Introduction

A ValueNotes May 2009 report, Legal Services Outsourcing: What Do Law Firms Think?, provides insight into what large US and UK law firms think about offshoring and outsourcing.  ValueNotes (“VN”) is a respected analyst firm that has followed legal outsourcing for several years.  Many VN findings match our own market assessment, our customer feedback and recent broader trends we see in the LPO industry.  We do, however, have differing views on some of the VN findings.  This post highlights key report findings and shares our perspective on them.

Integreon is making available a free copy of this $US 395 report.  Click here if you would like to request a copy.  This offer is limited to the first 50 law firm owners or employees who complete the registration form with the required contact information, including an e-mail address with a law firm domain name, and who agree to subscribe to the Integreon blog.

How ValueNotes Conducted the Survey

VN conducted online and telephone surveys of both firms that offshore and those that do not.  In all, about 100 lawyers responded with about 30 from firms with over 1000 lawyers, 50 from firms with between 300 and 1000 lawyers, and 20 from firms with fewer than 300 lawyers.

ValueNotes Findings and Integreon Comments

LPO Penetration is Low.  VN found that offshoring still has fairly low penetration among law firms; less than 3% of firms in a random sample had tried offshoring.  On the one hand, low penetration is not surprising given that the LPO industry is still nascent.  On the other hand, 3% seems very low to us.  We wonder whether this finding is an artifact of asking individual lawyers rather than institutions.  Already four years ago, The American Lawyer reported that 6% of AmLaw 200 firms offshored work (see Law Firm Leaders: Conservatively Optimistic, Dec 2005). While it is understandable that only 3% of lawyers offshore, based purely on Integreon’s own customers, we know that many US and UK law firms do offshore.

Onshore Outsourcing is More Common.  Though the volume of offshoring VN found is lower than reported in other surveys and than many may have expected, the report notes that total outsourcing volume is higher because onshore outsourcing is more common (especially if one considers use of contract lawyers as outsourcing, which seems sensible to us).  We think onshore outsourcing is a key point.  Take document review for example, where outsourcing is well established onshore. Integreon currently has as many onshore review projects running as we have running offshore.

Our view is that LPO is a global phenomenon. Customers consider project complexity, availability of talent, business continuity, degree of real time communication, cost, and scalability in deciding on location.  In our experience, only a small portion of the market is dogmatic about location; the vast majority let business requirements drive the location decision.

Cost Savings is the Main Driver. For those firms that do offshore work, VN found that cost savings is the main driver, followed by client pressure.  VN notes that these two factors are, by and large, the same.  Our experience is that pressure from corporate law departments has historically been the overwhelming driver for law firms. Until now, the typical law firm response has been to react to a request from a client.   Some progressive law firms, however, are now proactively assessing and engaging LPOs so that that they can present alternative delivery and cost models to their clients.

We also see that many of our customers, both law firms and law departments, focus on more than just cost savings.  VN also found that firms that do offshore recognize offshoring benefits beyond cost savings, including satisfying client pressure and improving turnaround time.

What Customers Seek in an LPO.  VN found that customers of offshore services seek a provider with deep management and domain expertise, good references, end-to-end services, the ability to scale, and onshore / global delivery capability.  These findings are consistent with our own experiences.

We think it is also important to note that legal outsourcing works best when it is not about “lifting and shifting” a function from a high cost location to a lower cost location.  That is, the benefits are not merely labor cost arbitrage.  A mature LPO operates based on established processes that provide a consistent, repeatable framework for quality and workflow, performance measurement and continuous improvement.  Lawyers are, in our opinion, too quick to overlook or discount the “process” component of “legal process outsourcing”.  Clearly not all legal work is suited to a process orientation.  Much is, however, and we find lawyers tend to under-rate the value of process engineers, Six Sigma Black Belts and technology experts that are integral to mature an LPO offering – until they’ve worked with us.

