Analysis

On borrowed time

The once-lauded LPO industry has lost momentum. IHL assesses changing in-house responses to outsourcing and asks if the industry is reinventing itself

counter_filters-IHL

Analysis |

The collapse of film giant Kodak in 2012 is already established to many as the definitive case study of the failure of a business convinced its model would last forever. At its peak, Kodak’s share of the photographic film market was more than 80% in the US and 50% globally. So, when a Kodak employee invented the first digital camera in the 1970s, he was told by the board to keep quiet about it. Denial took hold right up until January 2017 when it filed for Chapter 11 bankruptcy. Reborn as a tiny, niche player with a few lucrative patents these days, annual profits for Kodak now are around $12m.

counter_filters-IHLThe lesson? Adapt or die. If innovators stop innovating, problems follow. Just ask Nokia and BlackBerry. This, on a much smaller scale, could be an existential crisis that the legal process outsourcing (LPO) industry may have to face.

The outsourcing of processed legal work, either through third-party LPO or a captive offshore office, was once considered strong enough evidence of a free-thinking in-house team. But with threats to traditional models, including external pressures from new automated technology solutions, dwindling labour arbitrage, and a saturated market forcing evolution and transformation, the traditional LPO has embraced new models and in-house teams are demanding more.

‘Legal departments under pressure from a resourcing perspective and those that are evangelists for change are starting to look at multi-party solutions to a much greater degree,’ argues Bruce Macmillan, director of the RPC Centre for Legal Leadership.

He adds that, rather than the traditional model with legal departments, law firms and perhaps a basic LPO arrangement, such as Lawyers On Demand (LOD), or an offshore business processing outsourcing arrangement, in-house legal is starting to deploy more sophisticated combinations of these components. With the advance of automated technology, the strongest LPO models have moved into consulting and widened their service in an effort to remain relevant. Traditional services such as document management and e-billing have become commoditised and LPOs are focusing more on offering consultative services, such as risk analysis, discovery, artificial intelligence and operational support.

‘Outsourcing has moved from being a commoditised “can you collect and process this data?” to something that is much more consultative,’ notes Julia Chain, managing director and executive vice-president of Advanced Discovery, a global e-discovery and risk management company. ‘It is now about: “Let’s partner with you, let’s look at what your needs are, let’s be more thoughtful about how you do discovery.”’

The changing environment is such that some commentators are beginning to question the future of legal outsourcing. Macmillan even suggests that the traditional LPO model could be in danger of going the way of Kodak, not because the main players are unaware of what is going on, but because they are too invested in the longevity of their current business models.

Bringing it home

Traditionally, there were two main categories of legal outsourcing: contracted offshore services from third parties such as Integreon and Exigent, and captive offshore capability, which in-house teams such as Colt Technology Services, Vodafone and BT have traditionally used.

‘The contracted offshore services is what people in the past have called an LPO,’ says Robin Saphra, founder and chief executive of legal outsourcer Yuzu.law and previously group general counsel of Colt. ‘That market never really took off and you couldn’t get a very flexible service out of it. Then companies started looking at setting up their own captives, which is what we did at Colt, what BT did initially and what KPMG is looking into now.’

However, the captive model, which was only available to the largest multinationals with the resources to set up in faraway locations, such as India, or take advantage of existing company offices for other support, is becoming less favourable.

‘The prices have gone up in India,’ says Kerry Phillip, director for group enterprise legal at Vodafone, which still uses an Indian law firm for volume work. ‘There is massive demand for qualified lawyers in India, so there is a premium – they are asking for a higher salary. There is not much difference between our Budapest Vodafone shared service price and our Indian law firm price.’

That factor, combined with the fact that this Indian law firm does not have access to Vodafone’s automation systems, means that Phillip is now relocating her work into Vodafone’s shared service centre. ‘That is my area of the business. Vodafone is still using the Indian law firm, but for my part of the business I am bringing that back in-house,’ adds Phillip.

Another factor for in-house teams that have outsourced work to remote locations is the potential risk that arises from being far removed from important customer or business data, especially with the incoming General Data Protection Regulation (GDPR).

‘Everybody thought that India was the jurisdiction that kept on giving, but the Indian market has wised up very quickly and it is not nearly as cheap as it used to be,’ adds Chain. ‘We are finding now that clients are getting very worried about security and they are saying they need to keep their documents secure. With GDPR coming in, they need to know exactly who is transferring what to whom. Banks are under know-your-client (KYC) pressure – there are all these different pressures coming, which makes clients think: “We need to be close to our data, we need to be close to what is going on and we might need that to be closer to home.”’

We are finding now that clients are getting very worried about security and they are saying they need to keep their documents secure.
Julia Chain, Advanced Discovery

BT, which was one of the first in-house teams to create a captive office in India, closed that outpost in favour of a deal with legal, cyber security and business services provider UnitedLex, later moving to alternative legal services provider Axiom. According to the company’s GC for UK commercial legal services, Chris Fowler, the move was primarily because BT wanted more than labour arbitrage.

‘Being a UK-headquartered company, we wanted access to technology, we wanted a global service and we wanted more than just people.’

The potential of moving offshore outsourcing much closer to home is what Saphra is banking on with his New Law outsourcing business Yuzu, which offers clients the opportunity to transfer parts of their legal function out of the business to reduce fixed costs and benefit from further training, development and modern technology. Yuzu takes over all or part of a client’s in-house legal work and will base the team either onsite with the original in-house team, move them to a remote location near the original site or place them with other teams that have been procured by the start-up. The rest of the in-house team are then freed up to tackle more strategic mandates.

