Law Firms Partner with LSOs to Create Value for Clients

In the not-so-distant past, legal service outsourcers (LSOs) were not on the radar screen of most law firms. The few firms that were aware of these new market entrants dismissed them as irrelevant providers of low-level, “commodity” work.

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Times have changed. Clients are now increasingly vocal about their dissatisfaction with outside counsel: fees are too high and unpredictable, and often, the work is not well-calibrated to their business needs. As a result, clients have been steadily bringing more legal work in-house, leveraging technology, and significantly, expanding their use of LSOs.

Clients value LSOs because they can handle certain kinds of high-volume, complex work more efficiently and at much lower costs than law firms through the application of process and operational expertise, coupled with teams of lawyers and other support professionals, typically located in lower-cost jurisdictions. And, while most LSOs first gained traction in the legal industry providing litigation document review services, they have been steadily expanding both the breadth and depth of services they offer to include temporary legal staffing, M&A due diligence, compliance services, contract lifecycle management, legal spend management, technology and legal operations consulting, to name a few.

Law firms are beginning to notice.

According to the Altman Weil 2016 “Law Firms in Transition” survey, 19% of law firm leaders believe they are currently losing business to “non-law providers” (up from 17% in 2015). Similarly, 82% see competition from alternative service providers as a permanent competitive threat to their business.

As law firms recognize that their clients are using LSOs for much more than ”commodity” work, they are reacting in a variety of ways. Some firms are trying to develop their own LSO-type services while others are collaborating with LSOs on discrete client projects. However, the more interesting trend, and perhaps the most promising for all involved, is the emergence of law firm/LSO partnerships. These partnerships are creating entirely new categories of legal service that deliver enhanced value to clients.

Firms that are developing their own LSO-type services largely focus on offering clients alternative lower-cost staffing options, i.e., non-lawyer professionals or non-partner-track lawyers (often operating from lower cost locales) on a project basis.

FLEX by Fenwick and Berwin Leighton Paisner’s now spun-off Lawyers on Demand are examples of the alternative staffing offer. Similarly, Orrick built its own in-house document review team based out of its Global Operations Center in Wheeling, West Virginia to handle large-scale litigation document review and some transactional services at lower cost.

However, these offerings are essentially premised on the same traditional law firm service model. It only changes who is doing the work, rather than how the work gets done. Changing how work gets done is where the real sustainable value is achieved. It is also much more difficult, because it has a number of components, including:

  1. Analyzing each step in a given process
  2. Developing standardized workflows
  3. Deploying workers with skillsets best suited to each task
  4. Incorporating technology to help drive efficiency
  5. Developing quality control techniques to ensure consistency
  6. Protocols to address unique situations
  7. Incorporating continuous improvement methods to drive value optimization

In short, it requires significant operational expertise and resources, and a laser focus on the process, quite distinct from the traditional law firm approach of treating every engagement as a one-of-a-kind project.

That said, some law firms are attempting to reengineer what they do: that is to say, changing the “how.” Examples include DWT DeNovo, Littler Mendelson’s CaseSmart, Ogletree Deakins’ Advantage, and Evershed’s Ignite. All four highlight their use of project management and workflow techniques in performing legal work. Indeed some firms are re-envisioning the work product itself. Eversheds Consulting, for example, is going beyond traditional legal advice by including strategic, HR, and compliance consulting services. Verbatim, a subsidiary of Orrick, provides global corporate entity governance and compliance services, while DeNovo and CaseSmart both incorporate data analytics into the services they provide.

Not surprisingly, only a few firms have been able to develop and launch such truly cutting-edge service offerings, as even the most dynamic, forward-thinking leaders face a number of internal obstacles.

The typically flat management structure of a law firm means that a majority of the partners must be persuaded to invest necessary capital and resources in a new service offering: a difficult undertaking. To make these new ventures successful, firms will likely need to hire and manage a broad array of non-lawyer professionals such as project managers, software developers, financial analysts, and others. This is new territory for many law firms and represents significant overhead, not only in terms of cost, but in impact to human resources and talent management as well. Finally, as meaningful innovation requires re-envisioning how work is performed and what the final work product looks like, it represents a significant challenge for those who have spent their careers practicing law.