Lack of Awareness is Biggest Reason Not to Offshore.  The biggest reason law firms cite for not offshoring – 85% of firms – is lack of awareness of offshoring or no perceived need to do so.  We find that hard to believe.  LPO has been around for 5 years and there’s been plenty of hype (including many articles about LPO in both the legal trade press and mainstream media).  The economic dynamic started to change a year ago and major corporate clients have been banging the drum for efficiencies for a considerable time.  That said, it can be dangerous to assume lawyers are informed because of the volume of articles.  For example, even today many US litigators remain under-informed about modern e-discovery rules and practice, a widely reported topic.

Security Concerns.  Other reasons for not offshoring include satisfaction with onshore outsourcing and prior unsatisfactory experience with offshoring.  Also, about 8% of firms cite data security and confidentiality concerns for not offshoring.  In our view, firms can easily allay these concerns by assessing a provider’s facilities, security, and procedures.  VN notes that firms with more extensive offshoring experience say that “client confidentiality and client conflict are not major concerns.”  The recent ABA Opinion Formal Opinion 08-451 [see our blog post ABA: Legal Outsourcing is Salutary and Ethically Allowable] bears this out. VN notes that firms with more extensive offshoring experience say that “client confidentiality and client conflict are not major concerns.”

Separately, Integreon, along with other reputable LPOs, meet stringent ISO information security standards.   Many LPOs (well over 100) have sprung up over the last few years since barriers to entry are low.  Only a few, however, have the process expertise, management systems and security infrastructure to support demanding legal work.  So it is no small wonder that law firms that may not have conducted careful provider due diligence would have had a bad experience.

Quality Concerns.  Some firms that tried offshoring were not satisfied with the quality.  We suspect that most of these instances were ad hoc, projects that were not properly planned or executed. Deep domain expertise is a critical component of most successful outsourcing, wherever the location. Most of the major activity in the LPO market is a result of long-term strategic decision making; these customers recognize the investment to be made and value to be extracted from proper and thorough documentation of workflow, quality testing, implementation and transitioning, to set the strongest foundation for success.  [For example, one of our multi-year agreements with a client supports multiple litigations with as many as 100 offshore lawyers working on their matters at any one time]

In our opinion, the “quality issue” is a perception not grounded in fact.  Quality should, of course, be at the top of every diligence check list. Saving 50% on cost is false economy if the quality is not right. A reputable LPO should be able to demonstrate understanding of the components of quality.  And not just with a blanket statement about “US or UK lawyers checking the work” but with a commitment to quality and a culture of quality from recruitment to process to audit to management, etc.

Customer due diligence should reveal whether it’s real. There are many ways to test quality – thorough diligence, references, tests (pre-pilots), and pilots to name a few. And a reputable LPO should be able to demonstrate that it has auditable, defensible documented processes and a performance metrics system which accurately monitors and ensures quality.  It’s also important to remember that quality is a moving target; for that reason, we have a formal Six Sigma process.   We note that every LPO pilot we have run met the pre-established quality standards.

Document Review Dominates Offshore Work.  For firms that do offshore, VN found that document review is the most popular function to send offshore.  This is consistent with our experience.  We continue to see document review driving LPO - offshore, onshore and dual shore - from both law firms and corporations. Many major law firms have experienced offshore document review, not as direct customers but at the insistence of their corporate clients. Many have seen it first hand and have become convinced of its efficacy because of what they see in their own layer of quality control.  Some of our law department customers have directly compared our reviews with their outside law firm on a blind basis and found ours  superior.  Obviously it’s not because we have better lawyers offshore than the law firms do onshore, but because we have a proven, repeatable, measured industrial process to recruiting, training, performing and auditing the work, including implementing technologies, which assist or automate the work.

The Conclusions We Draw

We find the ValueNotes report to be very useful.  While we take issue with some of the specific findings, the report certainly raises many of the issues lawyers should consider in offshoring.

