Spotting a Trend in Outsourcing

April 16, 2009

Outsourcing is one way with tremendous potential by which firms can both reduce cost and improve operating efficiency. Lately there seems to be developing an interesting trend in terms of how large law firms are adapting their business models to incorporate LPOs. It is interesting due to it's evolving in a way few had predicted.

LPO industry comes across as a silver lining amidst companies busy devising effective cost cutting measures without compromising the quality, Indian legal outsourcing industry stands to reap many benefits. A large pool of quality lawyers and engineers; the Indian legal system, which is common with that of U.S. and U.K.; exhaustive academic infrastructure; ability of some established LPO companies to scale-up operations in cost-effective manner are some of the factors that add to their attractiveness for the U.S. and European markets. Forrester research projected that legal outsourcing to India will reach $4bn by 2015. Outsourcing can lower costs and offers other financial benefits:

Many tasks can now be performed away from the main office. Outsourcing providers locate in onshore or offshore markets where labor and occupancy costs less than in the expensive cities where many lawyers work.
Vendors serve multiple customers. Aggregating demand has two key benefits.

1. More consistent capacity utilization than any single customer. Fewer peaks and valleys mean lower costs.

2. The scale to make investments in efficiency-enhancing processes or technology pay off.

Outsourcing converts fixed costs to variable ones and avoids the need to borrow. Many law firms are under-capitalized. Partners may therefore want to avoid fixed commitments and to minimize borrowing. Similarly, law departments have small capital budgets and like to avoid locking in headcount. For both, outsourcing provides flexibility and avoids capital commitments.
Allow lawyers to focus on their "highest and best use," which is serving clients and winning new business. Eliminating managerial distractions from lawyers can let them bill more hours, thus boosting revenue.

Beyond cost savings, outsourcing offers operational benefits:

Outsourcing avoids management headaches such as finding, recruiting, and evaluating staff. Vendors can do this more effectively than firms because of their focus and scale.
Vendors may offer better talent. Recruiting and retaining quality talent can be easier for a large, focused company that chose its location to tap certain labor. Moreover, the bigger scale creates better career paths, which attracts and keeps talent.
24x7 services without operating hard-to-manage graveyard shifts. This facilitates better service to lawyers and, more importantly, to clients.
Multiple locations for business continuity.

A sorting of legal offices into three general categories will enumerate: [1] In-house corporate counsel, [2] large corporate law firms, and [3] small/medium sized private practices. In-house corporate counsels and the small and midsize firms are already enthusiastic users of LPOs, thanks to the ability of an LPO to provide flexibility, e.g. overnight turnaround, ultra affordable pricing, and scalability to support peek demands on a smaller firm. The sector that many thought would be the slowest to embrace LPO was the well established, conservative larger firms. The conventional wisdom was that these firms, with their seasonal hiring patterns, established hierarchies, and entrenched billable hours model would be the slowest to evolve based simply on inertia.

The trend that is being witnessed is that of large firms actively aligning with an LPO to present their services to corporate counsel in a convergence that benefits each party. The large firm gains an advantage over their competitors with the significant savings the LPO provides; the LPO benefits by the association with well established domestic firms; and the in-house counsel enjoys the dual benefit of cost savings managed by a firm with whom they already have a business relationship.

Over the last three decades, large law firms have evolved into big and sophisticated businesses. Until recently, firms emphasized revenue growth over cost reduction. They have merged, invested in marketing, added practice groups, and opened offices around the world. Now cost control is of growing interest. At the same time, firms face increasing client pressure to improve service and efficiency. Law departments are complaining about rate increases and demanding efficiency improvements. Being top-notch lawyers no longer suffices. Firms must differentiate themselves from competitors with outstanding service and cost-effectiveness.

Outsourcing is one way firms can both reduce cost and improve service. Though already common, outsourcing still has tremendous potential to reduce costs further and to improve operating efficiency. The story is similar for corporate law departments. They face tremendous pressures to reduce cost and improve operations. Outsourcing is a good way for the general counsel to control costs and improve efficiency.

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