with clients increasingly looking for better business skills, many firms are already realising the benefits.

By Tina Lofthouse

Law firms have lagged behind other industries when it comes to outsourcing, but increasing competition is now leading firms to look at the potential benefits and examine whether it can help them realise their business strategies.

Historically, there has been a healthy dose of scepticism in the legal industry when it comes to outsourcing. There has been suspicion in some quarters that it is simply management speak, or yet another trend from the business world that doesn’t really apply to law practices. Major misconceptions have also proliferated, with some firms thinking it is little more than shipping documents off to the subcontinent.

Indeed, outsourcing has been treated with much apathy – and sometimes downright hostility among lawyers who actually advise clients on outsourcing – with the belief it is hard to make work. While this may be true, the benefits are hard to ignore, namely, cost-savings, greater efficiencies and the opportunity to free up lawyers and managers from performing non-core activities. When you add to this the fact that market conditions are tough and client demands great, it is not surprising that outsourcing is now looking like an appealing proposition.

The changing landscape

Until relatively recently law firms have lacked the level of competition experienced by many industries so initiatives that will save a little money or bring about efficiencies haven’t really hit the radar, believes Chris Bull, Osborne Clarke’s chief operating officer. “They’ve looked at the potential saving in relation to the hassle factor and people issues, and decided it is not worth it,” says Bull, whose firm currently outsources part of its IT function, as well as reception, catering, post, reprographics, web design and hosting, marketing design and brandwork, and training.

But an increasingly competitive environment means firms now have to become more like businesses in their approach. They must focus on overheads, savings and efficiencies that five years ago would have been treated in a different light. Additionally, as more firms consolidate and create critical mass, there is more opportunity for outsourcing to deliver greater efficiencies.

There are also more prosaic reasons that outsourcing hasn’t pervaded the legal world until now. There simply weren’t the providers around, for example. Today there are businesses that are prepared to tailor outsourcing services directly to the demands of the legal profession.

The way law firms are becoming more open to bringing in skill-sets from outside the legal sector is also driving interest in outsourcing. Margaret Lang, chief executive of back-office outsourcing company Intelligent Office UK, says: “They have only embraced people from outside the industry in a limited way, but this is now changing and firms are recruiting externally for positions such as finance directors and chief executives. Firms are looking at what new ideas and different skills can be brought in from outside.”

It is also fair to say there has been a little snobbery thrown in. “The legal profession is a very highbrow style profession and outsourcing is seen as lowbrow so in some respects there is an arrogance about it. It has not been seen in practical, realistic terms,” says John Banister, chief operating officer for media law specialists Wiggin.

Barriers to adoption

It’s not just cynicism, however, that has prevented outsourcing from being widely accepted by the legal industry. There are very real concerns over security issues and client confidentiality. This is not an insurmountable problem though.

“I think it is overplayed,” says Bull. “We have serious obligations to clients on confidentiality and any attempt to use companies that have access to client data, but are not controlled directly ourselves, must be considered carefully. Even when you’re dealing with issues that aren’t confidential, ensuring security of data across the network is crucial.”

But Lang argues that external service providers place more emphasis on security than some law firms – their reputations depend on it: “Security is always uppermost in our thoughts – in our processes, in recruitment and training. I’d say we are more diligent than many law firms in terms of how we vet staff – some firms take in temporary staff to cover gaps and there isn’t the same diligence. We have a trained bank of staff for holidays and sickness.”

The fear could be more to do with competition than anything else, and Bull believes that firms don’t want to risk competitors knowing how they’re dealing with the likes of legal research and IT, let alone take any risks that rivals might obtain access to their data.

Then there is also the fear over the reaction from clients – although this is largely unfounded, especially in the case of corporate clients. “Most clients will know instinctively why you’re outsourcing and will probably be wondering why you hadn’t done so years ago,” says Bull.

What can be outsourced?

Where outsourcing has been embraced, it has been in a limited way with tasks such as cleaning, post services and security contracted externally. But this is changing and firms are looking at what other operations could be done more efficiently elsewhere.

