Innovators at the Barricades by Bruce MacEwen at Adam Smith, Esq. argues that legal process outsourcing (LPO) is a disruptive force for law firms, citing Clayton Christensen’s The Innovator’s Dilemma

“Outsourcing is here to stay” writes MacEwen. He describes different flavors using a 2 x 2 grid: location on the x-axis with offshore or onshore (“foreign” or “domestic”); ownership on the y-axis with captive or 3rd-party (“owned” or “rented”). MacEwen notes that this model is “by no means exhaustive; it’s merely indicative and representative”. This is a good model for thinking about centralizing support services.

LPO will have a big impact: “Once clients begin to get accustomed to the notion of being able to unbundle, or unchunk, legal engagements – be they disputed matters or transactional ones – there’s potentially little end to it.” MacEwen argues that LPOs are likely to go upmarket, meaning they perform higher value work, which will threaten law firms – and also force them to innovate and move up the value chain.

Working for an LPO, my view is that there is a clear line between legal support and law practice. An LPO cannot practice law so I think there is a clear limit to how far “up the value chain” an LPO can go.

Turning the “LPO moving up the value chain” idea on its head may well be a more helpful way to think about the legal market. The very forces that enabled the birth of the LPO industry – globalization, technology, and shifts in buyer attitudes – continue to push legal work toward standardization and systemization (as Richard Susskind discusses in The End of Lawyers?). That means work once done only by associates can be performed by more efficient operating models offered by alternative sources such as LPOs, contract attorneys, virtual law firms, online legal resource providers, and still-to-be-invented providers.

So it is likely that repetitive tasks once the exclusive domain of partner-track associates will continue to be unbundled and move to more cost-effective approaches. Document review in litigation is the classic example. Even without LPOs, law firms’ ability to offer this service at associate billing rates is already threatened by corporate clients contracting directly with contract lawyer staffing agencies. An innovative law firm might even decide it makes sense to partner with an LPO to do the high volume, routine work.

Given this shift, MacEwen questions the fundamental premise of large firms, citing Ronald Coase’s Nobel Prize winning The Nature of the Firm. He suggests that LPO-enabled unbundling calls into the question the “why” of law firms: “Why create the management overhead, bureaucracy, and administrative friction entailed in any firm of scale? Why not just purchase whatever is needed, when it’s needed, on the open market?”

That is a good question indeed, but LPO is symptom, not cause. The cause is corporate client price sensitivity and quest for value. These have changed buyer (general counsel) behavior, which in turn has propelled growth of law firm alternatives. Smart large firms can still profit from their scale. For example, they can

  • Coordinate across practices and geographies to serve global clients. Cross-selling is not only a profit lever, done correctly, it is a service enhancer.
  • Assemble large teams of highly skilled and experienced lawyers to work on tough, big cases or deals.
  • Serve as expert general contractors with project management skills to ensure the swift and cost-effective resolution of client matters. Many general counsels will happily delegate that function.

MacEwen raises provocative questions that large firms need to consider carefully. I have never been persuaded that “big is better”. Big is only better if size really confers benefit and the organization actively takes advantage of its scale. Big firms that adopt sound strategies and execute effectively will continue to thrive. Those operating on auto-pilot may indeed lack a good answer to the question MacEwen / Coase asks.

[Note: above is a modified version of my Integreon blog post, LPO as a Driver of Law Firm Innovation]