And any quibbles notwithstanding, it is certainly true that many lawyers are skeptical about both offshoring and outsourcing.   We think this will change.  Our management team has decades of experience managing within large law firms and corporate legal departments and know that in the legal market, any new way of working takes years to penetrate.  Firms take time to gain comfort with new ways of working; indeed, it takes time to use those ways effectively and achieve the desired quality.   For example, for many years in the 1990s, a majority of lawyers and firms either did not understand why e-mail might be useful or actively thought it was not required.

Times change and eventually so do firms.  The economic reality today creates huge external and internal pressures for law firms.  Clients demand better value, which puts pressure on rates and revenues.  This squeezes profits, which puts the high overhead of law firms under the spotlight, perhaps in a way not seen previously.   Offshoring / outsourcing commoditized aspects of law practice is among the easier ways law firms have to improve their value proposition.  Similarly, outsourcing middle office operations is an effective method to reduce cost.

The legal market is slow to “tip” to a new way of working.  But when it does, it tips quickly.  We think in the current environment, the tipping point is upon us.

[ Update 29 June 2009: The PosseList blog also commented on this subject. PosseList is a thoughtful and insightful blog focusing on contract lawyers in the US and often comments on broader legal market trends. ]

Rio Tinto’s legal switch puts pressure on London by Alex Spence reports on the facts. Rio Tinto deal heralds huge changes by well-known commentator and author Richard Susskind discusses the ramifications.

Spence reports that “Rio Tinto has hired a team of lawyers in India to try to reduce its annual £60 million legal bill by 20 per cent.” It is working with an LPO to recruit a team of 12 lawyers in India to “work for it on tasks such as reviewing documents and drafting contracts.” Rio expects to have 24 Indian lawyers within one year.

Susskind writes “the Rio Tinto deal suggests that imaginative pricing may not fully fix the more-for-less dilemma. Lawyers will need to go further and source their work differently, often by using less costly labour to do routine legal work…. People often assume that outsourcing and the options are applicable only to high-volume, low-value legal work. The Rio Tinto deal confirms this is wrong.”

The Rio deal adds to the list - literally - of corporations that offshore or outsource work.   At least 15 companies have publicly stated that they offshore work to outsourcers or to their own offshore operations (see Outsourced Legal Services list at Prism Legal, a personal site I maintain).

So Rio is just one more company offshoring. Or is it? Specifically, this deal is announced with the intent of significant cost cutting and that feels new. More generally, markets tip when the new and exotic become accepted and common. Geoffrey Moore’s Crossing the Chasm provides one framework for thinking about how markets adopt new approaches. Well before his work, however, economists modeled  adoption of new high tech products (e.g., Polaroid cameras or Xerox-brand copiers) with S-shaped curves: slow ramp up followed by sudden acceleration.

The continuous (smooth) S-curve may not be a good fit for legal. Instead, a discontinuous step-shaped function may apply. Consider legal market adoption of e-mail, document management, marketing, lateral partner moves, or mergers. For each, there seemed to be only a few firms doing it and then, quite suddenly, many or all were. The “step function” reflects law firm decision making: the first few adopters change slowly, gingerly, and quietly.  Firms want to follow.   Once a half-dozen to a dozen have led by adopting the new thing, “the coast is clear” and the rest rush in.

Unfortunately, like calling the bottom of a recession (or the top of the market), it’s much easier to recognize the tipping point after the fact.  Working for an LPO may distort my view but it feels like legal outsourcing is at a tipping point. Of course, we won’t know for some time. Whether the market tips this year or beyond though, I am confident that, as with e-mail, marketing, etc., we will look at outsourcing and offshoring and have forgotten what all the fuss was about.  Just like we did for so many other legal market changes.

[A variation of this post first appeared at the Strategic Legal Technology blog.]

In addition, LTN’s Monica Bay interviews Babs about her job hunting experiences in a Law Technology Now podcast, Greening Your Career: Surviving after a Layoff, available on Legal Talk Network.

