LPO Provides a Positive Boost for an Economy in Recession

Three recent surveys have forecast a positive outlook for the legal process outsourcing (LPO) sector. Surprised? Given the current economic crisis, you shouldn’t be.

Before I elaborate on these surveys, let’s take stock of where we are at present. We all know what shape the global economy is in. So how is the legal industry shaping up? These are some of the recent headlines.

“Closings, layoffs come to U.S law firms”
“Wilson Sonsini cuts 113 jobs, freezes associate pay”
“White & Case lays off 70 associates”
“Orrick lays off 40 attorneys, 35 staff”
“Cooley Godward fired 50 lawyers and 60 other staffers”
“Akin Gump let 65 staff members go”
“Cadwalader, Wickersham and Taft sacked 96 lawyers”
“Clifford Chance announced 100 departures”

But if that’s not enough, a number of high profile law firms in the US have recently closed their doors for good. Heller Ehrman LLP, a San Francisco firm, closed its doors after 118 years in business. Thelen LLP, another San Francisco firm, also closed its doors. Thacher Proffitt & Wood LLP, a 160 year old New York firm, announced that it was closing its doors.

If you’re thinking that Canadian lawyers are safe, think again. Recent Canadian headlines have included:

“Cassels Brock lets 38 support staff go”
“Fraser Milner lets 40 people, including 10 lawyers go”

Given the state of the Canadian economy, it’s probably safe to assume that this trend will continue. We all face a great deal of uncertainty in the coming months and perhaps years. There is little doubt that these difficult economic times will bring change – sometimes painful change. But it isn’t all bad. Legal process outsourcing offers corporate law departments and law firms an opportunity to improve their operating efficiencies and reduce their costs significantly.

Survey 1

Legal OnRamp — a social network for corporate lawyers — received replies to 35 questions by 84 people who worked for large companies with $1 billion or more of annual revenue.

Devised by prominent legal business consultant Rees Morrison and American Lawyer editor Aric Press, the Legal OnRamp survey asked in-house counsel what percentage of their department’s spending would be moved to lower-cost offshore service providers – whether directly or as subcontractors to in-country law firms — by 2013. Remarking on the rapid spread of legal outsourcing in recent years, the survey reported that three respondent groups, of around 16% each, considered that they would shift spending to LPO specialists in the next five years. The first group predicted a shift of 1% to 6%; the second 6% to 10%, and the third 10% or above.

Survey 2

The UK Law Society received 52 responses from law department heads at several FTSE 250 companies, plus a range of other businesses engaged in IT, retail and manufacturing.

Although the UK Law Society’s In-house Survey on Offshoring was more conservative in its predictions, it still indicated that larger corporations would outsource more work as an alternative to hiring traditional law firms for assistance. Of the survey’s 52 respondents, almost half (25) were keen to divert work from law firms; while a substantial 40% expressed dissatisfaction with the fee requirements of traditional law firms, such as hourly billing, indicating a broad wish to seek other means of legal support. Around 30% of respondents thought that most large corporations would continue to offshore.

One FTSE respondent said:

As long as you select the right areas for outsourcing, the benefits can be significant.

The respondent added that outsourcing enables a business to decide where to focus its costly private practice resources.

I couldn’t have said it better myself!

Another FTSE company respondent said:

We use an offshoring company and also encourage our private practice firms to include an element of offshoring in their service to us.

This comment signals a significant shift in the approach of law departments to LPO. As law departments become more comfortable with legal process outsourcing, they will start to “encourage” law firms that serve them, to “include an element of offshoring in their services”. Some law firms have already begun to get that message loud and clear and have begun to explore the benefits of LPO.

Survey 3

Altman Weil Inc – an independent management consultancy for the legal profession – questioned 115 prominent General Counsels and found that 75% are facing budget cuts for 2009. Altman Weil said that General Counsels normally have a number of tools that they can use to reduce legal costs. These tools include:

• Internalising more of their legal work
• Reducing, and making more predictable, the costs of outside counsel
• Practising preventive law within the company, which will lead to the reduction of legal costs
• Finding alternative, less costly, methods of delivering their legal services

Legal process outsourcing fits into the last category. According to Altman Weil, finding alternative, less costly, methods of delivering legal services, will happen in two ways. First, law departments will turn directly to LPOs and seek their services. Second, law departments will begin to expect their outside counsel to find less expensive methods to deliver legal services. This suggests that in-house counsel may expect their law firms to retain the services of LPOs to provide cost effective services, with those cost savings being passed on to the law department. This survey supports the results of the UK Law Society’s In-house Survey on Offshoring.

There is no question that buyer interest in legal process outsourcing is growing. With all the talk of a recession (and perhaps worse, a depression), and with all these staff layoffs, budget cuts and law firm closings, it’s no wonder that the legal industry forecasts a positive outlook for legal process outsourcing.