LPOver and out?

Three years ago Rio Tinto’s legal team struck a deal with legal process outsourcing (LPO) provider CPA Global that hit the headlines. The mining giant signed an agreement to use 12 lawyers from CPA in India for contract review, basic drafting and document review work. The rationale was simple: immediate cost savings. Leah Cooper, then-managing attorney at Rio Tinto, declared that a CPA lawyer would cost just $250 per day. Bypassing a law firm for routine work had seemed unthinkable, but all of a sudden private practice was being cut out.

For a legal department to contract directly with an LPO provider was radical, but the arguments over commoditised work had been alive for some time.

The logic had already been articulated by Richard Susskind a year previously. In his 2008 book ‘The End of Lawyers?’, Susskind argued that disaggregation of legal work was inevitable in a world where pricing strategy was king.

However, in 2008 there were not many in-house legal departments unbundling their work or requiring that the work they were sending out to private practice be formally disaggregated (one exception being Mark Chambers at Cisco, who features heavily in Susskind’s book). In fact, Rio Tinto’s move to engage CPA Global meant that the discussion around outsourcing was effectively colonised by the LPO providers which targeted private practice firms to undertake routine tasks within the legal process.

The CPA Global deal was followed quickly by Pinsent Masons, which teamed up with Exigent in June 2009, outsourcing basic litigation work in South Africa. A few months later, in November of that year, Allen & Overy (A&O) partnered up with Integreon to outsource litigation document review to staff in New York and Mumbai.

Private enterprises

Crucially, the biggest threat to LPOs has been from those private practice law firms that have moved to reappropriate the movement towards disaggregation. Herbert Smith opened in Belfast in November 2010; A&O transferred much of its back-office function to Northern Ireland in February 2011. (The decisions to invest in Belfast were helped by a total of £3m in public funds.) Taylor Wessing launched an effective subsidiary, New Street Solutions, to handle due diligence work on corporate transactions. Addleshaw Goddard began unbundling its chargeable work in February 2011, setting up a transaction services centre in Manchester, while Dundas & Wilson set up a legal services unit - badged as a ‘firm within a firm’ - in July this year.

Nor is this activity confined to international or national players; major regionals have also been exploring costs arbitrage. In August this year Mills & Reeve set up a paralegal centre in Norwich. ‘Northshoring’, whereby firms handle this work in lower cost locations, can deliver clear cost benefits without resorting to an India operation. A survey published by OMC Partners last year (The Lawyer, 21 November 2011) noted that paralegals and graduates in the north of England or Northern Ireland could be employed at £18,000 in alternative sourcing roles - representing nearly a 60 per cent saving on a City salary of £45,000.

All of this is providing a major challenge to the LPOs, which are well aware of the newly competitive landscape. Fronterion itself acknowledged this in a candid briefing paper a year ago entitled ‘Ten for 2012: Top Ten Trends for Legal Outsourcing in 2012’.

The briefing declares: “The shrinking gap between wages in the developing and developed countries and accelerating growth of -onshore LPO services will combine to squeeze margins for LPO vendors in 2012.”

It also notes that some LPO firms began to freeze hiring in 2011, with some even downsizing.

“LPOs have changed since the Legal Services Act,” argues assistant GC of Weight Watchers international operations Richard Reade (previously GC at ISS). “Sending work onshore is a key theme. Integreon spotted the trend early and developed onshore delivery centres in the UK and US. CPA Global, at that time, stuck more to its model of using offshore centres. Centres like Belfast and Bristol have developed through LPO and law firm use. Glasgow is attempting to ape Belfast and various start-up grants are available to that end.”

“Today, the LPO [vendor] market is not nearly as significant as we all expected it would be,” reflects Olswang CEO David Stewart, who is of the opinion that law firms are taking steps themselves to keep control of the process.

Stewart adds: “We are exploring some pilot projects, establishing relationships with LPO providers that will enable us to deliver better value to our clients while maintaining quality.”

It is certainly the case that routine work on litigation has become a fruitful area for disaggregation. Pinsent Masons’ offering in South Africa employs three lawyers full-time, with a flexible team of para-legals. Litigation head Nigel Kissack says the operation has handled 27,000 hours of review work and 2.5 million documents since opening.