For those attending the upcoming LegalTech West Coast conference in Los Angeles, Babs will be speaking on June 25, 2009 during the Greening Your Career networking breakfast. The breakfast will be hosted by Monica Bay and will feature a panel of experts in an upbeat discussion for members of the legal community who may be looking for jobs.

(Be sure to also visit Integreon at booth 208 during LegalTech West Coast to learn about our integrated discovery solutions.)

EDRM added two new projects this year, Information Management and Jobs. Information Management as its own project was an obvious evolution. It had been part of the Evergreen group but the topic has grown enough to warrant its own focus. The Jobs project is a timely response to the current economic situation plus the addition of recruiters to the attendee mix certainly made for a more entertaining conference. I’m not saying that e-discovery “geeks” don’t like to party, but if I’m going to be in a bar in the Midwest, it’s more fun if Michael Potters and David Cowen are there. Michael for example is a real people magnet and I think he managed to get jobs for some folks staying at the St. Paul Hotel who weren’t even in e-discovery.

Eric Mandel, Director of E-Discovery and Litigation Support with Zelle, Hofmann, Voelbel & Mason LLP and the Chairman of the Model Code of Conduct Project, is back on the law firm side having completed a long stint in vendor-land. The MCOC project is immensely stimulating, having many “nooks and crannies”. The one-year-old group is finishing up their first round of content and has made a plea for comments and suggestions from the rest of EDRM and from the general public. The group’s goal is to develop aspirational voluntary ethical guidelines for electronic discovery providers and consumers that will be similar to those under which attorneys, court personnel and others in the legal space operate.

Eric offered this interesting take on being back on the procurement side, “No matter how much vendors may think they understand their law firm clients, there is no way they can fully empathize with the cost pressures law firms are facing now from their clients. I used to think when I was on the vendor side that if I could sell value, then I could get the law firm to leave price as an afterthought.”

Courtney Gray, VP/Technology/Partner with Nextpoint, “spent a fair amount of ‘cocktail party’ time with the Data Group at ERDM’s semi-annual conference, learning more about their unique challenges. I gained a much clearer understanding regarding securing a pristine data set — one which has not been processed, deduped and culled to the point of uselessness in testing.”

My role in the EDRM is co-Chair on The Evergreen Project, one of the longest standing projects, which has now refocused its efforts on making the current EDRM content more useable. Evergreen is primarily concerned with ensuring that the Electronic Discovery Reference Model remains current, practical and relevant; enhancing the content at each node of the Model; and educating about how to make effective use of the Model. Our efforts may include guides on how to apply the model in practice such as with examples of usage scenarios.

There will be a flurry of activity this spring to make sure all content makes its way to www.edrm.net. This will be followed by an all out assault on the “use-ability” of the site. The EDRM membership as a whole has acknowledged that it is very hard to find information on the website in its current incarnation and so the Evergreen project has taken on the job of redesigning, auditing, linking, standardizing, and testing each component from the non-EDRM member point of view. I’m sure our group is up to the challenge. Quoting Evergreen member Josh Byrne, “I have been impressed with the level of passion for the topic, and the number of members who participate from one year to the next.”

One of the highest notes during the conference was the acknowledgement of Jason Velasco’s continuing service to EDRM and particularly for his three years as the Chair of the Evergreen Project. Florinda Baldridge, Project Management leader, outdid herself by creating a mock Law Technology News Cover to honor Jason. It was presented during the Wednesday night dinner and everyone enjoyed it. Thank you again, Jason!

Babs Deacon is the Director of Consulting and Data Analytics with Integreon and a co-Chair of The EDRM Evergreen Project.

In fact, it focuses exclusively on law departments outsourcing legal work to law firms. Incisive found that general counsels (GC) outsourced 40% of legal spend in 2008, down from 46% in 2007. The study does not quantify other law department outsourcing such as e-discovery.

With GCs outsourcing so much, we wonder why some seem nervous about legal process outsourcing, that is using a company like Integreon for managed review service, e-discovery, contract review and management, or legal research.