For example, outsourcing paralegal services is becoming more commonplace. “At the basic end of the spectrum, we’re seeing firms outsource form-filling, research and filings that can be done by law graduates in places such as India for a fraction of the cost,” explains Bull. “The claim is that it is done to a very high standard as these [overseas] companies built their reputations servicing financial-services firms. Researching a point of law, where you’re searching publicly available resources, is quite straightforward and can be done anywhere. As well as cost-savings, these companies tend to offer other selling points such as quick turnaround.”

Outsourcing IT functions is also on the agenda. In January this year, Allen & Overy LLP signed a £5.5m contract with IT utility services supplier SAVVIS to centralise its UK-based IT infrastructure. The firm wanted to ensure it had a reliable and secure 24/7 IT service that would minimise any downtime. If the firm suffers an outage for just half a day, it could lose £1m in revenue.

Many other areas could also be outsourced in theory – but what is appropriate for one firm may not be so desirable in another. “Outsourcing areas such as legal research could work for some firms with a broader service offering but it wouldn’t work for us as we’re so niche,” says Banister. “Outsourcing IT wouldn’t be appropriate for us either. Our strategy demands we use IT heavily – we’re based in Cheltenham with a client base in London and the US. We have a more hands-on approach to IT and have good people already on board so it wouldn’t add any more to what we already know.”

Wiggin currently outsources its back-office functions to Intelligent Office after deciding a couple of years ago that the firm’s managers needed to be focusing on strategy, culture and driving change.

“There was empathy between us and Intelligent Office and they understood our business,” explains Banister. The integration has been straightforward. “It’s not obvious to our clients that we outsource – all they see is that we provide very good quality of service. It has also been received well internally – the staff employed by Intelligent Office are very much part of our team and come to our social events.”

Centralised services

Law firm Baker & McKenzie has been particularly forward thinking in how it has approached the outsourcing question – or more accurately in this case, insourcing. The firm has a shared service centre in the Philippines that provides 24/7 support in document services (such as word processing), marketing design, a global helpdesk, and a network operations centre that manages the WAN link and back-office equipment of all 70 offices. There is also a staff-extension programme where Manila-based personnel can be hired by a global office.

The staff comprises suitably trained and qualified Filipino nationals. “When we first started it was a good way to save money, and there is no question it does that, but what it also means is that we can use a greater number of highly qualified personnel – we could find such people in countries such as the US and the UK but we couldn’t afford to hire as many. This enables us to do more of what we want to do to support the attorneys, drive strategy and provide the clients with the service they need,” says Craig Courter, Baker & McKenzie’s chief operating officer.

As a back-office service, clients don’t directly deal with the centre; however, Courter says they are impressed by the efficiencies it provides to lawyers. An attorney might, for instance, finish a negotiation late in the evening, dictate it on their way home, e-mail it to the Philippines, and by the next morning have everything back to present to the client.

Baker & McKenzie built up its shared service centre incrementally, from just six support staff in 2000 to around 225 today. “We saw that it worked and kept adding to it a little at a time. There are real benefits in this approach as you’re not making huge investments upfront; it does mean, however, that it is slow to develop. Until you get critical mass, it is not a fully functioning centre, and it takes a long time to get something that makes a business impact,” says Courter.

Lovells’ Mexican-Wave

City firm Lovells is another innovator when it comes to legal outsourcing. Its ‘Mexican-Wave’ system allows it to concentrate on the more complex work – charged at City rates – while outsourcing more routine work to a group of provincial law firms that have lower overheads and can therefore charge lower rates.

The idea came about following ten years of working with Prudential, a very substantial property client for the firm, which showed that 40 per cent of the work was very standard conveyancing. This is work that required accuracy and speed but not the value-added innovation that a City firm should be doing. Robert Kidby, Lovells’ head of property, points out that Prudential was probably paying more for this standard work than they needed to but it was less than the firm needed for its projections.

It was then agreed that if Prudential gave Lovells all its work, the latter would funnel it out appropriately. The philosophy was if the firm couldn’t do the work better than someone who could do it cheaper, they’d give the work to them and pass on the cost savings to Prudential.

