By Mark Ross and Ron Friedmann

This article was first published in Outsource Magazine (17 Nov 2010).

When we are asked how the LPO industry has evolved over the last few years, our answer is that the “conversation has changed”. During the formative years of the industry, proponents of LPO were often met with the question “why outsource?” and had to extol the benefits of outsourcing. Today, the discussion has moved to either “How to outsource?” or “What’s the best way to centralise non-core support functions in a low cost location?”

The prevalence of an increasing array of LPO operating models is evidence of the continuing evolving nature of the “how to outsource” discussion. The Lawyer reported recently how Colt Technology Services has analysed the full spectrum of legal services it consumes and has implemented a combination of innovative legal models, which includes an offshore captive LPO operation employing six lawyers in Bangalore, India. Colt’s general counsel comments that: “the team provides a shared legal service across the business.” Captive LPO is where a firm or corporation sets up its own internal LPO subgroup to handle appropriate legal tasks.

The captive approach is one that many organisations evaluate and some ultimately choose. Colt’s announcement comes hot on the heels of a captive LPO initiative from leading Anglo-German law firm Taylor Wessing. Here the firm created a division based in Cambridge to handle standardised legal tasks. For some organisations, Captive LPO provides improved efficiency while retaining full in-house control. On the other side of the Atlantic, in April this year, AmLaw 100 giant Wilmer Hale announced that it would open a new business services centre in Dayton, Ohio and will offer existing employees positions there and also hire new employees from the Dayton area. Services to be provided from the new centre also include LPO.

In addition to Wilmer a few other large law firms have opened captive support centres in low cost locations; these illustrate different operating and location options:

• Orrick has a large domestic, low-cost support facility, its Global Operations Centre in Wheeling, West Virginia, which it owns and operates.
• White & Case and Baker McKenzie both have low cost offshore centres in Manila in the Philippines, which each firm owns and operates.
• Clifford Chance operates a centre in Delhi, which Integreon advised and supported (a “build, operate, transfer” model).

Whereas the Wilmer, Clifford Chance and Orrick centres all provide LPO service line solutions, it is pertinent to note that the majority of the employees situated within the centres provide traditional BPO support functions (HR, IT, Document Production).

Though Colt, Taylor Wessing and Wilmer chose the captive route, their moves are good news for the legal outsourcing market generally. Their decisions validate my view that LPO and centralising legal support in a low cost location, whether onshore or offshore, has now become an accepted strategic operating model for major corporations and law firms.

Their approach is only one answer to the question “What’s the best way to centralise non-core support functions in a low cost location?” Many organisations decide that outsourcing is the better option. A significant volume of literature explains the pros and cons of operating a captive centre versus working with a third-party outsourcing provider.

The existence of these captives is also good news for the legal market generally, especially clients. The move to low-cost, centralised service centres shows law firms now understand the need to respond to corporate pressure for (1) a suite of options in providing support to their clients, (2) lower cost and innovative pricing models, and (3) process improvements. I view these moves as an explicit endorsement of the LPO approach.

It is now clear that the LPO mantra of unbundling legal services will soon become the norm rather than the exception. Once unbundled, more work will move to lawyers in lower cost locations. Whether these lawyers work for a law firm, law department, or outsourcing provider, the point is that lawyers must engage in a disaggregation process. Legal work can and must be broken down into discrete units and analysed to determine the most cost-efficient provider of each required resource. That provider may be outside the organisation i.e. a traditional, third-party LPO; a captive; or a hybrid model (for example where the law firm or legal department establish a captive model but day-to-day management of the centre is contracted to an LPO provider).

I suggest that organisations just starting on the path of establishing a low-cost, centralised service centre consider a couple of key factors when thinking about captive versus third-party. One consideration is control. A common misconception held by proponents of captives is that working with a third party means loss of control. In my view, control is more about governance than ownership. For example, some captives are “out of control” because they have not been properly set up with service level agreements (SLA) and rigorous metrics. Conversely, a proper SLA and governance structure can give an organisation more control over a third party than they might typically have over their own staff.

Another consideration is whether a captive can achieve sufficient scale of operations. Running a captive centre, especially offshore, requires a scale that only the largest law firms possess. One reason that I advocate third-party LPO is that this path typically offers several scale and other advantages over a captive:

• Better capacity utilisation − by aggregating demand across many clients, a third party is better able to manage the peaks and troughs of legal workload variability than any single firm.
• Improved efficiency with the right processes, tools, and training – with scale larger than a single firm can achieve, providers can more readily invest in analysing and documenting processes, acquiring specialised software and providing appropriate training.
• Managing financial risk by converting fixed to variable costs − law firms face challenges investing capital; providers can tap the capital markets. Working with a third party, firms can convert fixed costs that require capital to variable ones.
• Delivering performance with service level agreements (SLAs) and metrics − most law firms lack the metrics and formal programs to assess internal service delivery. Many even find it a challenge to administer rigorous performance reviews or take corrective HR actions, so internal service levels vary widely. Outsourcers, in contrast, live by metrics and SLAs.
• Assuring business continuity with multiple locations – while a central location for staff does minimise cost, it increases the consequences of a business disruption. Working with a provider that has a global delivery platform allows splitting production between two or more countries or arranging a ‘fail over’ from one location to another in the event of a disruption.
• Operational know-how and focus − running a central services centre is not as easy as it looks. Providers are in the business of doing just that and have learned how to optimise building and operating such centres. Experienced providers operate multiple low-cost delivery centres, this means they can benefit from the ‘experience curve effect’ in a way law firms cannot. Moreover, providers are in the business of support services; for law firms, building and operating a centre can become a distraction.

In the ‘new normal’ of the legal market, value is the name of the game. That means unbundling and disaggregating. Whether firms choose a captive or third party, one can be sure that an increasing volume of legal support work will be undertaken by lawyers located in lower cost delivery centres, both onshore and offshore.