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Commercial Question

LPO: here to stay

updated on 07 June 2011

Question

How is legal process outsourcing (LPO) affecting the management of law firms?

Answer

The economic downturn, increasing competition in the legal services sector (including from specialised LPO providers) and mounting demands on in-house counsel are all contributing to a drive for innovative and cost-effective legal solutions. More clients are enquiring about LPO and related supply chain management practices, including offshoring, engaging contract lawyers and subcontracting to lower-cost firms. Commercial law firms are consistently being asked to consider LPO in their services solutions for clients, and their proposals are often key differentiators in legal panel selection processes. LPO may not be suitable for many types of work, however, for law firm management which is considering the implementation of an LPO solution, there are challenges: how do we maintain quality? Should we be worried about losing control of the client? How do we manage this process? How do we price for it? Can we make money from such an offering?

Lawyers should not be surprised by LPO demands from clients. The concepts are well tested in other industries such as the automotive and electronics sectors, which have globalized over the last few decades. Large corporations are sourcing from an evolved structure of specialised manufacturers across the world. The benefits and strategic advantages for clients in doing so may include:

  • increased levels of service;
  • freeing up of management time;
  • cost reductions;
  • access to niche expertise;
  • economies of scale;
  • continuous process efficiencies; and
  • improved management.

In the IT sector, service providers offer clients 'systems integration' solutions; there are parallels in these with LPO solutions. Typically, the client will instruct the commercial law firm and agree a fee for the work. The firm will then act as a 'prime contractor', segmenting the work and allocating it to subcontractors often for a fixed fee or at a strictly controlled rate. The subcontractor will then process its aspect of the work before sending it back to the prime, which will quality assure the work, add a margin and deliver it in a specified format to the client.

There are many ways in which a commercial law firm acting as prime could segment the work; for example, standardised legal agreements with high volumes could be processed by other firms based in cheaper jurisdictions or at offices with lower charge-out rates. Importantly, if the client has an issue, it's the prime's throat it will choke! It should not have to call a legal provider in a far-flung country to find out where that non-disclosure agreement has got to, or chase a high-street firm that has been subcontracted to draft a building lease. The commercial law firm operating as prime should act as a classic systems integrator and project manage the entire solution.

The trick here is expert project management and using processes that people have confidence in. These skills may need to be brought into the firm or nurtured from the existing talent pool - they can also be enhanced by the intelligent use of technology. It is likely that the success or otherwise of the project management and processes will determine whether the firm can make such an LPO offering profitable. Get it wrong, and it could be a costly and embarrassing failure.

The first obstacle for an internal champion of an LPO solution may be in changing the existing internal culture and fighting any natural resistance to change that may exist within the firm. The cynics will say, 'this isn't the way we do things round here!', but perhaps the sensible answer is, 'well we'd better start, otherwise we'll struggle to survive in this environment'. When it comes to LPO, the managers of commercial law firms can't rest on their laurels or bury their heads in the sand; it's here to stay and the maxim must be 'Innovate or die'!

Peter Lee is an associate in the commercial group of Bird & Bird. The views expressed in this article are the author's own.