16 June 2014 | By Lucy Burton
16 June 2014
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For every new business model success story there’s a disaster. As more firms contemplate more efficient working structures, here’s how to avoid the pitfalls
What will the legal market look like in five years’ time? According to management consultancy OMC Partners, by 2019 every firm in the UK 100 – those with a turnover of £22.3m or above – will have some form of alternative sourcing. This could take the shape of captive centres in low-cost regions, back-office functions abroad or jobs being sent out to external providers.
“Most will choose to set up their own legal support centres to carry out routine procedural and regulatory legal work,” predicts OMC director David Ellis , who says that 20 firms in the UK legal market are planning to follow in the footsteps of Ashurst , Allen & Overy (A&O ) and Herbert Smith Freehills (HSF ) by sending some work to a regional UK office.
It is hardly surprising – according to research by the RBS legal team, the biggest expenses law firms face are linked to location.
“The problem firms face is that three of their biggest expenses are largely fixed – staff salaries, premises costs and professional indemnity insurance premiums,” writes RBS head of legal James Tsolakis in the research report. “A key to financial success for law firms of the future will be to increasingly shift this largely fixed-cost base to a variable profile.”
Moving the present model away from qualified, permanent, London-based lawyers makes sense. According to Tsolakis’ study, just 5 per cent of a lawyer’s workload is exclusively dependent on having a legal qualification. The sort of ‘middle-office’ legal work being outsourced – document management and review, corporate due diligence, contract amendments and areas of real estate work such as licensing of premises – does not need teams of senior associates working on it, consultants argue, but nor is it so low value that it can be shipped off to an external provider abroad.
“Outsourcing hasn’t kicked off in the way the market thought it would,” Ellis adds. “Clients prefer the idea of insourcing, keeping mid-level work in the firm under a name they know. I always advise firms never to use the words downgrading, deskilling, outsourcing or ‘them’ [referring to the support office] when talking to colleagues or in a pitch.”
But one size does not fit all. There are obvious differences in the low-cost models adopted by Hogan Lovells in Birmingham, Ashurst in Glasgow, Simmons & Simmons in Bristol, Addleshaw Goddard in Manchester and A&O or HSF in Belfast (see boxes). However, they are all leading the way in alternative sourcing. A&O predicts its Belfast office will save the firm £11m within five years, HSF is already looking at how its Belfast office can support its Australian disputes practice, and Ashurst’s Glaswegian outpost is close to becoming the firm’s fourth-largest base.
But for every success story there is a disaster. Ellis points out that insourcing mistakes include not being drastic enough – “moving slightly outside of London, where the salaries are only marginally smaller”; choosing to open in less urban areas with a limited talent pool; or taking too long to decide on doing anything at all (“from start to finish,” says Ellis, “the process should take 18 months”).
So if the top 100 are considering opening a support arm, statistics would dictate that a goodly proportion are going to get it wrong. Here is how to avoid an expensive mistake.
Stage one: the clients
Once upon a time firms would have a regional rate and a London rate, and no questions would be asked. But in Clydesdale Bank’s recent panel review the in-house team decided this would no longer cut the mustard.
“They didn’t care whether the work was done in London or not – they just wanted one rate,” notes an insider.
While the bank’s 2011 review was split between a national and regional roster, its most recent one – like many other significant corporate panel rejigs in the past 12 months – was sliced by specialism.
“Nobody cares if we have an office in Birmingham or not,” says Hogan Lovells UK and South Africa chief Susan Bright, when asked if the firm’s opening of a legal services centre in the area was due to client demand. “[Clients] just need to have delivery of high-quality legal advice that’s within a budget.”
For firms with large banking clients such as Hogan Lovells, a low-cost support centre is seen as a necessary part of the production line. Ashurst Glasgow head Mike Polson is looking for two qualified finance lawyers after finding the majority of work coming through Glasgow was being instructed through a financial institution.
But that is not the case with all clients.
“For some companies, particularly banks, where they have high-volume work that gets allocated amongst large teams of anonymous lawyers, this model may work,” says United Biscuits head of legal Simon Rose. “But for us, work is more bespoke and the identity of the lawyer handling it and where they are located is important. A blended rate is unlikely to work to our advantage as it would result in us losing control of who deals with a particular job.”
So a low-cost legal centre might be vital to gain one client and make little difference to another. Is alternative sourcing better suited to the top 20 or those with high-volumes of financial institution work?
“When we were building the original business case, the minimum size to make a captive sector economic was 150 jobs,” confides A&O Belfast head Andrew Brammer, who also looked at Budapest and Manila as potential spots for a legal services hub. “It costs millions to run a redundancy programme, find accommodation, be left with space in the previous building, run a large recruitment exercise and transition services to the new centre.
