The news that Herbert Smith and Allen & Overy have opened offices in Belfast followed by further news that Addleshaw Goddard is opening a depot in Manchester to do due diligence and less complex legal tasks has resulted in a tumult of comments across the twitter- and blog- sphere. Everyone is entitled to their opinion on this subject but I take issue with those whose opinion is that the only reason that these law firms (or indeed any law firm) undertakes a form of outsourcing is to cut costs and line the partners' pockets as if that was a heinous crime. All businesses must manage their cost bases in a sensible way in order to remain competitive.
Let's be a bit more analytical about this. The UK does not lack law firms and, whilst this might surprise some, competition between firms is pretty fierce. Whilst repeatedly in surveys of buyers of legal services pricing is not at the top of the list of reasons for choosing a law firm personal experience tells me that in reality price is often the factor (it's just that price knocks you out before the race can even start!). Therefore firms must be competitive and that means cutting costs so that fees can be maintained at a level the market will bear.
Because it is a market, lawyers will charge what they believe their services are worth. Where a law firm has a recognised niche it is normal market forces which allow them to charge more. This is no different to Apple setting the price of its iPad - set it too high and only the die-hards will buy it. Therefore, the so-called Magic Circle can charge more for services which the market perceives only they can provide. Proving that the perception is wrong is a completely different point but simply charging less is unlikely to win over those clients.
The second point is that law firms are not only competing against each other for work but also to hire and retain talent. A firm which fails to maintain its PEP is going to start losing its higher billing partners and seem less attractive to associates and even prospective trainees. Again this is no different to any other business seeking to attract the highest quality staff. The argument regarding banks and bonuses is not a million miles away.
Therefore to attack Legal Process Outsourcing on the basis that the sole purpose is to line the pockets of partners with no benefits to clients shows a complete lack of understanding of the competitive legal market of today. Part of the end result and indeed the aim may be to increase profitability but to achieve this a firm has to remain attractive to its clients and be competitive.
There are issues with LPO as a concept especially in terms of quality of the product being provided and potential negative effects on training. In terms of quality the main concern is how do you ensure that the output is good enough. This is a serious reputational issue but I find it hard to believe that the likes of A&O have just said "Who gives a damn about quality just show me the money". Reputation is everything.
The training issue is more difficult. Addleshaw's PR blurb highlighted that their new project would mean "No more drudge work for associates". This was followed quickly by a remark that whilst associates do need to undertake due diligence exercises to understand the processes they do not need to do 500 of them. The problem is that once you have a system in place which means associates do not need to do any of them you automatically go from 500 to zero with the result that associates have no experience. This would seem to suggest that there must be a level of sacrificing associate experience to cut costs. Full experience of the process and work is a necessary step to managing the process.
In my area, Real Estate, this is a real issue. A significant proportion of Real Estate work could be considered relatively straight forward - basic leases, licences to assign, licences for alterations and even simple sale and purchases of pieces of land. Pricing competition in these areas is intense and it is difficult to compete against regional firms on price. The obvious answer would be for us to open a regional office and send all the low value work to that office. However, unless we forced every trainee and associate to spend a proportion of time in that office (thus losing a major cost save in terms of lower salaries in the regions) our office in London would be populated with Real Estate lawyers who do not have proper hands-on experience of the nuts and bolts of the assets they are dealing with. That would be failing our associates and failing our clients and putting at risk our status as the go to firm for Real Estate. Whilst it might be possible to reach a happy medium by sending out some of this work and retaining some the temptation will always be there to send it all out to improve the bottom line.
In summary:
- Competition amongst law firms has never been greater
- All firms are looking to create competitive advantage and LPOs are just one way of creating that advantage
- Successfully creating such an advantage over competitors should result in increased profitability afterall that is the primary function of any business (as opposed to a charity).
I'm completely bemused by all the outrage. LPO isn't new, not by a long shot. I have a client who has been outsourcing discovery work for 12 years, for example.
ReplyDeleteI would think that, as long as quality is maintained, clients could care less where/how the more routine parts of their work is managed from. Clients instruct individual lawyers for the most part, all the 'gubbins' is verging on the irrelevant.
I think Addleshaws really messed up with their 'no more drudge' messaging. Perhaps it rings bells for possible recruits but, in this market, I'm assuming they aren't short of candidates. From a client perspective it's not a reassuring message, far from it.
If lawyers (inhouse and outhouse) are really to be client focused then all the debate and uproar over process issues such as LPO is just 'noise', surely? Law firms are businesses just like any other. They exist to make money for their shareholders/partners. How they do so, in terms of the mechanics, is irrelevant beyond being a talking point.
Barry, thanks for these excellent thoughts on LPOs. One question about the training issue: given that neither 500 nor zero is the optimal number of due diligence exercises for an associate to experience, surely there's a better number to be found somewhere in between the two, and closer to zero than 500?
ReplyDeleteI can see a legitimate role for new associates to take part in due diligence or document review as part of learning about an entire legal process end to end, from the inside out (although whether the associate's work should be billed to the client or to an in-house training budget is a different question). But past a certain number of repeated experiences -- I'll hazard a guess and say 5 to 10 at the outside -- there's very little actual learning and training going on. Past a certain point, it does become drudge work for which clients are essentially being overcharged.
If we agree that (a) new lawyers should know how this work is done first-hand, and (b) this work ought to be done, as a matter of course, by lower-cost LPO personnel actually trained and skilled for the task, then it seems to me the solution is to assign the associates to spend a month with the LPO, and have the LPO people train the associates on what they do. Obviously this militates against sending all the work to India (although I suspect your average new lawyer in the UK or US would benefit tremendously from a week in Mumbai), but regional outsourced personnel, accessible via a two-hour trip from the city center, could be made available as both performers and trainers.
That raises your concern about sending all the work to a regional low-cost office and obliging London solicitors to spend a proportion of their time there. Maybe I'm misunderstanding, but it seems to me the London lawyers wouldn't need to spend a huge amount of time on site, especially if the whole process is specifically structured and funded as training, and that the investment early in their careers would pay off handsomely down the line. It may be that there'd be cultural resistance from City lawyers who don't think they've got anything to learn from regional non-lawyers, in which case the attitude adjustment would also be a welcome benefit. :-)
Jordan. I am not sure it is as simply as spending a few weeks in one of these places. Some of the due diligence exercises take place over months and you do need to experience a critical mass (e.g. 10) over a period of time and style of deal to get a good picture of how they need to be managed but also the sorts of issues that they turn up. In Real estate the real value of due diligence is not about regurgitating what information there is but rather sifting that information to tell the client only what is likely to affect his commercial interests; the rest is just noise. But you can only really learn what the important stuff is by first looking at and being familiar with the noise. Guess what I am saying is it would need to be a few months at least rather than a couple of weeks.
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