For any law firm in the UK or US that is currently considering the use of lower cost delivery models, last week’s Mallesons/ Integreon deal is a real reminder of the two main options available: “Build Your Own (BYO)” or “Legal Process Outsourcing (LPO)”.
The BYO option has been favored by most larger law firms (with exceptions such as CMS and Osbourne Clarke). Put simply, they separate out specific activities and shift them to a lower cost delivery location like India, Belfast, or Nashville. By moving to a greenfield site, their view is that those legal processes can be more easily and efficiently managed, monitored and improved, all within the firm (albeit often in a nominal arm’s length arrangement).
In choosing this model law firms are selecting a path that needs:
· Up front capital investment in property, infrastructure, and people with the skills to lead and operate the service
· Executive focus and attention to get it up and running, manage it, and ensure it is meeting delivery expectations
· Patience to deal with the period between “flash” (when the headlines hit) and “bang” (when the service reaches forecast efficiency levels).
Even once it is up and running, the BYO model still needs investment capital and executive time to keep pace with an ever-improving benchmark of “market best practice”. In addition:
· All the delivery risk stays squarely within the firm
· There is relatively fixed resource pool (by volume and skillset) to draw on
· And the economies of scale are always limited to the size of the firm
These are the reasons why you don’t see global corporates setting up this kind of model any more. If they didn’t do it 5-10 years ago, they are now jumping straight to outsourcing as a solution.
Why the Mallesons deal stood out was that here was an expanding firm that had the scale and resources to justify BYO. Given clear options they chose commercially supplied, externally deliver LPO. And given finite capital resources they chose to invest in growth rather than in improving the quality of lower value activities.
Maybe they were attracted to the transfer of risk. The price risk sits firmly with the LPO, as does the quality and service level risk (though the law firm still has overall responsibility for quality to its clients). Indeed, I recommend that all firms should take a risk-based approach when analyzing their options.
However, the main reason that most firms choose the BYO model is actually wrapped into the broad conceptual question of “What is a law firm?” When you’ve been operating a highly successful and highly profitable law business for many years, it is a bold leadership team that considers making radical changes to it.
LPO is not always the right option. In my day job I do take a more pragmatic view point about BYO. However, anyone choosing that option has to look at, and understand, the road ahead.
One exercise I encourage anyone to do is to look at some extreme potential business and economic scenarios, and work out how you would react under both the BYO and LPO options. Then work out which model enables you to adapt faster, more flexibly, more cost effectively, and with less capital.
For example, what would happen if you grew by 25%? In the BYO option you have to expand your capacity, get headcount sign off, and recruit and train new staff (after stretching the existing workforce a bit). In the LPO model you will access your supplier’s capacity and skills pool (not quite overnight, but certainly quickly). Other scenarios to work through include changes in the nature of your work, short term bursts in demand, and 25% drops in demand.
Just don’t select BYO because you believe that you can achieve the efficiency levels of a commercially operated LPO. There haven’t yet been any definitive studies into whether LPO or BYO are more effective. However, similar studies that compared HR , IT and Finance outsourcing with internal operations have shown around a 20% differential. I’d be surprised if Legal closed that gap.
And for the law firms that have already developed their own lower cost delivery centers, I predict that we will see some of them sold off in the coming years, whether to management buyouts or general outsourcing providers. Those capital value realization opportunities are certainly one reason why I’d support BYO.
Edward Brooks, The LPO Program