“They’re not providing legal advice, they’re providing legal administration so they’re better placed than us,” Kissack says. “As soon as you know the volume you can give a quote. It means that everyone’s happier and clearer on the pricing.”

Clients speak out

Despite this law firm activity, many clients are saying their advisers in private practice are not pushing disaggregation and outsourcing. In our UK 200 survey only 23 per cent of private practice respondents said their firm offered any sort of LPO, whether offshore or onshore.

“Our external law firms have been slow to adopt new business models, even where to do so would be in the interests of their clients,” says one GC. “Our experience is that law firms are committed to existing business models and need to be incentivised to consider alternatives. We intend to reward panel firms that are proactive in adopting new approaches that benefit us.”

“I don’t think outsourcing or disaggregation of repetitive or routine work is commonplace,” agrees Reade.

Reade claims that during his time at ISS he was not approached by Pinsent Masons, ISS’s main UK firm for routine work.

“Pinsents sends work to an LPO in South Africa, but the service was never offered to ISS for our commercial contract reviews,” he says. “Instead, I continued using NewGalexy in London and India.”

Despite impatience on the part of some GCs, law firms’ moves in this sector seem to have faltered. In the past three years a variety of leading GCs at multinationals such David Eveleigh of BT Global Services (see interview, page 21), Robin Saphra of Colt and Weight Watchers’ Reade have re-engineered the way their in-house teams handle legal work. But the publicity afforded to these moves and to LPO-law firm partnerships disguises the fact that they are not yet the norm.

Indeed, in a survey of 30 GCs conducted in association with Taylor Wessing by The Lawyer, only two had considered using services from LPO providers. For all, outsourcing meant sending work to external lawyers rather than unbundling, and they had to be prompted into considering the implications of LPO. The clear reluctance of these in-house lawyers - whose companies operate in sectors ranging from media to investment banking - suggests LPO providers have a considerable way to go before becoming ‘front of mind’.

So what’s the problem? What are the most common in-house objections?

1 Home comfort

While in-house lawyers like to vent their frustration at law firm response times, private practice competence is not an issue. And where competence is not an issue - and if costs are not enormously out of kilter - they are less likely to look elsewhere.

One in-house lawyer states: “Where we have a complex transaction that needs outsourcing we would rather use a full-service law firm and have people on the transaction who understand our business and commercial approach. We have a panel of firms where we have negotiated rates to an acceptable level.”

Several GCs mention the ‘brand’ issue. An outsourcing operation based in India, for all its immediate cost benefits, is not quite as attractive as some LPOs would like. In our survey, the only jurisdictions regularly ticked were those in the UK and New Zealand. Only half said they would consider outsourcing to India or the Philippines, while Central and Eastern Europe got no votes at all.

“I’d only be comfortable with jurisdictions if they are politically stable and data protection is strong,” says one in-house lawyer, in a typical comment.

This wariness on the part of clients has already moved the market, as Osborne Clarke managing partner Simon Beswick points out.

“Historically, LPO providers developed their offerings on the back of high-volume document reviews, often for multinationals,” he observes. “However, providers now offer more scalable solutions that use onshore resources.”

Taylor Wessing’s New Street Solutions has partly sidestepped the offshoring debate; it claims to handle routine work on corporate transactions without resorting to overseas jurisdictions but this has involved considerable investment in IT.

“Our solution isn’t based on cheaper premises or labour,” says Taylor Wessing’s Tim Eyles. “Rather it is very directly based on use of technology and so it’s a different skill set.”

2 Regulation and risk

Issues of liability have arisen in a number of cases, notably J-M Manufacturing’s lawsuit against McDermott Will & Emery, filed in June 2011, which alleged that McDermotts did not adequately supervise contract review lawyers who inadvertently revealed privileged documents to the government.

A year later, J-M filed a second claim, naming Navigant and Stratify as defendants. All deny liability.

“Law firms appear more comfort-able to outsource onshore,” says Reade. “It’s easier to sell to insurers - getting insurance for off-shore work is tricky - and to clients.”