“When you build the business case you are comparing role and space costs between two geographies, and there needs to be a good multiplier to get over the hump of the initial set-up costs. How long do you have to wait to get your money back? Within five years you want to be saving money and to do this you have to do it at scale.”
Others disagree with the 150 rule. Hogan Lovells , which will continue to use its ‘Mexican wave’ referral model for real estate work after it opens in Birmingham, is opening its Birmingham hub and South African business support centre with just 20 staff in each, while Mayfair boutique Gordon Dadds – the firm that recently bought Davenport Lyons out of administration, leading to significant support staff redundancies – has a back-office function in Cardiff.
“You don’t need to start with 150 people if you’re moving far enough,” stresses Ellis. “If you’re moving from London to Manchester, there will be a significant salary saving in the long run.”
Banks or biscuits, few clients would argue with the benefit of the above.
“Using out-of-London offices to handle more commoditised work means we can benefit from lower overheads and hourly rates,” adds Rose.
Stage two: the process
But how exactly does a low-cost legal centre work? Ellis argues that a detailed operating model should be identified early on in the process (see Fig. 1).
“A common misconception is that only entire matters can be delivered by support units,” he states. “In practice, tasks within more complex matters can be allocated to a different resource model. This does require careful design, but is straightforward once basic principles are understood.”
Legacy Herbert Smith drew up a transactions model before launching its Belfast office in 2011, and this remains more or less the same. A typical project will start with a period of working with the instructing team to settle the instructions and workflow methodology for the matter, followed by a “case familiarisation for the team” and then a detailed cost estimate.
“The project will then progress with appropriate quality control, metrics, reporting and communication about actual costs taking place both during the course of the review and at its conclusion, before a final report is prepared for the instructing team,” explains HSF Belfast head Libby Jackson. “Generally speaking, both qualified lawyers and legal assistants will be represented in the team, with the team leader and relevant practice group lead involved throughout.”
Likewise, Ashurst came up with various visuals to represent the breakdown of legal work before launching in Glasgow. These included a ‘value pyramid’ (see Fig.2) that illustrates the areas of work the office is trying to make more efficient.
While its legal analysts – a new position for the firm covering elements of trainee and paralegal roles – are invested primarily in document production and data rooms, the idea is that they will also take on increasingly complex areas of work at the top of the pyramid, such as drafting contracts and documentation.
“In-house teams are spending a lot of time on the drafting and negotiation of contracts that aren’t high-value, so we’re looking to form partnerships with general counsel so we can put some process around that,” adds Polson. “That would mean taking those activities completely away or working alongside them.”
The targeting of both complex and lower value pieces of work echoes the approach of Addleshaw ’s Manchester-based Transaction Services Team, which started to unbundle more complex work a year after opening.
“At the moment, the team does document review and due diligence, but we’re starting o nbundle -transactional work such as banking deals and take things to the next level,” Addleshaw’s former employment head Andrew Chamberlain, who recently joined DWF , told The Lawyer in 2011. “The more we develop the team, the more it’s a better response to certain issues than are LPOs [legal process outsourcers].
“[Clients] don’t want to pay £150 an hour for the process elements of a transaction, but they don’t need to drop to £35 per hour either. We can deliver for between £60 and £90 per hour.”
Stage three: development
While the pyramid structure might not appeal to every firm, this disaggregated focus on process is now vital to clients.
“Over the next few years, to remain competitive, law firms will need to develop better skills and techniques in cost accounting, project management and workflow analysis,” concludes the RBS report. “They will also have increased leverage at the lower end of the fee-earning ‘pyramid’, meaning that paralegals and associates will have more responsibility for instruction execution, thereby delivering a more cost-effective service.”
And as firms rejig their business models, so the UK’s over-reliance on London is lifted. According to this year’s annual Cities Outlook report, one in three 22- to 30-year-olds who move city move to London, with the capital accounting for 79 per cent of private sector job growth between 2010 and 2012.
Spreading work out into the regions can only be a good thing, adding a rich new dimension to the legal scene in the country.
Hogan Lovells, Birmingham
Date to be set up: autumn 2014
(announced just months after the firm said it would transfer a large proportion of its support network to a low-cost office in South Africa)
What the firm says it aims to do : UK head Susan Bright said the base, called the Legal Services Centre, will be an “extension” of the London office, meaning it will offer less complex aspects of work already instructed through the City. It differs from the South Africa centre in that it focuses on legal work rather than back-office services.
Headcount and work split : Recruiting at the time of writing, with plans to launch with 20 lawyers. They will initially work on areas such as document review processes, due diligence and real estate licensing.
Why Birmingham? The firm found the cost savings in Birmingham were just as good as somewhere further from London. Bright says Birmingham is also within easy reach of London and has a strong talent pool, with a number of qualified lawyers.
(The firm chose Johannesburg as its back-office base because of time zone, talent pool, language and costs. The 2014 merger with South African outfit Routledge Modise was also a factor.)
