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Finance

Managing the Risks of Engaging, or Not, in Legal Process Outsourcing

By Ganesh Natarajan and Danny Ertel

A look at the potential pitfalls in approaches when considering whether to reject or embrace LPO options.

It’s not easy managing a law firm today. The corporate client’s increased involvement in overseeing the line-item legal spend is shifting the practice of law away from the associate-based pyramid model to a more diamond-shaped or rectangular model of partner and senior associate engagement. In addition, the formerly sacrosanct billable hour is making way for caps, fixed fees and other alternative billing models. Plus, the corporate client is herself under tremendous pressure from CFOs, shareholders and internal procurement to reduce costs. This more challenging examination and questioning of outside counsel spending, accelerated by the downturn, will not stop with an economic recovery.

One of the standard moves in-house counsel will consider and that some outside counsel firms may feel threatened by will be legal process outsourcing (LPO). LPO is just the latest variant on a longer-term process of unbundling of legal services, which has included the use of paralegals, contract attorneys and e-discovery companies, and is entirely consistent with what other functions in the corporation have been doing to reduce costs.

Law firms can resist LPO or they can help their clients identify when and how to make use of LPO resources. Each approach carries risks.

The Potential Pitfalls in the Approaches

Challenging the client’s testing of LPO or refusing to participate in LPO may expose law firms to the very substantial risk that clients will replace them for more open-minded or responsive law firms. We won’t try to assess that very real risk here, but recognize it will vary significantly depending on the service (IP, litigation, corporate due diligence, etc.) and the client.

A more common, although passive, version of this resistance is for the firm to make use of LPO services only when the client makes it a condition of the engagement. This exposes the firm not only to the risk of damaging the client relationship, but it can also result in the following types of damages to the firm:

• By being entirely reactive, the law firm gets no credit for any of the savings.
• By resisting and objecting, the law firm creates the environment for unhelpful finger pointing when problems do arise.
• By working with an LPO imposed on them by the client, perhaps selected purely on the basis of price, firms take on the risk of unacceptable work product that they are still held accountable for not only by the client but under their own ethical duty (See ABA Comm. on Ethics and Prof’l Responsibility, Formal Op. 08-451 (2008)) and which affect their reputation.
• By failing to engage, learn and gain experience in partnering with an LPO, firms take on the risk of failing to serve the best interests of their clients as well being seen as unresponsive and uncooperative.

The significance of these risks depends on the market and the behavior of the law firm’s principal competitors. But what they share is that there are few if any effective strategies for managing these risks.

The opposite approach—embracing LPO as a part of the answer to deliver legal services efficiently—also exposes the law firm to risks. But these are risks that can be managed by how the firm selects with which LPO providers to work, by what capabilities the firm builds for managing relationships with their preferred providers, and by how they help their clients make informed choices about whether or not to unbundle certain activities. Consider these typical problems:

1. Outsourcing the wrong things, or for the wrong reasons.

In order to make good choices among different kinds of strategies (retain delivery, outsource selectively, build your own captive delivery center, develop a “best-friends” network, etc.), law firms can start by understanding their own models and what it really costs to deliver which parts of their key offerings, and which types of clients are most likely to be interested in exploring LPO in the near term.

2. Selecting the wrong provider.

Substantial due diligence, including on-site visits and customer reference checks, is essential. Conducting pilots with one or more providers before committing to a full rollout helps ensure that both sides fully understand what is required and what it will be like to work together.

3. Defining the wrong solution or scope.

Making a decision to outsource high-volume, repetitive tasks simply to save money through labor arbitrage is not sufficient. At a minimum, an effective outsourcing solution requires the following: carefully structuring document and information flows; ensuring that the provider can work as an extension of the law firm’s team; clarifying responsibilities for the activities that need to be completed by the client, the law firm and the LPO provider; and building quality assurance and continuous improvement (in error reductions, in turnaround times, in efficiencies) into each engagement.

4. Having the wrong contract terms.

The difference in pricing among providers will not be as big as the differences in their ability to manage conflicts, confidentiality and staff turnover, as well as to provide good reporting. Service level agreements and other contract terms should be oriented toward desired outputs and their enablers.

5. Having a poorly managed relationship.

All available research and experience tell us that the right governance model, if well implemented, cures many ills of an outsourcing deal—and the lack of the same dooms many deals to disappointment and lost value. Good governance in this case means smooth decision making and issue resolution; effective communications (even across great distances, time zones and cultures); and that the right things (as opposed to just many things) are measured and monitored.

6. Partners and associates fail to change and adopt new processes.

To be effective with hardworking professionals (and especially with law firm partners) change management efforts must win hearts and minds. If LPO is going to be part of your strategy, you’ll want to engage key opinion leaders early on in the process of defining what success looks like and enlist them in the effort to change behavior.

Law firm managers need to meet the challenge laid down by their clients, to enhance the quality, cost and effectiveness of their representation. As long as risks are properly managed, meeting the best interests of clients (and retaining their loyalty) may mean delegating some of the tasks formerly performed by the firm to an LPO, in order to better focus the firm’s efforts on higher value work, keeping both clients and members of the firm happy and productive during these challenging and changing times.

About the Author

Ganesh Natarajan is CEO of Mindcrest, Inc., a leading LPO. Danny Ertel is founding partner of Vantage Partners, where he leads the outsourcing practice area.