Many lawyers conflate “outsource” with “offshore”. While we think offshore is a fine option, we and other LPOs offer onshore service as well. Perhaps GC misgivings are more about the type of resource than the location. Other than inertia, it’s hard to understand GC reluctance to expand the already broad scope of law department outsourcing by deploying more LPO services.

Law departments can reduce costs by explicitly acting as general contractors to solve company legal problems. Like any GC (general contractor that is, not general counsel), a law department should consider what resources it employs full time and what it sub-contracts. With this mindset, law departments would select a broader range of resources that better meet corporate objectives.

Law department management consultant Rees Morrison notes in Three reasons why legal departments are better positioned to negotiate arrangements with suppliers (15 April 2009) that (1) GC have more bargaining power than law firms, (2) GC are more motivated than firms to save money, and (3) GC can provide better direction to sub-contractors than can firms. Morrison’s blog post further supports the idea of GC = “general contractor” as well as “general counsel.”

In our own business, we do see GCs act as general contractors. Fortune 50 and FTSE 100 law departments use our managed litigation document review and contract review services. They know they must deliver the best solutions at the lowest cost so they assemble the right teams and resources, including our services. A general contractor approach to meeting corporate legal needs is one of the easiest and least painful way to get more bang for the buck.

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What if the legal market transforms and the pyramid no longer works?  What if the new shape of law firms is a cylinder instead?   In a cylinder, equity partners remain at the top but the number of fee-earners and staff supporting them is much less.

Two recent UK articles suggest a possible move to cylinders.  Focus, Law firm management: A year of living dangerously by Matt Byrne in The Lawyer (30 March 2009) is an excellent, in-depth analysis of the future of large law firms.  “The current financial crisis has been widely characterised as the most severe downturn since the Great Depression… Is it a cyclical downturn or does it represent a paradigm shift?… “  The article presents the varying views of managing partners of large US and UK firms on this question.

The Lawyer article reaches no definite conclusion.  In contrast, Redundancy in the City: painful lessons for the big beasts in Times Online (2 April 2009) interviews Linklaters managing partner Simon Davies and suggests we may see a paradigm shift:

“Simon Davies, the managing partner of Linklaters, spoke exclusively to The Times… Davies sees a very different model emerging for the future… ‘Partners are spending much more time executing transactions or giving advice and, in each case, working with smaller number of lawyers to ensure that quality is maintained.’ …  In this context it is inevitable that the firm should prioritise the very high-value work that needs the most experienced and creative skills while starting to slew off the lower value work that could be undertaken by more junior staff…  ‘We are now moving to the right size for the new realities in the legal marketplace.’  “

It’s not clear what the “right size” is.  Suppose, however, large law firms must adopt more cylindrical structures to succeed.  This would require major changes in how they operate.  The huge and costly infrastructure supporting partners and other lawyers would need to shrink.   For individual lawyers and staff, that surely would mean more pain than we have already seen.  For institutions, it would require a careful reconsideration of how they support high-end fee earners.

In such a transition, the question would be how much support partners need and how best to provide it.  We’re not unbiased of course, but we think that outsourcing is a natural answer for this potential new regime.  Large firms can do away with much of the expensive and hard-to-manage middle office services required to support armies of lawyers.  Instead, they can outsource support on a more flexible basis.  Even some of the support junior lawyers currently provide can likely be outsourced to legal support staff onshore or off.

One way to think about the potential de-leveraging is a big squeeze:  the traditional BigLaw pyramid must squish down to a cylinder.  No longer will there be armies to support a few generals.  In a cylinder, the size of support layers differ little from top to bottom.  If slabs of the pyramid must become smaller disks of a cylinder, firms need to consider whether the economics of operating all those layers on their own will still make sense.  As functions shrink in scale, the economics change - usually for the worse.  So moving services such as document product, finance and accounting, and business research to an outsourced, shared services model may become much more attractive in this new world.