‘At Yuzu we think offshoring only offers a small one-off saving,’ says Saphra. ‘The more consistent savings and those you can guarantee will be delivered for a longer period are to do with process transformation and with systems transformation. That is not dependent on location. The UK could become the offshore legal delivery centre for the rest of the world. We have a fantastic infrastructure in the UK – currency is weaker and buying sterling is considerably cheaper than it used to be. We have a huge workforce of lawyers. We have got legal technology and some real examples of innovation.’

According to Chain, the move of law departments away from a focus on low-cost foreign staff has validated the use of external LPO providers for certain things that cannot be done in-house, such as e-discovery and risk analysis. ‘It is hard to do that internally. It is never going to be as cost effective or efficient. You need software and that is what the outsourced provider now does.’

A Kodak moment?

According to Saphra, the changing nature of outsourcing may lead to the shrinking of in-house teams, although Macmillan says this depends on the type and volume of work. ‘In-house law is still growing numerically at the moment. There is some traction in the argument that in-house teams will shrink, whether it is an internal captive or the sort of thing that BT runs. A high proportion of the volume repeat work will head to automation. That is why some providers are mixing the provision of LPO content for dealing with bulky, one-off activity with helping to program-build and technology-build to deal with more routine matters.’

LPO providers such as Elevate Services and Obelisk Support are moving towards the creation and management of automation technology rather than using it as their sole purpose. According to Phillip, these LPO models provide management information very well – a luxury that many in-house departments do not have.

‘I like the model I have with one of them where I buy a chunk of time per month and it is filled by people working remotely that are Vodafone-ready – they have worked with us before, or we have done an induction so they understand how we work. The hardest part for outsourcers is not the legal skills but having the company knowledge.’

Vodafone’s legal department is a good example of the merging of different players when it comes to outsourcing work. The team uses external resources for four main categories of work: volume, overflow, specialist and filling the gaps for temporary vacancies. In addition to the Indian law firm, the team has its own shared-service centre in Budapest and uses a mixture of LOD, Elevate, Axiom and Obelisk, which supply either temporary resources to fill the gaps or a managed service where the LPO business takes a slice of work and delivers it on a fixed-fee basis. Vodafone also uses law firms for either specialist work or the overflow work, where typically they provide secondees.

‘There is a merging in the middle,’ says Phillip. ‘Law firms are offering the LPO and the flexible temporary work, and the LPOs are offering the consulting. I have a bottom layer that is automated and then I have the next layer of complexity, which is an LPO of some sort. The next layer up is usually the Vodafone shared service centre piece, which is medium complexity, and then the high-complexity, high-value work, which is onshore but may be in any of our locations, not necessarily in the UK.’

Additionally, according to Macmillan, the makeup of bigger legal teams is becoming more technically minded – more concerned with implementing processes, running projects and implementing technology. ‘Some of the biggest legal departments have a chief operating officer type of role and increasingly there are non-lawyers. A characteristic that is emerging with legal departments is that they are looking for lawyers with more skills or they are bringing people who have disciplines other than law onto the legal payroll – project management, knowledge management, IT – because they have those needs.’

This argument would suggest that, directionally, in-house teams are insourcing and, as a whole, they are creating non-legal roles to bring their own work in. Additionally this feeds into the debate as to whether the LPO model will ever be considered mainstream.

‘Using a third-party provider is very mainstream,’ says Chain. ‘To the extent that law firms or corporates are ignoring that, they are going to be in trouble.’ And the emergence of the trade body CLOC – the corporate legal operations consortium – which represents legal operations professionals, suggests that this is becoming a dedicated function in its own right in larger organisations.

The hardest part for outsourcers is not the legal skills but having the company knowledge.
Kerry Phillip, Vodafone

However, Macmillan argues that the size of the market is restricted because there is only a relatively limited number of legal departments big enough to make those activities worthwhile. ‘It is worth remembering that we are not talking about a high number of companies. I’d be surprised if we were into triple digits of companies that had sufficient scale to seriously consider that solution regularly.’

Macmillan goes further to suggest that not only is legal outsourcing not considered to be a mainstream product, but it is in danger of becoming a redundant product.

‘The big question for me with LPO is not so much nearshore versus offshore but, is the long-term view of LPO really only to help put things into tools so that they can then be automated? Is a traditional LPO a time-limited product that will end up expiring within a generation because of the move towards technology? Maybe we will end up with effectively a new-model LPO being the combination of consulting, high-level transitory legal output, and transitory volume work in order to put things into a working tool, and process and then running the tool and processes. This is the interesting bit where businesses like Riverview [Law] and Elevate are starting to go. The future is almost here.’

Outsourcing may have moved on from the traditional third party or captive offshore office model, but ultimately the impact outsourcing has had on traditional law firms and legal departments cannot be underestimated. The model may have evolved, but a potential new iteration could be even more successful.

Concludes Phillip: ‘If I were them I would be licensing out the software they use, I would be managing the automation and, though you keep the work there, even though it is automated, you have a slightly different model. They have a shelf life, but I have a lot of faith in them to find new models.’

Author(s)

  • Kathryn McCann, , The In-House Lawyer