Legal Process Outsourcing – new offering spiralling to a crash landing?

This article is based on the White Paper “Outsourcing in Turmoil”, written by Neil Farmer who is a director at both Informal Networks Ltd and Outsource Reality Ltd in cooperation with Carola Copland, Ass.iur. (Germany) who is director of Rara Avis Partners Ltd.

Legal Process Outsourcing is one of the new non-IT related outsourcing offerings on the market, at least in ‘case law ruled countries’. Similar services to meet the needs of ‘Roman law based countries’ (such as in Europe, parts of Middle East, Africa and Japan) are lagging behind. A full range of offerings would really be of interest for globally operating law firms and there are rumours that outsource suppliers are planning future outsource services with global coverage.

Legal Process Outsourcing is the provision of legal support services through standardised activities that produce a specific service or outcome for particular customers. Today Outsourced Legal Processes generally include:

- Contract drafting - Document review and management - Compliance assistance - E discovery - Litigation and IP support

Sometimes these capabilities are used to buy in additional legal capacity in short-term high volume and sensitive work, such as Due Diligence projects within Mergers and Acquisitions. Legal-specific outsourced services are sometimes combined with traditional ‘non- core business’ activities, such as IT, HR, Finance and Accounting.

What makes LPO so special and ‘new’?

LPO covers a niche in the non-IT related outsourcing business. For legal firms it seems to be special and new mainly because the Legal profession has lagged behind other businesses in embracing innovation – services that have been available on the market for decades are finally arriving in this nice and cosy legal corner .

Besides the fact that there are a range of specifics to consider, related to the Law profession, we might be looking at the same predictable issues experienced with

services like IT or IT-related Business Processes: standardised and high-volume work at a lower cost in only a minority of cases, based onshore or offshore with no value add.

Looking at LPO we need to ask two questions: will each specific service as we see it now be obsolete in the very near future? And: will the latest “new kids on the block” follow the same patterns and repeat mistakes that have already been made by others 5 to 10 years ago?

What outsourcing looked like five years ago

Five years ago, some of the early ‘no brainer’ assumptions in the outsourcing industry were beginning to be challenged. In late 2008, Neil wrote:

“If we take the published ‘evidence’ at face value, white-collar outsourcing is currently:

• Failing to deliver best practice/quality/innovation in many cases, as vendors become complacent once contracts are in place.

• Failing in many cases to provide access to high-calibre skills due to the hiring model and high vendor staff turnover (particularly offshore) and a growing realisation by client organisations that the knowledge base they have paid for was fleeting.

• Failing to deliver flexibility/capacity/scalability because contracts are binding and (by nature) inflexible.

• Failing to focus on non-core business activities, with more than a quarter of all outsourcing contracts transgressing the non-core criteria.

• Failing to effectively transfer risks to the vendor, since vendors are unable to fully absorb the costs of business losses, often leaving the organisation responsible to pay the bill.

• Experiencing high levels of ‘in sourcing’ as organisations bring in-house many of their failing or inflexible outsourcing arrangements.”

So, five years ago we were waking up from the early naive wishful thinking about IT and business process outsourcing (in particular): more importantly, we were aware of some of the fundamentals of the underlying financial model for outsourcing.

The words from 2008 still resonate today:

“Outsourcing is failing to deliver significant financial benefits in most cases, due to the inherently high costs of the outsourcing model – 10% negotiation/contract costs, plus contract management costs, plus 15% profit margins, plus staff TUPE costs, etc, etc. In many cases, outsource vendors need to increase efficiency by 40% plus before they make any profit.”

What outsourcing looks like today

We are just emerging from five years of financial crisis and recession. The most noticeable impact on the outsourcing market has been that potential client organisations have largely ‘battened down the hatches’. Uncertainty has led to inaction. However rather than going for the mass redundancies that have characterised previous recessions, many businesses have instead been ‘selective’ about their labour downsizing and overall this has resulted in significant falls in productivity.