Integreon is betting on this trend as illustrated by our recently announced middle office services for Osborne Clarke and opening a Bristol delivery centre.  What do readers think - will pyramids become cylinders and, if so, what does this mean for support?

Many of our readers undoubtedly know that Fargo, where we have a delivery center, is battling record floods.  The dikes seem to be holding, though damage to Fargo is extensive and the risk continues.  More snow may soon fall and waves caused by high winds may threaten dikes.

I thought readers would be interested in an e-mail from Penny Retzer, our Fargo VP and General Manager.   Penny sent the e-mail below internally and, with her permission, I publish it here.

We have been fortunate to be able to continue operating, in large part because of the dedication of our associates.  Of course, in the event that we did have to shut down our Fargo facility, many of our customers have elected business continuity options that would automatically transfer their work to one of our other delivery centers.

The difficult situation in Fargo and all along the Red River is a reminder that no location is immune from natural or man-made disaster.  For companies that must continue their work, hope is not enough.  Business continuity plans (with back-up locations) and spirited teams are the requirements to keep operating in the face of major disruptions.

Penny, all of us at Integreon wish you and the team well and good luck getting through the crisis!

[Sent by Penny Retzer, Sunday night US Central time, 29 March 2009]

Hello from flooded Fargo!  What a week it has been!

Unless you have been in hiding, I think everyone around the world knows that Fargo has been experiencing the worst flood since records were started in the 1890’s.  We are hoping that the river will crest today or tomorrow at a historic height of 41 feet (32-34 feet is flood stage).  Our team has worked diligently to keep services available for all customers while we were short-staffed with many employees fighting the flood or evacuated from their homes.  Our “Success Team” which is our inter-departmental group of managers has been holding conference calls every day at 10 a.m. and 7 p.m. to keep abreast of employee safety, to organize customer communications and in general prepare for every possible alternative that might happen.  To date, we have only a few employees whose homes have been flooded but we have many more employees who have been evacuated from their homes or have  left the community in order to be safe.

We’ve also had many employees who have covered shifts for other employees who were impacted and even some who left their own families to stay in Fargo to continue working.  (Erin has hosted two of these employees.)  We have experienced an unbelievable amount of stress and chaos throughout this.  Not only have we experienced the flood but we received almost 9 inches of snow during the flood and now we are anticipating another winter storm on Monday afternoon!!!  I’m almost ready to move to California!!

This past few days all non-essential businesses were asked to close; travel was limited on many of our major roads in order to allow sand trucks through; our community now has 46 miles of dikes comprised of over 3.5 million sand bags and clay dikes; hospitals and nursing homes patients were all evacuated to other communities; colleges have been closed for almost one week and will likely be closed for another week; many people have totally lost their homes and last night we lost one major school campus due to dike breakage.  Throughout all of this, our team has been in good spirits, filling sand bags, helping others, keeping our customers happy!!

I want to personally thank all of you that have contacted me to find out about my personal welfare.  It really means a lot when everything else around you is in great turmoil.  Last week Wednesday I left work and have not been able to return since.  Our home was surrounded by water so much so that I was unable to leave the subdivision to travel anywhere in the city.  On Thursday we lost all phone, television and Internet access.  On Friday, our house succumbed to sewer water when a lift station in our area went under water and we were forced to evacuate when all water was cut off.  We are now unable to return to our home until water is turned back on and our home has been inspected.  We were able to move most items in our lower level up a level so we believe we have saved most of our belongings but we won’t know for sure until we return.  Our house has never been subjected to flooding, even in 1997 when it was the most severe prior to this flood, so we had not anticipated needing to move 1800 sq feet of belongings up a level in less than 24 hours!  It becomes a good indication that you should really clean out your unused items at least once a year!!  While it’s been traumatic and very depressing to move out, we are safe and very well cared for by Steve’s cousin and his family.  Belongings mean very little when you have friends and family that support you!!

