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Legal services outsourcing: don't miss the boat

18 April 11

The Scottish legal profession and the wider economy has a unique, take-it-or-leave-it opportunity to create jobs and growth by keeping legal process outsourcing within Scotland

by Edward Brooks

While the ultimate impact of legal processes outsourcing (LPO) on the legal profession will take a few more years to play out fully, 2010 showed that its presence cannot be ignored. The question for Scotland is whether to be passive or active during this industry realignment.

Headline deals in the last 18 months by CMS Cameron McKenna, Herbert Smith, Rio Tinto, Microsoft etc confirmed the robustness of the demand-side of LPO; with quoted savings of more than 40% this is not surprising. Deals such as Thomson Reuters’ acquisition of Pangea3, CPA Global’s raising of £100m in private equity funding for its expansion, and UnitedLex’s acquisition of Lawscribe, showed the maturity of the supply-side. LPO is not going to disappear and law firms across the UK and US are currently determining their strategic response.

To illustrate the opportunity for Scotland, the point to note is that “outsourcing” is not necessarily the same as “offshoring”. For example, about 50% of the revenues of an LPO provider such as UnitedLex are expected to come from onshore delivery. Additionally, the definition of what constitutes LPO is pretty wide. Examples in the UK market include:

  • Third party delivery onshore – Integreon delivers most of CMS’s services from the UK
  • Third party delivery offshore – Rio Tinto fully offshored its legal function to CPA Global in India
  • In-house onshore delivery – Herbert Smith moved services to its own delivery centre in Belfast
  • In-house offshore delivery – Clifford Chance established its own offshore delivery centre in India.

Market advantages

For the Scottish legal profession the choice is:

(1) lose jobs to overseas, very low cost offshore locations;

(2) let other UK regions such as Northern Ireland or south west England become the main onshore LPO delivery hubs; or

(3) choose to grow jobs by expanding existing capabilities and leveraging the power of Scotland’s comparative advantages.

For option 3, the timing is uniquely right as both suppliers and buyers of LPO services are currently seeking onshore locations that will form long-term delivery hubs. By offering a quality destination for legal services, Scotland can easily deliver the key pillars required for outsourcing:

  • labour arbitrage, where services are carried out by skilled employees in a lower-cost location;
  • process excellence, where services are re-engineered and managed under manufacturing-style discipline;
  • technology, where specific tools are used to capture data, automate tasks, and support process improvement.

I emphasise the importance and value of quality. Transferring activities to a low-cost location delivers one-off savings, but these are undermined if quality levels are not maintained. So, by offering some labour arbitrage, quality delivery, strong process excellence and embedded technology skills, Scotland could be a major net jobs winner in the great legal realignment.

More importantly, these are high-value jobs, in a growing market. Thinking further ahead, as LPO expands throughout non-English speaking countries, there is the opportunity to create a multilingual global legal delivery hub, as IBM achieved for IT in Greenock. As many LPO activities require strong training and clear processes, not specific legal qualifications, creating a global delivery hub is certainly feasible.

Decision time

Even at this early stage there is competition from other areas of the UK offering similar value mixes, such as Bristol and Northern Ireland. Scotland is at best third out of the trap, but has not missed the opportunity.

For the larger Scottish law firms there are a number of options available:

  • maintain their current delivery model as a strategic decision;
  • outsource selected services to a third party (onshore or offshore);
  • establish a centralised delivery centre to service their own internal requirements;
  • establish a centralised delivery centre in conjunction with other Scottish law firms to deliver services on which there is no competition, such as billing, IT support, research – i.e. the areas where they do not see competitive advantage when bidding for work, and which could be used to sell services to law firms outside Scotland;
  • work independently with an existing LPO supplier (or potentially in conjunction with another Scottish firm(s)) to establish a Scottish delivery centre that would meet internal requirements but also service other clients.

It is the stated objective of several of the larger LPOs to expand their onshore delivery footprint, so there is a willingness to work with a sizeable Scottish firm. In addition to operational and financial benefits available, these deals can offer equity stakes, though there is capacity for only one or, at the most, two such deals per location such as Scotland.

Our projections show a 34% growth in the LPO market in 2011, and even that takes LPO to only a small fraction of the overall size of the legal services market. To meet this demand there is only a short window of opportunity to set up a Scottish delivery hub – it will not be an option 12-18 months from now. Given that establishing an onshore delivery hub takes a minimum of six months to complete, time is of the essence. The opportunity to take advantage of Scotland’s natural comparative advantages, and create a lasting, high value legal jobs engine, has a finite timeframe and it really is a question of “now or never”.

Edward Brooks advises clients in the UK and US on their legal process outsourcing strategy and can be found at www.thelpoprogram.com

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