Who is heading it? Former global private equity head Alan Greenough, who is relocating for the role. (South Africa base to be headed by chief operating officer Nick Cray.)
What is his background? Greenough was expected to retire after stepping down as private equity co-head in December 2013. He joined legacy Lovells after Weil Gotshal & Manges hired the firm’s private equity head Marco Compagnoni and his team in 2006. Greenough left White & Case to succeed Compagnoni.
Simmons & Simmons, Bristol
Set up: September 2012
What the firm says it aims to do : According to managing partner Jeremy Hoyland, the office would handle “complex legal work” where location is not an issue for clients. The idea was to provide high-end legal advice at lower cost.
Headcount after end of first year and work split : The office opened with five partners and 12 qualified lawyers, but added support roles in February 2013, moving 14 staff from London.
Headcount and work split : There are 23 lawyers and 23 support staff. The office opened with partner-led teams in projects, real estate and litigation, but has since added employment and banking, and will open a regulated funds practice shortly. “The office was never about reducing headcount, but rather creating a new model,” Hoyland recently told
Where recruiting from/typical applicants, qualifications : The firm made a number of lateral hires when opening, bringing in disputes partners Tim Boyce and Ed Crosse from Osborne Clarke as well as banking partner Helen Hancock from Burges Salmon .
Why Bristol? “The best pool of talent and proximity to London”.
Who is heading it? Projects partner Richard Armitage and real estate partner Iain Macfarlane.
What is their background? In 2007 Simmons sent Armitage, its former global head of international projects, to Spain to oversee its integration with Mochales & Palacios Abogados following a merger. Macfarlane joined the firm’s partnership during the 2012 promotions round.
Career path for employees : Hoyland says the lawyers in Bristol work on a number of joint projects with those in London.
Herbert Smith Freehills, Belfast
Set up: April 2011
What the firm set out to do : Build an office of solicitors and legal assistants focused on reviewing and analysing large volumes of documents often found in major contentious work, notably in litigation, arbitration and regulatory investigations.
Headcount after end of first year and work split : 56 staff in total. In its first year, work was primarily document review and analysis for clients of the firm’s disputes practice – the vast majority generated from the London office.
Headcount now and work split : 143 staff in total, of which 25 per cent work on a flexible, part-time basis. In December 2012 the office launched support for non-contentious practice areas.
Where recruiting from/typical applicants, qualifications : Mostly the Northern Ireland market. According to office head Libby Jackson, the state education system in the area is “excellent”. She adds that there are a number of ‘returners’ – candidates with experience in other jurisdictions are keen to come back.
How many documents processed since opening? “Millions”.
Why Belfast? The funding and the talent pool.
Grants? Invest Northern Ireland (INI) initially offered £734,000 of support towards the creation of 87 jobs that will generate £3.1m annually in salaries and benefits by 2016. The office then agreed to create a further 51 jobs after INI offered another £369,750 to support this. The investments will increase the salaries and benefits in Northern Ireland to £4.7m by 2016.
Who is heading it? Libby Jackson, with Lisa McLaughlin as deputy director.
What is their background? Jackson worked in legacy Herbert Smith’s commercial disputes team between 2001 and 2003, when she moved into a management role. McLaughlin was a senior associate in the international arbitration practice before becoming a quality manager when the Belfast office opened. She became deputy director last month.
Career path for employees : The focus is on internal promotion. The office also offers some legal assistants training contracts after they have worked at the base for at least a year. Trainees qualify as solicitors in England and Wales, but are only offered jobs in the Belfast office.
Differential in salary compared to London : Solicitor salaries in Belfast range between £22,396 and £58,280.
How much is being shaved off, in terms of bills to clients? Using advanced predictive coding technology on one review, we saved a client 25 per cent in review costs.
Why not abroad? The office recently ran a pilot to see whether the firm could support the Australia disputes practice or if it should open another support base. A decision is expected at the end of the summer.
Addleshaw Goddard, Manchester
Set up: November 2010
What the firm set out to do : Launch an in-house transaction/litigation/advisory support team that would focus on the process elements of the work.
Headcount after end of first year and work split : The Transaction Services Team (TST) grew from five to over 40 in its first year. An 18-strong team was recruited to carry out the tasks found in major assignments but which did not need to be done by qualified lawyers. They combined with an existing team in the real estate division, supporting commercial property transactions.
Headcount now and work split : 113 staff at the time of writing. In 2013 the office process-mapped 46 of the most common types of legal work in areas such as banking, corporate, litigation and real estate.
Why Manchester? A large pool of talented graduates, available space to grow and lower salaries.
Who is heading it? Head of corporate services, Mike Potter. Overall responsibility was with the firm’s former employment chief Andrew Chamberlain, who resigned for DWF last month. Managing partner John Joyce is considering team leadership.