I plan to be back in the office on Monday and we should be able to operate back at close to normal speed with some rearranging of scheduling.  Since the colleges are out, we will utilize our college students for additional shifts until our other team members can return to work.  We are also considering a temporary day care facility in our employee break room as a solution to schools being closed and employees not having any day care available.  It’s amazing how resilient a team can be when faced with crisis!!  When I am back in the office, I will send some photos but if you are curious before then, check out the photos from www.inforum.com or www.startribune.com.

Thank you once again for all your calls and e-mails of concern!!  I really appreciated hearing from you!

]]> http://www.integreon.com/blog/2009/03/integreon-operates-through-hardship-of-fargo-floods.html/feed http://www.integreon.com/blog/2009/03/integreon-operates-through-hardship-of-fargo-floods.html http://feedproxy.google.com/~r/integreon/~3/zP952b8sY-0/the-advantages-of-a-multi-shore-outsourcing-strategy.html http://www.integreon.com/blog/2009/03/the-advantages-of-a-multi-shore-outsourcing-strategy.html#comments Thu, 19 Mar 2009 15:25:36 +0000 Ron Friedmann http://www.integreon.com/?p=2242 Financial services groups relocating to UK regions in the FT (18 March 2009) illustrates the benefits of combining onshore and offshore outsourcing.

The article reports that “[l]arge financial services groups are increasingly looking to the United Kingdom’s regional cities to house key support divisions.”   Financial services companies were initially driven to onshore or near-shore cities such as Belfast and Birmingham to seek out talent.  Now, the rationale has expanded.  Whilst they still remain committed to Asian outsourcing centers, they see the benefit of moving some tasks closer to London front offices.  “Language and time zone reasons make the UK an attractive place for call centres and other customer-facing functions, as well as relatively complicated work that may need oversight from London.”

Our clients share this view.  They recognize the need to analyze each task to determine where best to perform it.  Key considerations include complexity, continuity, and the amount of communication required.  Business continuity and time zone coverage are also important.  It is for the reasons outlined in the article that we opened in Bristol in the UK and in Fargo, ND in the US, locations which complement our delivery centres in India and The Philippines.

LegalWeek surveyed UK partners on which law firm support functions partners want cut the most.  It’s instructive to start with those that partners don’t think are over-staffed.  Only a handful (4%) think IT should be cut.  As an ex-large law firm CIO, I know that both UK and US firms reacted strongly in the 1990s to growing IT costs and took steps to assess, benchmark, and control.  Finance and HR would also be spared by most partners.  These two functions never grew explosively as did IT so arguably are close to being “right sized”.

So, just where do partners think the cuts should come? Almost 20% want to cut marketing, which mushroomed in many firms with insufficient attention on its return on investment (ROI).   Few firms have applied the same rigor to marketing spending that they did to IT.

At biggest risk, however, is secretarial and admin support, which 54% think should be cut.  That is no surprise.  Secretarial job functions started changing 20 years ago as lawyers began using PCs.  Yet only a few firms have systematically assessed how to re-align admin staffing to meet new support needs.

It is clear that new support models are required across the board.  For example, top 30 UK law firm Osborne Clarke recently adopted a completely new support model, outsourcing much of its Middle Office to Integreon. And, as the article notes, Clifford Chance “currently offshores and outsources support functions to a centre in India.”  (For more information, see the Integreon press release Integreon to Build Service Center in Delhi to Support Global Administrative Functions of Clifford Chance.)

Firms not ready to adopt an entirely new approach can start with “point solutions.”  For example, “[o]utsourcing document processing can slash payroll and facilities costs, reduce turnaround time, and boost in-house secretarial careers“.  That is the sub-title of of the Legal Management article Dealing with Documents (PDF, Sept-Oct 2008).

LegalWeek reports that almost one-third of respondents “said that outsourcing and offshoring support functions will become more important to law firms moving forward as firms look to cut costs.” We think outsourcing makes sense.

