Law Departments have traditionally resisted working with Sourcing and Procurement, fearing that legal services were just “too different” from materials and other services with which sourcing professionals were used to working, and that procurement techniques would damage the “trusted advisor” relationships they relied on with outside counsel. Some of this resistance may be rooted in in-house counsel’s reluctance to see their craft sourced the same way as IT help desks or travel services, or in the perception that Sourcing did not appreciate the importance of professional judgment and other intangibles. It may also be that sourcing professionals have been a bit too cavalier about claiming that “everyone thinks they are different” before pulling out their dog-eared 7-step process manuals.
As expense pressures grew and sourcing teams developed more experience sourcing other services, some in-house counsel started to welcome their advice and support. Sourcing teams bring valuable experience and tools; when they also invest in and build relevant category expertise, they can help bring predictability and transparency in legal spend. As law departments move beyond asking outside counsel for discounts, the exploration of whether legal services can be “unbundled,” and whether some unbundled activities should be outsourced, represents a great opportunity for collaboration between these two corporate functions.
Law departments actually have much more experience outsourcing and working closely with outside providers (law firms) than many other functions. But unbundling activities that have traditionally been treated as single matters or services, and determining how to move some tasks to other providers, does create different risks to manage, ranging from scope definition and provider selection to the impact on the relationship with lead outside counsel. For more on the risks and challenges experienced by in-house counsel, see this article in ACC Docket. Sourcing teams will need to adapt their methodologies to the uniqueness of the legal domain as they try to work with law departments on legal process outsourcing (LPO). An important place to start is defining what success is for outsourcing legal services or processes.
What makes clarifying objectives a bit more challenging in the context of legal services is that non-financial objectives are quite real and often as important as cost savings. Identifying those with some rigor so they do not become excuses for sloppy analysis, and developing ways to account for them in an outsourcing business case, takes a bit of art and discipline. The relative importance of the different ways in which law departments can obtain value by outsourcing has implications for the process:
• Reduce internal headcount (by moving activities to a third party) – This is the typical way in which other business functions save money by outsourcing. Given the size of a typical law department, if headcount reduction is the driving objective, the scope of the LPO engagement will be relatively small. Indeed, initial engagements are often as small as 10 full-time-equivalents (FTEs). Clear role definitions and workflows are critical to enabling both customer and provider to understand the scope of work, price it, and determine whether there is sufficient value to incur accompanying risks. The savings, net of transition and governance costs, will be small. (Consider that average in-house legal spend is less than 40% of the company’s total legal spend, and assume that most, but not all, of that is on staff; then, if you could outsource 25% of those roles and save 50% of the cost of those positions—two very generous estimates—your savings amount to less than 5% of total legal spend.)
• Reduce external spend (by moving activities from law firm to LPO provider) – This objective represents a much larger opportunity for savings and has different implications for the sourcing exercise. Shifting tasks from counsel to outsourcer on specific matters happens sporadically. Savings are realized on a matter-by-matter basis, and often by a business unit budget holder; but there will be additional costs incurred by the law department as overhead to manage a process that is more like “serial out-tasking” than traditional outsourcing. The most common example of this sort of outsourcing (which, incidentally, represents about 50% of the work of many “pure play” LPO providers) involves sending initial document review work to a provider, but having outside counsel provide supervision and quality assurance. Actual savings are realized in comparison to having outside counsel conduct all of the review work using their own associates or contract attorneys.
• Reallocate internal resources to higher-value activities – This goal produces savings only by avoiding the cost of hiring additional staff, but it delivers a very real benefit: making sure that in-house lawyers are spending their time productively. Consider the value of freeing up legal staff from reviewing every routine change proposed by a counterparty to the thousands of non-disclosure agreements a technology company signs every year, where most of those proposed changes fall into one of a handful of predictable (and acceptable) requests that can be described in an outsourcer’s playbook. Freeing up their time from mundane tasks is important to retaining motivated professionals and it is important to making sure that the company is realizing a return on its in-house legal talent. Translating this management objective into one that justifies the disruption and expense of a sourcing exercise, however, requires that law department management articulate what priorities are underserved because of such unavoidable but lower value tasks. There should also be a plan for how internal resources will be redeployed.
• Provide new, previously unaffordable services to the business – This objective falls squarely on the side of “do more” rather than “with less.” Companies face ever-increasing risks in global markets; outsourcing can allow a law department affordably to provide new or added risk management services to the business. The availability of lower cost resources managed to a well-run process and supported by effective technology can allow law departments to provide support that might otherwise be unthinkable, for example: provide more detailed, market-by-market guidance to a business about the legal and regulatory risks facing their distributors; extract key terms and conditions data from thousands of license agreements; conduct due diligence reviews on every major customer contract for an acquisition target; and more. The value here comes from reduced risks elsewhere in the company rather than savings in the law department.
If your organization is considering outsourcing some legal processes, you should ensure key stakeholders are aligned around a clear set of objectives so that you can design an engagement that is “fit for purpose” and you can select a provider with the right capabilities. Careful mapping of processes, thorough due diligence in selection, effective quality control, and robust governance of the relationship all represent additional investments required to outsource successfully. Achieving real return on those investments requires starting with a clear picture of what success looks like and what trade-offs may be required to get there. Effectively sourcing legal processes and services to achieve real benefit requires close collaboration between law department and sourcing professionals. Both hold important pieces of the puzzle. For more discussion on unbundling, sourcing, and paying for legal services, check out my blog at www.dannyertel.com.