What is their background? Chamberlain was national head of employment at Addleshaws for nine years as well as head of client delivery, and served on the firm’s executive committee and its governance board. (He will lead DWF’s national employment team, but the firm is thought to be most interested in his experience in rolling out Addleshaw’s process-mapping initiative and the TST.)
How many documents processed? More than 3,000 matters in the past three years, including working for 300 clients in 20 countries. It has now spent around 500 hours mapping its legal processes.
Career path for employees : The firm has 10 apprentices, while eight members of the TST team are set to become trainees.
Berwin Leighton Paisner , Manchester
Date to be set up: summer 2014
What the firm says it aims to do : Launch a four-pronged process-mapping and outsourcing programme, which will include the launch of a hub in Manchester, aimed at cutting costs. The firm says its client services will be improved with initiatives including: outsourcing work to third-party firms in a similar way to its global preferred firms network; the development of a Manchester hub; the extension of its Lawyers On Demand service to include virtual transaction teams; and a process-mapping initiative.
Why Manchester? “It is the largest legal market outside London and has a large pool of high-quality legal staff.”
Who is heading it? IT director Janet Day has been leading the project from London but no formal head has been confirmed.
Allen & Overy, Belfast
Set up: November 2011
What the firm set out to do : A support services centre delivering some internal business support services as well as a legal services centre delivering some less complex elements of legal work. The firm brought in Qedis as consultants after announcing a redundancy round and the relocation of back-office staff.
Headcount after end of first year and work split : 155 support roles transferred from London to Belfast ahead of the launch in 2011. Fee-earning legal services roles were all newly created, with 20 associates and legal professionals introduced in January 2012 to work on due diligence for M&A and dispute resolution discovery and disclosure work. According to office head Andrew Brammer, the base attracted 10,000 applications in the original phase.
Headcount now and work split : 350, after 43 support roles were moved from the firm’s US and Europe offices last year. No Asia support roles will be moved.
Where recruiting from/typical applicants, qualifications : The average age of the office is 27.
Why Belfast? Brammer says the investment from Invest Northern Ireland (INI) was only one of many factors determining a Belfast launch. “It’s mainly the quality of people, the education system here and the fact it is low-risk,” he says. “It is price-competitive, with a higher level of academic achievement than
the rest of the UK. More widely, we were looking at Budapest and Manila.”
Grants? Invest Northern Ireland initially provided £2.5m. The firm then received additional public funding of more than £500,000 from INI in 2011, leading to the creation of 61 jobs.
Who is heading it? Andrew Brammer.
What is his background? Joined A&O as head of global IT operations in 2002, became head of systems development and delivery in 2007 and head of the Belfast base in 2011.
Career path for employees : Legal professionals go on secondment to other offices, including New York.
How much is being shaved off, in terms of bills to clients? The firm says it will save £11m within five years of opening.
Set up: August 2013
What the firm set out to do : An office in two parts – business support services and legal services. The plan “was and remains dealing with those two parts”, says office head Mike Polson, although he is also looking to bring in two qualified lawyers by the end of this year.
Headcount after end of first year and work split : 150 expected at end of first year, 20 of which are ‘legal analysts’ and the remainder back-office staff. The office hopes to have up to 200 people in the office within 18 months.
Clients : Mostly existing clients in financial services.
Where recruiting from/typical applicants, qualifications : Legal analysts are mostly law graduates from local law schools. In terms of business support, people are from “all backgrounds” across finance, HR, IT, risk and compliance.
How many documents processed? The office does not measure this.
Why Glasgow? Location, talent pool and funding. Ashurst managing partner James Collis says he realised Glasgow was the right option for the firm’s ‘northshoring’ base when he travelled up to Scotland for a recce in January. The UK was close to the height of its snow epidemic and planes were grounded. He was able to hop on the train to London and avoid the aviation chaos, which would not have been possible in Northern Ireland.
Grants? The firm will receive some £1m-plus from Scottish Development International if it hits its target of 150 full-time equivalent roles in the office within a year and £2.4m if it manages 300 in five years.
Who is heading it? Senior ex-Dundas & Wilson partner Mike Polson.
What is his background? Polson spent a year on secondment to Ashurst in 1991 while a junior associate at Dundas, working with Adrian Clark in corporate and Nigel Parr in competition, and getting to know future senior partners Geoffrey Green and Charlie Geffen.
Career path for employees : Legal analysts and business support staff can progress to team leader or project manager.
How much is being shaved off, in terms of bills to clients? The main benefit is efficiency – not necessarily a saving on hourly costs but on time, which translates into cost savings for clients.
Which office is it doing most work for, outside London? Australia. And in Europe, there are strong workflows from France and Germany.
Changes planned? Already looking at bringing in qualified lawyers and partnering with in-house lawyers.