Law firms must reduce costs.  Layoffs address only a short term problem – firms must rationalize support and costs for the long term.  Most law firms, however, lack the capability to do so on their own.  Few have internal operations consulting capabilities that can evaluate and benchmark their operations against best in class peers. Law firm management consulting firms are great for strategy, finance, marketing, and technology.  For operations and support, however, they have neither the in-depth expertise to recommend detailed staffing and workflow changes nor the resources to implement their recommendations.

So what’s really needed is someone who understands law firm culture, knows how to run support operations, and has sufficient cross-firm experience to make specific people, process and technology recommendations and then has the ability to execute their recommendations.  Reputable outsourcing companies such as Integreon offer law firms both the analytic horsepower to design long-term solutions for lawyer support and the experience and resources to execute them

The legal market changes slowly.   Many say the slow pace stems from lawyers’ training to focus on precedent.   That’s true but I think the bigger reason is that the market has rarely punished late adopters.  Law firms could afford not to change because they consistently earned high profits.

Late adopters in other industries, in contrast, are regularly punished.  For example, Sony’s focus on cathode ray tube televisions while competitors developed flat screen technology cost it dearly.  Or look at the US auto industry.  Law firms, however, rarely suffer by being late to the game.  The ones that waited to adopt e-mail, waited to create marketing departments, or waited to take business intelligence / analysis seriously have not visibly suffered.

That may change in the current economic crisis.  Three AmLaw 100 firms have dissolved and many have laid off lawyers and staff.  The question is whether this is just a market downturn or a fundamental change.  Blogger and editor Jordan Furlong argues in This is not a drill that

“Many underlying beliefs about how economic value is generated are simply falling away, and we don’t yet know what will replace them — all we know is that it’ll be different from what we had before. That’s why many of the legal job losses we’re seeing, in firms of all sizes, aren’t temporary layoffs that will return when the recession ends. They’re eliminations — positions that won’t come back, because the underlying mechanics of value in legal services are changing and the new environment that emerges from this crisis won’t require them.”

His blog post cites many recent articles and blog posts supporting this proposition (including Recession Sends Lawyers Home from the Washington Post, in which I am quoted).

The question for large law firms is how to react to this downturn beyond immediate lay-offs and cost cutting.  Should they deploy more technology?  Work virtually?  Move to fixed fee billing?  Put project managers in charge of big matters?   Centralize management?  Get serious about practice group profitability and management?  Outsource more?

I would argue for all these changes and more.  Yet some of my BigLaw friends think that all will return to normal in a couple of years.  What if they are not right?  What if the market really has changed?  What if firms late to adopt new ways of working and doing business are punished?

Smart managing partners should explore options to reduce the risk of being left behind (and perhaps going out of business).   Also, exploring options with clients builds their trust and can gain share.   Just offering  clients a new approach - even if declined  - tells clients that the firm is looking out for their interests.

Few companies or professional service firms made outsourcing decisions at the onset or in the early stages of the economic crisis.   As companies try to exit crisis management or adapt to a long-term crisis, however, they are again thinking about more tactical/strategic responses.  And outsourcing is back on the agenda.

For example,  Business Week, in JPMorgan Chase to Increase India Outsourcing 25% (9 March 2009), reports that JP Morgan “will increase its outsourcing to India by 25% this year to nearly $400 million [and] will also manage the integration of the acquired companies from India to bring down the cost of integrating different information technology (IT) systems.”

This article is consistent with many third-party studies over the last few years that outsourcing is only partly about cost savings.  It’s also about rationalizing business processes and freeing up internal resources for higher value work.

In our business, we see the same signs of a shifting mentality.  For example, we recently began what we believe is an industry first, outsourcing of an entire research function for a global investment bank (including onsite and offshore teams).  This was unthinkable previously.  And in the UK, following our announcement of outsourcing the Middle Office of top 30 law firm Osborne Clarke, we have had many inquiries about outsourcing from top 50 UK law firms.