The Winds of Change: Law Firms & LPO

Few would argue that the outsourcing of legal services by law departments to LPO companies offers the law departments a number of benefits — the most notable of which are significant cost savings, productivity and efficiencies. The big question however that is yet to be definitively answered is how does outsourcing of legal services by law firms benefit the law firms? Until this question is settled, I think it’s safe to assume that law firms are going to drag their heels on implementing a LPO strategy.

Let’s face it, law firms are businesses. It’s that simple. Law firms, like any other service businesses, seek to maximize their revenues and minimize their costs. Firms do this by “selling” as many hours as clients are willing to “buy”.

The reality of practicing law today is that the rules of the game are changing. Clients, technology, the economy and the forces of globalization are driving the changes in the legal profession. We can see the signs all around us. That was the theme of a recent article by Jim Middlemiss in the Financial Post, titled “Lawyers must change with times, Book warns the ‘risk-averse’ risk disappearing”. The article highlights a recent book titled “Unbound: How Entrepreneurship is Dramatically Transforming Legal Services Today” by American writer David Galbenski. One of the conclusions reached in the book is that the legal industry is facing unprecedented change. The book highlights a series of interviews with leading general counsel, who explain the changing global landscape their companies operate in and the pressures in-house lawyers face to reduce costs. Susan Flook, Group General Counsel at The Body Shop International, is quoted as saying:

In my view, outside counsel have got to substantially change the way they charge for and deliver legal services. It is my opinion that the basic fee-earning structure in law firms is wrong. The whole thing needs a sea change.

So are law firms listening to what appears to be growing clear message?

A few major law firms are getting the message. Simmons & Simmons is reportedly preparing a plan to outsource work to lawyers in low-cost jurisdictions, paving the way for a fresh wave of outsourcing in the legal sector. Partners are voting on proposals to use lawyers in low-cost jurisdictions for litigation and corporate due diligence. It is understood that Simmons & Simmons could achieve a 50 per cent cost saving by outsourcing.

Managing partner Mark Dawkins is reported to have said that

We want to be at the forefront of delivering value through new ways of working at the top end of the market. We’re not going to defend a business model that clients don’t want to have to pay for. We could get more work from clients and grow. It could be a way of enlarging our market share.

Other firms, including Clifford Chance and Lovells, have outsourced paralegal and support staff functions. In August 2008, Clifford Chance announced plans to ramp up its offshore paralegal capacity in India, while Lovells and Eversheds are reported to have moved some business support functions to low-cost centres.

The world is changing at breakneck speed. That’s for sure. But Canadian law firms have yet to take a position on LPO (at least publicly). I recently read the article Managing Through Tough Times by Sandra Rubin in Lexpert’s May 2009 edition. In reading this article, it struck me that in these tough times, the focus of change by some Canadian law firms is simply to reduce internal expenses such as travel and entertainment. Whilst that is a laudable goal, I think it’s safe to say that clients are demanding change that is more meaningful and effective (at least from the clients’ perspectives). As one lawyer anonymously wrote in the article, clients really don’t care whether law firms are managing their internal costs.

I think it’s safe to say that clients are looking to law firms to substantially change the way they charge for and deliver legal services. That must surely mean that clients are looking for more creative solutions than simply offering discounts or freezing rates. I have said it before, and I’ll say it again. LPO is one of the most fundamental changes affecting the legal profession today. It provides law firms with a cost effective way in which basic, repetitive legal services can be delivered.

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Comments

  1. Some firms may “drag their heels” on outsourcing because of profit concerns but I think the bigger force is inertia.

    With respect to client billable activity, I can speak more about US than Canadian firms. The #1 outsourced service is document review. Some firms have made this an enormous profit centre but others have not. Whatever the past and current practice, firms that want to keep clients may have to give up their margins on document review to keep clients happy. That said, only some GC so far insist so far that their firms outsource doc review.

    With respect to Middle Office functions such as word processing and research for business development, firms pay out of pocket for these internal services. Outsourcing can save but firms are still slow to act.

    I liken the transition to e-mail: some lawyers started in in the 1980s but most were dragged kicking and screaming after their clients adopted it.

    Inertia and precedent rule; change is bad; firms like to wait until at least a dozen others have done something new.