The legal and regulatory environment has become more complex and the risks more substantial. The growth in data to be managed and safeguarded – whether it is for discovery in litigation, due diligence in an acquisition, or regulatory compliance purposes – has been explosive. While outside counsel provide critically important services and assurance in dealing with those challenges, the pressure from business units and the Chief Financial Officer’s office to manage spend has never been stronger.
Fortunately, the last few years have also brought great advances in technology and automation, allowing us to at least try to keep up with the flood of documents. These advances have also brought new providers on the scene, with capabilities to integrate good processes, new tools, and lower cost resources. These include not only truly new providers, like pure-play legal process outsourcers based in lower cost locations, but also providers who have added new capabilities. One example is technology vendors who now bundle their tools with the labor to use them effectively as a “managed service,” and even traditional law firms who have started hiring “document review attorneys” on a different track and pay scale from their other lawyers and have dramatically upgraded their use of knowledge management and other tools.
As General Counsel have begun taking a closer look at the services they deliver internally and those that they send out to their preferred law firms, they have found that it pays to unbundle those services and consider their component parts. Many companies routinely separate out document management or parts of the e-Discovery life cycle and ask counsel to work with non-lawyers at third parties to get specific tasks completed accurately and efficiently. Others have started taking some activities that might have been handled by junior associates at law firms and are instead sending them to providers who may use a combination of lawyers and non-lawyers, who may be located on-site, on-shore, or off-shore. GCs today must manage what has become a more inter-dependent matrix of providers, including internal resources, traditional law firms, and some newer entrants.
Making good use of those providers, however, is not without its risks. Outsourcing is not a panacea for cost reduction and it is not for everyone. As you consider whether, and to what extent, to outsource tasks that have traditionally been performed internally or delegated to outside counsel, you need to think about how to manage two kinds of risks; substantive risks – concerning the work, its quality, and how you contract for it, and, relationship risks – with a new provider and with your principal outside counsel. Let’s examine the substantive risks first:
I. Outsourcing the wrong thing, or for the wrong reasons
There are important outsourcing tradeoffs to be made among objectives such as; spending less, improving predictability and transparency of an engagement budget, freeing up internal staff so they can focus on high value activities, and providing new kinds of support to the business that you could never have afforded to do previously. Understanding what you hope to achieve by shifting work to a different provider is critical.
II. Defining the wrong solution or scope
Just making a decision to outsource high-volume, repetitive tasks to save money through labor arbitrage, is not sufficient. As you think about the potential objectives for legal process outsourcing (LPO), you should also be considering the various tasks that can be outsourced to meet each of those objectives as well as the most optimal output. Outsourcing legal processes can be more than just unbundling a service and shifting tasks to a different provider. At a very different rate per hour, it may be more sensible to have an LPO provider deliver something different than what a paid engagement with a law firm would produce. For example, in Merger & Acquisition (M&A) due diligence, to reduce costs law firms are often pushed to minimize the time they spend abstracting the contracts in a data room. But with an LPO provider’s hourly rate being a fraction of law firm associate time, enhanced abstracts that are useful for post-deal integration and supplier management might well be a great, and cost-efficient, investment.
III. Selecting the wrong provider
There are more LPO providers than there is presently work to sustain them.* Substantial due diligence, including on-site visits and customer reference checks, is essential. Conducting pilots with one or more providers prior to committing to a full roll out helps ensure that both sides fully understand what is required and what it will be like to work together. The RFP process can and should be more meaningful than a price auction – you can ask potential providers to demonstrate how they’ll meet your objectives.
IV. Negotiating the wrong contract terms
It is important to consider what really impacts the total cost of the engagement of which outsourced activities are a part, and to make sure you pay as much attention to enablers of savings as to the rate card. Some key issues to consider include: knowledge management and training issues and responsibilities, fluidity of interactions among client, law firm and LPO provider, and quality assurance mechanisms (and their costs).
The substantive risks are manageable, provided that you approach the question of whether and how to outsource as you would a significant strategic decision about how the organization should manage legal and regulatory risks. But what about the relationship risks involved in a decision to outsource? There are at least two categories of such risks: those concerning your relationship with the new provider(s) and those concerning your relationship with the outside counsel who might have previously performed some of these tasks as part of a broader service they still provide to you.
V. Poorly managed relationship with the new provider
The research, albeit based more in IT and Business Process Outsourcing than LPO, suggests that these challenges collectively can eat up as much as 30-percent of contract value.** Protocols for decision making among client, LPO provider, and outside counsel are a crucial part of the framework; expectations about how the three parties will work together, deal with one another, and safeguard confidentiality need to be made explicit; and a scorecard that will promote accountability but also open communication and effective problem solving needs to be developed.
VI. Damaged relationships with outside counsel
Whether it is because of the hit to their pocketbooks, or because they perceive outsourcing as something that inherently devalues the services they provide, some outside counsel will feel attacked by any discussion of outsourcing. How you explain your thinking and characterize their role going forward will have a lot to do with the impact of your decision on your relationship with your most trusted advisors.
This new and somewhat unfamiliar relationship needs to work for all three parties. It is easy to imagine that you can just hold counsel accountable for everything, from the accuracy of the work that has been contracted out, to the smooth management of the interactions among all entities involved. And you can, if you are working with a firm that is sufficiently agile to adapt to changes in the profession and they have invested in the capabilities to manage such projects and third-party relationships. But even then, they cannot do it all on their own. One thing GCs can never truly outsource is ultimate responsibility for ensuring the right solution and effective working relationships address the company’s legal and regulatory risks.
* There are over 140 LPO providers in India alone, with competitors in the Philippines, South Africa, Israel, and Australia, as well as on-shore both in the US and the UK. ValueNotes, one of the leading analysts, recently estimated that in 2010, total LPO spend in India should reach $440 million. Taking that projection as fact, and recognizing that a handful of these firms are significantly larger than their competitors, that means that the vast majority of these firms have less than $3m in revenue and some may not have reached seven digits.
** Managing Outsourcing Relationships to Maximize Value: Evolving Relationship Management Practices, Vantage Partners, 2010