So, is the scene set for another surge in outsourcing: both on-shoring and off shoring?

The answer overall is probably ‘yes’, but the smart businesses will be heading for a set of very different business models. For example:

• Basic, non-customer facing service provision and commodity manufacturing will largely remain outsourced.

• A ‘race to the bottom’ will emerge as wages progressively rise in established production centres, and businesses continually seek new lower-cost countries with low cost, low-skill workforces.

• Mid-level production and services will experience a greater degree of on-shoring and in sourcing as the delays due to language, culture and geography fail to match rapidly changing demand patterns.

• Some services will progressively be in sourced or replaced as technology advances: Natural Language Processing software and Artificial Intelligence (IBM Watson) lead to cost effective alternatives to outsourcing.

• Core business activities (particularly those that interface with customers directly through contact, shared services and delivery centres) have been

significantly on-shored and in sourced over the last five years: remedying many early outsourcing mistakes.

The trend to in sourcing will accelerate in the future as even the mass-market businesses recognise that increasingly modest cost reductions do not justify mass customer dissatisfaction levels.

The tipping point

In particular, Business Process Outsourcing (BPO) has reached an important tipping point: whole rafts of negative factors are now combining to make the outsourcing and off shoring option increasingly unattractive to smart businesses:

• Staff turnover has now reached prohibitive levels; with some of the turnover rates for key IT, BPO and centre skills reaching 80% per annum.

• Year on year for the last five years and more, wage inflation (particularly in India) has been running at an average 15% or more. Gradually this has eroded the underlying cost benefit case for outsourcing.

• A limited number of high profile cases of dishonest employees selling customer data, participating in fraud and bribery or blasting customer relationships on purpose have raised questions about the risk levels in many offshore locations.

• There are a growing number of cases where offshore vendors have ‘pulled the plug with no warning’ when notice of termination has been given.

Of course, many of these situations are a breach of the outsourcing contract or even qualify as court case but ‘things are just done differently over here!’

Looking ahead

Remember the 2008 research finding that: “In many cases, outsource vendors need to increase efficiency by 40% plus before they make any profit”

In reality, despite some economies of scale, there were only ever two ways that cost efficiencies on this scale could be achieved: by transforming operational efficiency or by outsourcing and off shoring to low wage cost countries.

As we have seen (above), the off shoring option for labour cost reduction is fading fast. This leaves the transformation option: onshore transformation by outsource vendors, in sourcing with transformation and/or transforming existing in-house capability.

So what is the future of outsourcing? Given all of the problems described above, why should organisations outsource their non-core activities?

A key part of the answer is that outsource suppliers are often more innovative than their customers in creating effective transformation. Their motivation is very strong: after all, as mentioned above, they often need almost a 40% increase in efficiency before they start making a profit.

There are some fundamental requirements that need to be addressed for a successful outsourcing within the Law profession:

1. Cost reductions, service improvement and efficiency must be sustainable over the long term. A successful approach includes looking to resolve a problem first in-house instead of transferring this to a provider. High-volume work, such as document review, eDiscovery, even paralegal work within Litigation, IP support and Due Diligence can be done today using technology such as Watson. So what would be the advantage using people with their tendency to make mistakes? Particularly when maturing technology provides Artificial Intelligence (AI) and the capacity to process immense amount of data much faster, more precisely, cheaper, and more efficiently than any human could?

2. Service objectives and measurements must be clearly thought through. For example, where is the service primarily targeted at: the organisation that is outsourcing or the customer of this organisation? If customer relationships and satisfaction with the service degrades over time, the end results may be an ultimate loss for all concerned parties.

3. Be smart in building flexibility and change capability into contracts. For example, ensure that the service provided and skills of people increase continually, whilst the attrition rate stays low. This is an area that traditionally been very badly dealt with in contracts and has often been "a license for the outsource provider to print money".

4. Make innovation real. We are in a changing world: can your outsourcer really add innovation to your profession or are they business as normal until business as normal ceases to exist?

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