Outsourcing Armageddon!!!

13 02 2011

There’s no escaping the “o” word in the legal profession at the moment, and for the past 18 months, the stories in the UK legal press have just kept on coming. Lots of words, but what’s really happening? What’s going to happen?

A suitably shocking image was required for a discussion of the "O" word...

Does outsourcing spell armageddon for the legal profession? Will all the jobs be swept up and done offshore? Will process and technology decimate the practice of law? Or will the hype die down and the business model be exposed as simply not working for the legal profession? The outsourcers might find small niches, but not penetrate the mainstream?

I’ve been connected with the outsourcing industry for about twelve years. In practice I spent six years as a technology and outsourcing lawyer, and then spent four years in a global outsourcer as corporate counsel. I moved into the business for the same company and after I left, I spent a year leading the onshore team for the legal processing division of another global outsourcer. So now, with the news full of A&O’s support centre in Belfast, and the continuing story of Cameron’s large scale deal with Integreon, it seemed like the right time to offer my thoughts on the topic, particularly as lots of the comments flying around seem to me to be made by people who’ve never seen an outsourced operation, let alone have any understanding of the underlying business models.

So buckle up, here we go…. (my blogging guide did suggest being controversial – how am I doing?)

Let’s start with the observation that the fundamental principle of contracting with a third party to provide services that are non-core to your business is pretty well established. Whether it’s finance and accounting, payroll, logistics, manufacturing or customer services, many of the largest companies in the world have outsourcing well established as a critical part of their business model. It’s been going on a long time, and the long-term success of the big global outsourcing providers suggests that this approach does work.

With providers leveraging both lower costs from economies of scale and labour arbitrage and providing the service using highly specialised staff, best practice process and technology the business case can be compelling. On the other hand of course concerns about data privacy, potential loss of control, cultural differences, brand damage and the political and social implications of outsourcing jobs appear to make the decision less clear cut.

So while the underlying business model clearly has pros and cons, with the profession having been hit hard by the recession, with traditionally high labour and property cost-base, and incumbent providers of legal services potentially facing a new wave of competition as a result of deregulation, it’s surely no surprise that outsourcing has finally become a reality.

Where I think the most interesting questions lie, are not around the question of whether outsourcing will succeed, but what types of work are most suitable for outsourcing and will provide the biggest benefits for law firms.

To investigate this, a bit of clarity is required about what actually constitutes legal process outsourcing (or LPO). I wrote in an article for Managing Partner magazine last year that one of the problems with the hype surrounding outsourcing in the legal profession is that any outsourcing gets labelled as LPO, when in fact, many deals don’t actually include the outsourcing of legal work.

A helpful place to start is to think of the firm in terms of back, middle and front office, terms that are often used in the financial services industry. The term “back office” means those parts of the law firm that run the business, but are largely invisible to the client – accounts, human resources etc. By contrast the meaning of “middle office” is a little more fuzzy, but I think of that as those support functions which either directly support the provision of legal advice (such as legal research, knowledge management) or are in other ways visible to clients (business development etc), but are not the actual service that the client pays for. Front office work is much clearer – the actual provision of legal advice.

So, with a sprinkle of added clarity (that if a law firm outsources some of its finance function, it’s not LPO in my book), what do I think are the prospects for outsourcing in the profession?

If we start with the back office, this at first glance would seem the obvious place to start. Generally speaking, it’s non-core and won’t provide much in the way of competitive advantage (in fact, by contrast there are plenty of firms that have challenges with billing) for law firms. The challenge is however, that for all but the largest firms, the scale of the accounting function is not large enough for the economics to make sense on a dedicated outsourcing project.

The answer of course would be a shared service, that law firms could simply plug in to. The difficulty here is that law firm IT systems are incredibly diverse, and a lot of them have been customised and patched together over the years, so simply moving to a new (outsourced) platform will not be easy.  I’m sure this conundrum will be cracked, but am not sure whether anyone is there at the moment.

Looking then at the middle office, the raft of deals among UK firms at the moment suggests there is appetite for outsourcing here, and looking at parallel operations in other sectors, there’s no question the model can work. At the BPO provider where I was working last year, their research and analytics function had over 1,500 employees, 70% of whom had advanced degrees (MBAs, PhDs etc). The quality of their output was excellent, and they provided comparable services (pitch support, business intelligence, research etc) for blue chip corporates, investment banks and management consultancies. The team was led by someone who set up McKinsey‘s knowledge management centre in India, and I certainly felt confident that a lot of that team’s expertise was transferrable.

The final area is of course the legal work itself, and this is perhaps the most emotive area for lawyers. There is a huge split of opinion here with, on one side, service providers who are selling, keen to make the most of their credentials, and confidently talking of their ability to “move up the value chain” (by which they mean demonstrating they are capable of taking more and more complex work). On the other side, are many lawyers who, having spent many years working hard to join and progress in the profession, do not believe their work can be done by less qualified personnel, especially those outside the jurisdiction.

So what’s the truth?

Well, I think the starting point is to establish that in the world of volume legal services (think conveyancing, remortgages, personal injury litigation etc) legal work has been successfully outsourced and off-shored for sometime. Undoubtedly if you had asked the question ten years ago whether this would have been possible, the majority of the profession would have shaken their heads and exchanged knowing glances.

These days, my experience is that talking to lawyers, many now see how an outsourcing model could work for certain types of legal work, “but mine is too complex/specialised/personal”!

My view is that their is a spectrum of complexity for legal work, and at the very bottom end (low complexity) more of this can and will be automated – seeing some of the latest document assembly tools is a good reminder of progress here.

At the next layer of complexity, there is a huge scope for the application of process to make the legal work more efficient. Having done some process mapping engagements for law firms, I can confidently state that when you get a process standardised and down on paper, the opportunities to improve it are many.

Improving process is not of course synonymous with outsourcing, and I expect in the next few months there will continue to be a huge rise in process re-engineering engagements at law firms (and in in-house departments) without perhaps those firms being ready to outsource.

This work will ultimately be capable of being outsourced (mapping and documenting a process makes outsourcing much easier), but whether or not this happens will depend very much on the individual firms, their cultures, their business models and their financial situations as well as the sales reach and delivery capacity of the service providers.

At the top level, there is of course highly specialised work that does not lend itself to process standardisation or outsourcing. With the blurring of the boundaries between the professions, the opportunities for top-end lawyers to provide advice that is strategic in nature, but perhaps not technically legal advice, will grow.

Finally, as one of the people leaving comments on the Legal Week article on Susskind’s appointment to Integreon’s client board noted, all outsourcing deals have to go through transition before they then stabilise and start delivering to service levels and providing the expected value. Even at this stage, it takes time to realise the full benefits and so expect a raft of noise in the media if some of the deals experience a few wobbles to begin with.

Personally speaking, having had the privilege of having been to several offshore outsourcing centres in Asia (as well as UK operations) and seen them in action, I would have a lot of confidence that long term, back and middle office services could be delivered effectively by the top outsourcing providers. For the front office work, I suspect success will depend much more on the type of work being outsourced and the provider’s experience.

To wrap up, I’m not saying that outsourcing is the right or wrong choice for any firm. I do believe that the business model has been proven in other industries and that certain functions in a law firm are sufficiently similar to other industries that there’s no reason why the profession should be any different. In one flavour or another, outsourcing is here to stay – watch this space to see how it evolves.