Why too much onshoring could create a headache for LPO providers

Earlier this year (22 March) The Lawyer ­published a report that ­suggested that domestic ­outsourcing could eclipse offshoring as a means of ­cutting legal costs, with law firms’ conservatism preventing them from sending any large-scale projects overseas.

According to data from outsourcing consultancy Fronterion, 44 per cent of legal process outsourcing (LPO) vendors were aiming to increase the number of onshore personnel and lawyers they employ, with law firms indicating that they were more comfortable outsourcing locally than internationally. This was despite the fact that cost ­savings from sending work to offshore centres such as India or South Africa are typically twice as great.

For law firms onshoring is great because they get a cost saving without having to worry about sending their work to far-flung locations. LPO providers, on the other hand, operate on the assumption that eventually most of their domestic work will be sent abroad to even lower cost bases. The problem appears to be that law firms’ reluctance to embrace offshoring in any major way could have financial ­implications for outsourcing companies.

Like many LPO providers, Integreon has both onshore and offshore facilities with bases in China, India, the Philippines and South Africa as well as in Bristol and various locations in the US.

The domestic locations make sense, especially in the US, where firms are even more reluctant than in the UK to send work to overseas centres. However, the downside for the LPO providers is that, while they have to make the deal they offer economically viable for their law firm clients, the cost base in the UK and US is much higher.

For Integreon, the cost of paying salaries to staff in its Fargo, North Dakota onshore centre is so high that it is understood to be squeezing the company’s margins.

According to an internal document seen by The Lawyer, total direct compensation in Fargo is around 70-80 per cent of the office’s revenues, leading management to look at ways of linking compensation to revenue generation. It is also understood that the company is considering increasing the price at which Fargo services are sold to certain clients in a bid to improve its margin. According to Integreon president of ­global sales and marketing John Croft, who said he was not aware of any impending changes to pricing in Fargo, the base does work for 14 large US law firms and also does legal work for Microsoft.

The company’s Bristol operation is modelled on Fargo, with the cities seen as offering the first step in the road to full-blown offshored outsourcing. As an article on the company’s website states: “The location in Fargo was a big factor in our acquisition decision – we recognised that we could hire, and more importantly, retain long-term highly skilled workers there at costs significantly lower than in major US cities. We have also opened a delivery center in Bristol, UK. While Bristol is a major city, costs there are up to 30 per cent lower than in London, so it reflects the same thinking – find the right onshore locations that offer a good mix of skill, cost, and cultural compatability.”

Like Fargo, Bristol also keeps the bulk of its work (90 per cent) on-site rather than sending it to lower-cost offices in Asia or Africa and also currently pays out the bulk of its revenues in salaries. While Croft refused to discuss financial figures with The Lawyer, it is understood that in the five months from January to May this year the 17 members of staff working in the Bristol professional document services team generated revenues of $217,733 (£141,624) and were paid $267,772. Similarly, the 58 staff members working in the business solutions team, which focuses on services such as IT and procurement, generated revenues of $1.2m and received salaries of $1.1m.

Over the five-month period Bristol, which does work for main client Osborne Clarke as well as Beachcroft, Foot Anstey and TLT Solicitors, only made a profit in January, with the overall effect being a five-month loss of $511,075. This was against a budgeted loss of $404,906, meaning the company overshot its target by 26 per cent.

Integreon’s chief operating officer for Europe Chris Bull, who moved across from Osborne Clarke last year, said the business had budgeted to make a loss in its first two-to-three years because of the upfront investment involved in setting up a new operation. While he would not comment on Integreon’s Fargo arm, which the company acquired in 2007, it is understood that US management is considering introducing variable compensation packages for team leaders in a bid to incentivise them to meet new revenue targets.

Croft stressed that this is not something Integreon is currently considering for Bristol, adding that when the bulk of the office’s staff transferred from Osborne Clarke they did so under Transfer of Undertakings (Protection of Employment) regulations (TUPE), meaning they must continue on the same terms they were offered while at the law firm.

That said, one legal consultant, who pointed out that it is not surprising for a new venture such as this to make losses in the first ­couple of years, said that if losses are larger than ­anticipated it could prove problematic. The source added that the LPO model relies on clients getting ­comfortable with sending work overseas in a relatively short space of time.

“The first phase is to get a firm to sign up,” the source said. “Phase two will see most of the [LPO] staff working in the firm’s own building but with a changed employment and management structure. Phase three is to get them in a centre in the same country while phase four is to put as much work as you can offshore to a cheaper jurisdiction.”

Both Croft and Bull stressed that work is only sent offshore if the client wants it to be. Currently 10 per cent of Osborne Clarke’s outsourced work is sent to India, with the rest staying in Bristol. With the Bristol ­venture now halfway through its first three years, that ratio may have to change in the next 18 months.
Other LPO providers will be ­watching closely.