One of the challenges with Mexican-Wave is making the initial transition for a client. “What I’ve learnt is that there is still a good deal of personal loyalty and relationships, even with big corporate clients. People like to choose their own solicitor and it is not easy to push the relationship out to someone else so that takes a while,” says Kidby.

At the same time, Lovells’ MexNet system is designed to reassure clients, tracking every six minutes of a lawyer’s work with a narrative so a client sees exactly what is happening 24/7 regardless of which firm is doing the work.

Lovells doesn’t take a percentage from its panel of law firms, however; nor does it charge a management fee to its clients. This isn’t altruism, but rather part of a strategy to build relationships with clients: “If you’re a City firm with City overheads you should be doing City work – but clients wouldn’t be happy if you said you are only going to do the work that makes you a profit, you have to add more to the relationship than that.”

Cultural differences

While it is true that the legal industry has generally lagged behind the rest of the business world when it comes to outsourcing, there are also perceived geographical differences – namely, that UK law firms lag behind their US counterparts.

A 2006 study of US law firms by ALM Research found that almost two-thirds of respondents said their firms had outsourced some functions within a year and more than half reported their firms had begun outsourcing some functions five or more years ago.

Although this is a significant number, what is actually being outsourced is quite limited, as in the UK. The most frequently outsourced functions relate to areas such as post-room and reprographics, with administrative, travel and catering services second. Interestingly, fewer than 20 per cent of firms outsource IT functions, but many would consider it in the future.

Margaret Lang initially worked in outsourcing in the US in the 1990s, before launching Intelligent Office UK (previously Docuserve) here. The US law firms may have adopted outsourcing earlier – quite simply because they have operated more like businesses for longer, says Lang – but things are catching up in the UK, in thought at least. “Over the past four years we’ve been focusing on the UK and things have changed considerably,” she says. “Back then only a few firms had heard about outsourcing, let alone were using it, now everyone is aware of the opportunities.”

The business case

Anecdotally, Lang believes that many of the clients she is working with are growing faster than their counterparts who don’t outsource, perhaps because they are more able to concentrate on strategy. More tangibly, Lang points to a client of hers who recently tendered for some work and is now on the shortlist – the client believes that one of the reasons was because they outsource their administrative services.

“It is assumed that almost every firm can do the legal side competently so what is looked for in pitches is what differentiates a firm. In the tendering process, how a firm runs their business will be looked at and if they can show they are progressive, innovative and disciplined, it indicates how they will deliver their legal services,” she says.

Indeed client demands are well served by outsourcing policies. Clients want a 24/7 service, but 24/7 back-up support is expensive to staff, especially for medium-sized operations. Outsourcing can give much more flexibility – you can guarantee cover, arrange attractive out-of-hours support and share resources. There are attractive financial benefits, too, especially for firms based in high-cost centres such as London.

Above all, outsourcing allows lawyers to concentrate on what they’re trained for. “It boils down to core competencies – we’re lawyers, that’s what we’re good at and it’s what our clients want us to do. The rest is seen as peripheral.” Bull says.

Whatever the apparent benefits of outsourcing, it will only work if it is carefully executed. Cultural fit and communication are essential. “Find someone you can relate to, that gels with the culture of the firm and is an expert in the field,” advises Banister. “Also consider that you don’t want someone who will just continue to do the job you were doing before but someone who will drive ideas. They need to be proactive not reactive.”

Another factor to consider is a concept that Courter calls ‘emotional capital’. “Lawyers have to be comfortable with the service you are providing. They will, for example, build up a relationship with someone in the next office who does the typing – there is a bank of emotional capital there. You have to work hard to create that with a document support centre 3,000 miles away and you have to build up that goodwill.” Good communication is also vital: “You need to factor in a time when you will communicate – it doesn’t matter if that person is in the same office or on the other side of the world,”

Banister concludes: “Outsourcing doesn’t mean letting go – quite the reverse, in fact. It is about developing a strong relationship and you need to manage delivery closely. At the end of the day, law is a people business and good relationships need to be built with everyone on board.”