De-mystifying outsourcing

In the first of two features on how outsourcing has risen to the top of law firm management agendas, Chris Bull strips away the mystique behind the jargon and outlines what has really been going on in the legal world over the past few years.

Judging from the acres of print devoted by legal journals to all shades of outsourcing and offshoring in the past few years, not to mention the mini-industry in outsourcing-themed seminars and events, a casual reader could be forgiven for believing that they had stumbled upon a hitherto unheralded hotbed of innovative sourcing practice. In fact, this intense interest and the handful of genuinely newsworthy outsourcing transactions to-date now feel like the prelude to the real transformation.

   Whether you liken that prelude to the looming storm clouds before the devastating floods or the first liberating use of the internet, the presence of outsourcing somewhere on every firm's management agenda in 2008 demands that we all at least understand what it means and how it applies to law firms.

  

What is outsourcing?

Everyone who has worked their way through an accounting or finance qualification will understand the fundamental 'make versus buy' question every business faces. We all worked our way through what were almost exclusively financial evaluations of this basic business decision '“ can an external supplier deliver more cheaply than we can internally? In the real world, many other factors also come into play: the adequacy of internal resources, availability of capital for investment, and desire to focus on core competence. Outsourcing stems from the decision to 'buy' rather than 'make'.

   In the legal context, outsourcing refers to the decision to use a third party to provide services, rather than goods, typically where these services had previously been delivered internally. What happens over the years is that third-party provision of certain services becomes so prevalent that 'outsourcing' is seldom used to describe the transaction, although it is still technically correct. The most obvious, and closest to home, examples are the supply of legal or tax services by private practice firms ('in-house lawyer' is a phrase we all use to describe the roles still held inside our clients '“ will we soon be referring to our own 'in-house IT' or 'in-house finance' people?). At the lower-value end of the spectrum, services from cleaning to catering to data cabling are now commonly 'outsourced'.

BPO, LPO or GPO?

The outsourcing or support-service industry is a relatively immature one, and in common with management consultancy and the internet, is marking its territory with a never-ending stream of acronyms denoting new segments of the market. Within legal we hear most about BPO [business-process outsourcing] and LPO [legal-process outsourcing]. BPO covers a broad-church spanning pretty much the full range of functions a business undertakes but always centred on a repeatable process. Today the term is almost synonymous with outsourcing, although in the law firm context would cover outsourcing of our business or support services, rather than frontline legal work: this is where LPO comes in. The outsourcing of legal work to non law-firm third parties is still a relatively new development and, despite the hype and froth emanating from the Indian market in particular, has a lot of maturing to do. LPO can therefore be hard to pin down but generally refers to the outsourcing by law firms or corporates (the market thus far being dominated by the latter) of process-driven, often high volume/lower value legal work. The work might be completed by qualified lawyers or paralegals offshore or onshore but will be done at a major discount to the internal cost. Major US and global corporations have led the way in using LPO services, primarily in litigation support, e-discovery and patent work, but with an increasing trend to outsource due diligence and contract work. Law firms have shown some interest and have used LPO in particular to staff-up litigation work, perhaps notably where savvy clients have put pressure on costs.

   There are plenty of others percolating around too. KPO [knowledge-process outsourcing] tends to be used as an umbrella term for more 'judgement-based', higher value and complexity outsourcing, including LPO and areas such as research and analytics. ITO [information-technology outsourcing] is a fairly self-explanatory sub-set of BPO, and where some of the world's largest outsourcing business focus. HRO [human-resource outsourcing] and RPO [recruitment-process outsourcing] have been growth areas recently '“ in the wider business world at least '“ as has F&AO [finance and accounting outsourcing], a subject I'll return to in part two of this feature. Many law firms, both in the US and UK, have focused their outsourcing to-date on what the industry refers to as DPO [document process outsourcing]. This is another slippery term, with the main protagonists united in their aim to shift their offering from its basic post or reprographics beginning to a full-scope documents and records lifecycle, covering hard copy and electronic alike.