“Where GCs engage with LPO providers directly there could be a cause for concern,” admits Beswick, “but as far as private practice is concerned, all outsourcing activities continue to be regulated by the SRA. That said, the LPO providers we work with carry global insurance policies but, as you’ll appreciate, since they don’t provide legal services those policies aren’t equivalent to the PI cover carried by UK law firms. Clients are outsourcing process, not legal service, and therefore carry a higher degree of risk than if a law firm is involved in the delivery model.”

3 The hassle factor

Make no mistake: the process of identifying how work should be disaggregated can be laborious. “You probably need to double the time estimates,” observes one in-house lawyer with experience of process management. “You have to build in a coherent audit function and institute spot-checking.”

For many smaller in-house teams the sheer scale of the project work required is prohibitive.

Baker & McKenzie IP head Paul Rawlinson, who is relationship partner for Unilever, which uses Bakers’ captive operation in Manila for routine filing, acknowledges this.

“It’s a function of size,” he says. “It’s partly attitudinal, but some of it is size and organisations with big procurement departments can drive that thinking and manage that process. But it has to come down to the client being prepared to spend some time scoping.”

Stewart agrees.

“One of the challenges, whether you’re a law firm or client, is the set-up cost in time, effort and energy to establish the relationship, and that’s a considerable investment,” he says. “I don’t know a single in-house counsel who isn’t completely overworked and, having seen the sharp end of senior team engaging with the LPO relationship, it’s a lot of hard yards and you need someone in the LPO provider to be inducted properly, do the proper analysis.”

Adds Pinsent Masons litigation partner Nigel Kissack: “Once you’ve removed the problems of trust in the overseas or Northern Ireland entity and in-house counsel know it can be done, and there are good people to do it, they still have to get over the ‘I haven’t got time to organise it’ problem.”

4 Dislike of procurement

While procurement processes have some advocates among general counsel, they are in the minority.

“The procurement world is the one thing I steer clear of,” says one FTSE GC, with feeling. “When I want to get a law firm embedded I won’t want to involve the procurement guys. Procurement view it as an industrial process and they don’t understand that it’s okay if you use a firm whose hourly rates are slightly higher. You have to trust your terms of engagement.”

Contract management and procurement management are not necessarily part of the legal function,” says a financial services in-houser, who admits that among many legal departments there is a “fear of change”.

He notes: “The fact is that it requires upfront strategy decisions and that’s difficult. Also, you need a clear set of management data and many law firm departments don’t have that. This does force a structural change in thinking, but most people are creatures of habit.”

However, other GCs cautiously welcome it: as with all outsourcing it’s possible you might use LPO as a catalyst for changing in-house culture.

“We are conscious of the cost saving and also the potential for LPO to offer us improved outcomes in terms of service and quality, particularly in relation to litigation discovery,” muses one GC of a major financial services organisation. “In a world where business costs are under pressure, we believe it’s important to constantly examine whether there are more efficient ways of doing things, hence our interest in LPOs. We’ve driven this process as a client, both internally and with our law firms.”

5 It’s cheaper in-house

Given the mistrust of potentially disruptive - at least in the short term - processes and reorganisations, most in-house lawyers prefer to keep work indoors. The impulse has clearly been a factor in the rise of specialist resourcing organisations such as Axiom or Lawyers On Demand, which can also cover peaks of activity (although several in-housers point out that Axiom in particular does not come cheap). This logic has powered Barclays’ move to insource its e-disclosure function, a move that is understood to have seen a return on investment within a year and that is thought to employ 19 caseworkers. However, given the amount of capital investment, such initiatives are only suitable for the biggest global organisations with substantial and regular litigation needs.

Says the GC of a well-known media business: “We limit use of outside counsel to those transactions that are in different jurisdictions, litigation, major M&A work, or work where there are particularly novel or specialist legal issues and we need external input. Otherwise, we manage legal resource from in-house legal and business affairs staff - this is generally cheaper even than outsourcing.”

The legal director of a sporting organisation agrees.

“There are documentation and templates that should be created in-house,” he argues. “The in-house lawyers should be close enough to their businesses to be able to generate documents that work - at nil cost.”

