Outsourcing Return On Investment: the Myths, the Methods and the Means. That’s the topic of a panel discussion at the ALM Outsourcing Conference 315pm session. 

[This blog post comes to you live from the ALM-sponsored Legal Industry Outsourcing Forum (May 23, 2007, NYC). Notes and comments are real time with minimal editing and posted as a session ends. I am taking notes in Microsoft OneNote, so use the outlining format.]

1. Panelists
a. Moderator: John Croft, President, Integreon
b. Mike Bryant, CEO, Integreon North America
c. Chris Bull, COO, Osborne Clark (UK)
d. Christian Cooley, CFO, Sidley Austin
2. ROI Case Study: Internal Integreon processes for document production
a. Typically, doing ROI starts with labor cost arbitrage opportunity
b. A law firm customer (disguised) case study
c. Look first at “work ready” hours – how many hours per year are staff available and what’s the cost
1) For experienced legal secretaries, if you assume 100% utilization and fully loaded salary of $85k, then hourly cost is$50. But if you make more realistic assumption of productive time (utilization) of 80%, hourly rate is over $62/hour.
d. Law firms have limited ways to manage these admin expenses.
i. Central production pool is one way to manage document production. A lot of doc production occurs during non-core business hours when secretaries are not available (and if they are, they cost overtime). That is the business requirement for central pool.
ii. Central document production facilities are expensive
1) A lot of staff
2) Expensive real estate
e. At the firm, overtime cost was $5mil, or 0.50% of gross revenue. The firm wanted to cut this in half over a one year period.
i. This saving would fund the outsourced document production service
f. What savings are possible by re-sizing central facilities and outsourcing some of the work
i. Firm wanted to cut central staff by 20 people
ii. Move secretarial ratio from 2.50 to 2.75 (a savings of $3.5 mil/year)
g. Firm looked at breakeven analysis if it could charge back some Integreon service to clients (shift some overhead that clients might pay for as pass through expense). For example, some of the “admin” work turned out to be litigation support traditionally billed to clients.
h. All the potential savings and revenue made for a an annual savings of almost $4mil.
i. Actual savings turned out to be about $5mil in first year – subsequent years yielded another $3mil for a total of $8mil.
j. This firm did not lay off anyone – all staff savings occurred though natural attrition and by not hiring as much as they would have otherwise
k. The savings are a combination of
i. Substituting low cost for high cost resources
ii. Re-engineering processes (that could occur independently of outsourcing but often does not)
3. Osborn Clark outsourcing experience
a. Services outsourced
i. Document services
ii. Catering
iii. IT network support and help desk
iv. Training
v. Research and analysis (mainly market and business research, not legal)
b. Have now identified 100 jobs in the firm (cost of $8mil) that is non-core and could be sourced externally. Considering options now.
c. ROI
i. Cost elements of doing work with full time employees
1) Direct and allocated staff costs, bonus, benefits
2) Overtime
3) Uniforms, expenses, travel
4) Occupancy
5) Training
6) Recruitment (rule of thumb: one year salary if you factor in all the costs)
ii. Make sure you understand the cost elements of outsourcing
1) Open book costing – understand all elements
2) Transition from internal to outsourced – be able to justify any change to partners
3) Seek forward looking efficiencies – guarantees for productivity improvements or additional cost savings
4) Dealing with early termination
5) Clarify or cap annual increases
6) Seek procurement from providers if they have bigger scale – but what is the extra cost of doing so
7) Cost recovery potential
iii. Intangibles
1) Back-up and substitution (what does it cost for back-up service)
2) Flexibility (build in short-term variability into contract; estimate savings based on both peak and trough loads)
3) Quality – define by SLA, measure time savings, increased availability
4) Value add – figure out extra value and see if you can value (“value account”)
a) We ended up willing to pay a lot for elements we did not initially understand to be valuable
b) In law practice, “value account” can be access to information, secondments, or other “extras” that law firms can provide law departments. In UK, firms’ fees can be reduced if these extras are not delivered
5) Track impact of outsourcing on client acquisition and retention. May be hard to find but worth looking for
4. Sidley Austin, Summary of Outsourced Services
a. Office services
i. Copying
ii. Purchase and delivery of paper to copiers and printers
iii. Mailroom
iv. Supplies
v. Messenger, courier, delivery
vi. Facilities assistance (office moves, room set ups)
b. Word processing
i. Word processing
ii. Proofreading
iii. Desktop publishing
iv. Fax services
c. Benefits
i. Some financial
ii. Some is avoiding headaches
iii. Providing higher touch services to over-worked lawyers
d. Ability to arbitrage labor costs now is better than a few years ago
5. What happens after the immediate benefit of cost arbitrage is recognized? What’s next?
a. Chris Bull – experience so far is disappointing
b. From provider perspective, there is a lot of upfront cost to learn a customer’s work processes and cultures. Integreon tells clients that initially, it will need more people, but over time, fewer people will be required with experience, so savings can increase.