Legal process outsourcing is still a growing market but faces competition today from many other alternatives to large law firms. This article was originally published in a slightly different form as “Client market power means continuing cost-cutting” in the Legal Efficiency supplement to the The Times of London (11 June 2013), available on the web via Raconteur, publisher of the supplement.
A decade ago, legal process outsourcing (LPO) seemed new and exotic. Today, it is just one of many alternatives to large law firms. What is LPO and why is it now just a small part of a new legal landscape?
Until recently, corporations had two ways to meet their legal needs: in-house law departments and outside counsel, typically the top 50 law firms in the UK and the top 200 in the US. That worked well for many years but the legal market boom from 2000 to 2007 planted seeds of change.
During the boom, law firms raised billing rates well in excess of inflation, leading to growing partner profits. A few entrepreneurs saw the opportunity to do well by offering lower legal costs. They created legal process outsourcing companies. Today, well-established ones include CPA Global, Integreon, Pangea3, and United Lex. These and others perform high volume legal tasks such as document review, contract management, and due diligence. They can save as much as 50% relative to law firms.
Much of the savings comes from tapping lower cost lawyers in India. Some of it comes from the efficiency of applying industrial techniques such as process improvement, metrics, formal governance, and detailed playbooks.
The biggest share of LPO business is from disputes that involve high volumes of documents such as e-mail, word processing files, and PDFs. Reviewing these documents requires large teams of lawyers. A big team operated with industrial precision in Mumbai costs much less than one operated lackadaisically in London or New York.
The early buzz – and skepticism – about LPO centered on sending legal work to India. After a few years, many legal buyers realized that offshore lawyers provided high-quality work and that ethical and security concerns were readily addressed. Just as LPO was becoming established, however, the economic crash of 2008 occurred.
The crash put severe and ongoing pressure on corporate legal budgets. That boosted LPO sales but also spurred entrenched and new players to develop other costs-saving approaches as the examples here illustrate:
- New Options under Legal Reform. With UK legal reform and “alternative business structures”, law firm ownership is no longer restricted to lawyers. The ABS story only began in 2012 and so is still unfolding but the corporate market has already seen new, low-cost entrants. For example, both Carrillion and BT offer legal service delivery models with lower costs than traditional law firms.
- New Model Law Firms. The large law firm business formula is simple: bill clients dearly, by the hour, to cover enormous overheads, hefty partner profits, and high associate compensation. A new class of law firms is emerging that reduces overheads, eliminates most partners, and offers fixed fee service. Fixed fees motivate cost-saving automation and processes improvements. Prominent examples include Wirral-based Riverview Law in the UK and Clearspire Law in the US.
- Captive Low Cost Corporate and Law Firm Centres. Many large law firms and a handful of corporates operate their own low cost legal centers for high volume legal work and support. Clifford Chance has had a centre in India since 2005. More recently, Herbert Smith and Allen & Overy have opened Belfast centres. Other firms have centres in the north of England. Several US law firms have built such centres in low cost cities (e.g., Dayton, OH).
- LPO partnerships. A handful of large law firms have partnered with LPO providers to reduce client cost. Examples include Simmons & Simmons in the UK and King & Wood Mallesons in the UK.
- Lawyers at Lower Cost. For over a decade, Axiom Law, which is not a law firm, has been placing ex-large firm lawyers in law departments for fixed duration, well-defined projects, at much lower cost than firms. More recently, firms including Berwin Leighton and Eversheds offer lower cost staffing options.
- Process Improvement. US Seyfarth Shaw has received wide and positive press for its Seyfarth Lean program for client work (modeled on Lean Six Sigma).
- Alternative Fee Arrangements. Clients increasingly demand fixed fees or other arrangements where law firms bear the risk of overworking. As firms adopt AFA, to make a profit they must learn budgeting and project management to optimize resource allocation and control cost. This is slowly rationalizing how traditional firms deliver services and reducing cost.
What do these developments mean for the legal landscape? Although LPO providers continue to grow, with so many other options, they remain a tiny percent of the corporate law market. LPO in India faces challenges because lawyers in Belfast, Scotland, and the north of England cost more than in India but less than in London and do not create any time zone or cultural challenges. Consequently, some LPO providers now have onshore operations.
We likely will see an ever-more complex and nuanced legal landscape. Even the US, with its restrictive, 19th-century-world-view of legal market regulation, is seeing rapid growth in large firm alternatives. In the UK, market reform will undoubtedly yield ever more new and more cost-effective approaches. The future that Richard Susskind described, one where the bespoke work of the large firms would be limited to a shrinking number of matters, is now arriving.
The wildcard in predicting the future landscape is the general counsel. Complaining about cost accomplishes little; changing buying behavior accomplishes a great deal. If clients exercise their market power to obtain better value, we will likely see an ever-more varied legal landscape.