The Altman Weil survey bears this out. According to the 2016 survey, 64% of law firm leaders report that the partners at their firms are resistant to changing how they deliver legal services. As the authors of the survey point out, partner resistance actually increased by 20 points since last year’s survey, and is now viewed by law firm leaders as the single largest impediment they face in driving change. This resistance to change persists (and apparently is growing) notwithstanding the vast majority of law firm leaders who perceive alternative service providers as a “permanent competitive threat” to their business and the significant number of leaders who recognize that they are “currently losing business” to alternative providers, as noted above.

In light of these challenges, however, we see signs of an evolving new approach: law firms partnering with LSOs to provide “bundled” services. In fact, these partnerships entail first “unbundling” or “disaggregating” work into constituent parts that can be handled by the right types of resource (read skill level and cost) to create efficiencies and lower costs while maintaining or even improving quality. The final work product is then “re-bundled” and delivered to the client.

The London-based law firm Ashurst recently announced a partnership with Axiom, a US-based alternative provider, to assist banks with revising derivative contracts to comply with new regulations. Axiom is supporting the banks with the technology and renegotiation process, while Ashurst is providing legal advice on interpreting and implementing the new rules in contracts. Another example, UK Magic Circle firm Allen & Overy recently entered into a partnership with Deloitte focused on derivative contract compliance where Deloitte manages the renegotiation of large volume of contracts (using non-lawyer contract administrators), while Allen & Overy lawyers oversee the project and ensure the contracts comply with the new regulations.

LSOs are seeing increased interest from law firms in collaborating on a variety of work from delivery of M&A due diligence to contract lifecycle management services. In the M&A offering, the law firm will focus on structuring the transaction and negotiating the merger agreements while the LSO will handle the contract due diligence review under the direction of the deal lawyers.

Similarly, with regard to contract management, the law firm will be responsible for preparing contract templates and playbooks with LSO support, and the LSO will configure the automated contract assembly tools, integrate legacy contracts into the database, validate and manage the database, and provide ongoing analytics and reporting.

These partnerships provide clients with the best of both worlds. They offer the services law firms are uniquely suited to provide (tailored advice on complex, sophisticated, issues where legal training, experience and judgement are critical) with the benefits LSOs bring: mastery of technology, workflow and process discipline, lower resource cost, and the ability to handle high volume, repetitive tasks quickly, efficiently and with superior quality.

Some scholars see these partnerships as the future of the legal industry. Professor Richard Susskind, in his book “Tomorrow’s Lawyers”, describes the next stage in the evolution of the legal industry as “re-sourcing,” where law firms and in-house counsel will “decompose” (i.e., unbundle or disaggregate) legal projects into discrete tasks and processes, each of which will be handled by specialized service providers who are organized to perform that work with maximum efficiency. (Significantly, Professor Susskind sees this only as a temporary stage of development. More radical disruption of the legal industry will be achieved through the emergence of advanced information technology, particularly artificial intelligence, which will eventually replace the need for human involvement for much of this work.)

Similarly, Professor David Wilkins, director of the Center on the Legal Profession and the Center for Lawyers and the Professional Services Industry at Harvard Law School, believes that the legal industry is ripe for disruption, and that in order to succeed lawyers will need to become expert at unbundling legal projects, collaborating with an array of professionals inside and outside the law firm, and then re-bundling the work into a finished product for the client.

The rapidly changing market conditions, increasing demands made by corporate clients, and the advances alternative legal service providers continue to make all seem to point in the direction of this collaborative approach. It is likely that we will continue to see more law firms actively partner with LSOs and others to provide not only more cost effective services, but enhanced value to their clients. Clients are poised to be the big winners.

About the Authors

rosenfeld beschloss
Josh Rosenfeld (left) is vice president of legal services and Adam Beschloss (right) is executive director of client solutions at QuisLex, for a leading provider of document review, contract management, compliance, and other large-scale, process-oriented legal services.

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