  

Offshore, onshore or sandy shore?

Far too often I find myself having to pull up a law firm managing partner, FD or IT director when discussions turn to outsourcing, and stress that outsourcing is geographically agnostic. Outsourcing does not, either literally or in practice, have to involve moving jobs overseas. Indeed, many of the outsourcing deals done by UK law firms to-date have seen jobs remain not just onshore but onsite.

   The spectrum of location options spans a number of same-country options. As I mentioned above, some firms have outsourced part of their document processes. Many of these '“ post rooms, copying centres, records management '“ are, in part at least, very difficult to physically separate from the firm's offices. Management of the function has been handed to a third party but the staff have, for the main part, stayed onsite. Advances in IT, the acceleration of electronic file management and even the deregulation of the postal system are all contributing to open up offsite options for much of this work but there remain many functions that can and have been outsourced where an onsite component is fundamental: catering, reception, IT 'at-desk' support, library services for example.

   The cost of locating functions in the world's most expensive cities has become increasingly prohibitive '“ and in law the concentration of so many leading firms in the City of London and New York makes this an acute issue. Options to relocate a range of support services outside these expensive locations '“ but still within the same jurisdiction '“ are opening up. The very largest firms may have the scale and capability to create their own dedicated, 'captive' SSC's (shared-service centres), as US firm Orrick have done with their global operations centre in Wheeling, West Virginia. But for most firms, outsourcing to third parties who operate multi-client shared service centres is a more viable option. Again in the US, outsourced service provider Integreon run a centre servicing a number of major US firms from Fargo, North Dakota.

   The offshoring of work has grabbed a lot of the attention in recent years, in the legal world as well as far wider (the question of the accelerating offshoring of US jobs played a prominent part in the recent Democratic primaries). India, but also the Philippines, South Africa, China and other lower cost destinations have been spectacularly successful in attracting work. Many of the world's most successful outsourcing businesses are India-headquartered and the embryonic LPO industry has spawned hundreds of start-ups and spin-outs from Indian law firms. Whilst the use of offshoring does not always involve full outsourcing '“ Clifford Chance's Delhi operations centre is technically a captive, as is Baker & McKenzie's large Manila centre '“ a wide range of work for law firms could now be fully or partially outsourced offshore. CMS Cameron McKenna has outsourced a portion of its IT function to Indian firm HCL, a number of firms now use operations in India, South Africa and elsewhere for typing/transcription and there is a strong market in offshore conveyancing processing.

   You may come across the term 'nearshore' fairly regularly, which can seriously confuse things as either the work is being done onshore (your country) or offshore (somewhere else). Nearshore destinations from the UK's perspective will typically be in Eastern Europe (where outsourced services have been an important and rapidly growing sector) or closer to hand in locations such as Ireland (a popular call centre location): from the US '“ Mexico, Canada and Central/South America are 'nearshore', Asia and Africa 'offshore'.

  

Where next?

Thomas Friedman, in his seminal brief history of the twenty-first century The World is Flat describes the flattening of our world created by the convergence of the impact of the personal computer, fiber-optic cable and work-flow software. The fundamental change, which extends far beyond outsourcing, is the death of distance. The Asian economies mentioned above have reacted remarkably quickly to this seismic change. There is little doubt that we will see more of the work we currently do within our offices done elsewhere, much of it offshore. But at the same time we need to revisit our most basic 'make or buy' assumptions: the law firm is still evolving into a genuinely commercial organism and the received wisdom that most of what we do in-house is too sensitive, complex, confidential or critical to be handed to a third party has begun to be challenged in some firms. In the post-credit crunch world every firm is likely to have to return to the same basic business decision. FDs should, naturally, be at the forefront of this re-evaluation and I will return to their role in the next phase of law firm outsourcing in part two of this feature.

    

Chris Bull is chief operating officer at Osborne Clarke. He can be contacted at chris.bull@osborneclarke.com