A bank in-house lawyer comments: “For corporate deals people might use outsourcing, but if it’s low-risk and low-value you can just get someone junior to do it.”

For many general counsel, flexibility in covering work is key. Greenergy GC Richard Clifton says: “We’ve yet to find an outsourcing structure that can match the sudden changes in the way we need services to be provided. The business needs to react quickly to events. In fact, in the past year we have brought in house more than one service element. Time that was spent managing the commercial relationship is now spent managing the business and the benefits have been clear and positive.”

Greenergy is one of many in-house teams to have focused on an internal solution. Another is Aviva, which recently created what it dubs ‘centres of expertise’, an insourcing initiative that allows the company to parachute experts in particular areas, from M&A to technology outsourcing, across the business.

“As a result,” argues GC Monica Risam, “the decision to outsource becomes a more considered one and therefore a reflection of the tougher economic climate, which makes cost control even more of a priority for in-house teams.”

6 One size does not fit all

The Lawyer’s survey of 30 general counsel in a variety of sectors elicited a varied response in terms of what in-housers actually consider to be routine. One lawyer’s commodity work is another’s high-value, and varied organisational imperatives require a bespoke approach.

“In our case, the teams sit with the commercial businesses,” says a media GC. “They can therefore be a proactive source of advice at an early stage of the transaction, rather than just a policeman trying to resolve issues later or a draftsman sweeping up the paperwork. I don’t believe this relationship would be as effective if all the drafting was passed to a third party. It would probably be more expensive and slower.

“Apart from the cost issue, there is also the issue of building and maintaining the relationships with the commercial teams in the business. Relatively few of our contracts are entirely standard - if they are, they tend to be done by the sales teams. If the lawyers are involved they are relatively bespoke, and the lawyers work closely with the commercial teams to negotiate and draft the deal. It’s difficult to see how outsourcing works in this relationship. The iterative nature of the discussion between lawyers and commercial teams or the negotiations with the other side inevitably make it difficult to do outsourcing.”

Bakers’ Rawlinson agrees that different business cultures require private practice or the LPO to take time to understand the dynamics properly.

“Unless you really understand the client it’s difficult going in and saying ‘this is how to do it’ - just going in cold feels a little artificial,” he acknowledges. “You’ve got to spend some time discovering where they do have problems - what areas, what frequency and so on.”

Taylor Wessing’s Eyles adds: “I don’t think the outsourcing debate has morphed into a one-size-fits-all. But I think some in-house counsel might be in a place along the lines of ‘I’ve heard it all and nothing changes’. This could represent a risk to in-house departments because when disruptive innovation comes they won’t have the tools to turn change to their advantage.”

7 It’s the pricing, stupid

“We’ve looked at outsourcing through a number of providers - there’d been a big push from the States,” says a senior in-house bank lawyer. “I struggle to think what would be the benefit for us.

I’d rather get the [pricing] down to a competitive rate.”

In a nutshell, this is the biggest hurdle for LPOs. In-house lawyers care greatly about pricing. They care much less about how private practice might arrive at that pricing.

“My view of the outsourcing trend is that outsourcing offshore or onshore is still the hobby-horse of a few modern-thinking, dynamic law firm partners and does not reflect a widespread acceptance within the industry, even now,” says Reade. “Of course, law firms love the publicity and delivery centres in Belfast are very much a reality, but the variety of work being outsourced is limited and the scope of work that can be broken down into routine processes has in no way been fully explored by law firms.”

Taylor Wessing’s Eyles sums up: “The lesson I take away is that in-house counsel are saying ‘we want absolute assurance of quality and for vanilla work we’re under pressure to secure competitive deals with law firms. It doesn’t mean there isn’t a need to disaggregate, it’s just that the onus is on the law firm to manage that without compromising the imprimatur of the brand.’

Despite the pioneering work done by BT Global Services, Colt, Cisco and Weight Watchers it is clear that most GCs simply want a legal service with minimum upheaval and cost. LPOs may have made the running, but the ball is firmly in private practice’s court. Begin to unbundle.