The business case for outsourcing

Deciding to outsource key business functions such as HR or IT is inherently risky. But if the business case is sound, the firm, the provider and any transferred staff should all reap the rewards.

For some time now you might have been forgiven for believing that law firms were immune to the market pressures that have forced so many other companies outside of the legal profession to outsource business processes. No longer. Headline news stories in the last two months alone have revealed Eversheds’ proposal to transfer 90 IT staff to IT services giant Computacenter and Clifford Chance’s plans to move approximately 300 support jobs to India. Yet, despite these developments, many firms still regard outsourcing as not for them.

In this article, I will unapologetically take the contrary view. Outsourcing is not only a viable option for the legal profession, but perhaps a better fit here than in most other sectors of the economy. There is a real possibility that the next few years will see take-up accelerate dramatically and the profession embrace outsourcing with the zeal of the late convert, as it did with the use of IT in the previous decade.

Of course, there are good reasons to be wary when approaching an outsourcing project; just ask the partners in your firm who work on outsourcing contracts. In most firms, these arguments – forged around confidentiality, staff sensitivity, loss of control, competitive advantage or the contractual minefield – are in the ascendancy. For that reason, I will give some airtime to building the business case for outsourcing.

Why the legal sector is ripe for outsourcing

The received wisdom is that the legal sector, dominated by large, extremely profitable partnerships, with often arcane working practices and constantly fluctuating service requirements, has been slow to utilise outsourcing because it is inherently unsuitable. Turning this notion on its head, there are three good reasons why law firms are suitable businesses for outsourcing.

First, law firms are in the outsourcing business as well. Most people I speak to from outside the profession, including many of Osborne Clarke’s clients, understand that immediately. Lawyers tend to see it a little differently. Legal work, being both professional and knowledge based, is considered to be
the antithesis of the type of service that is typically outsourced. The dramatic increase in the number and influence of in-house legal teams in recent years gives the lie to this. All firms are now subject to their clients’ consideration of the classic ‘make or buy’ judgement; do we employ our own lawyers or outsource to external counsel. At the same time, it is more common for our lawyers to work for prolonged periods at the client’s site, either on major projects or secondments, blurring another distinction that is used to distance legal services from outsourcing. Outsourcing is all about businesses with a focus and specialisation delivering services.

Second, and perhaps rather sadly, the culture and typical structure of our sector remains founded on a ‘them and us’ divide, which separates the fee earner from the rest. Certainly, we have made great strides in recent years, integrating these groups more effectively, and introducing and promoting professionals from other disciplines. But the profession is institutionally and structurally focused on the client-facing lawyer. Lawyers hold a vast majority of the most senior management roles in law firms. Probably in excess of 90 per cent of law firm board members are lawyers. Ask the partners in most firms what really matters and it will be the clients, the people (for which read ‘the lawyers’) and the partners.

Finally, economic imperatives are turning the attention of every firm, and every legal finance director (FD), towards operational efficiencies. The realisation that we can’t rely any longer on hearty annual rate increases, hourly billing and client acquiescence, but that we can rely on ever-accelerating lawyer salaries, is shifting attention to the other side of the profit equation. Like it or not, we need to import some of the solutions our corporate clients have been deploying for some years now; one of them is outsourcing.

It isn’t ‘all about cost’, but it is about cost

The line ‘it isn’t all about cost’ has become the opening gambit I eagerly anticipate most when meeting potential outsourced service providers for the first time. I’m never disappointed. Sometimes it mutates into the even more radical, ‘it isn’t about cost at all’. It’s a nice sentiment but they don’t mean it.

Outsourcing can deliver a wide range of benefits but lower costs, in almost every case, should be one of them. There are some practical reasons why suppliers might suggest otherwise, not least that they have, by now, recognised that law firm management is squeamish about cost-driven outsourcing. If they can make a sale without offering cost reduction then the profit margin looks a lot healthier and everyone is happy.

For the largest firms, particularly those spread across multiple sites that have not attempted or completed a programme of internal rationalisation and centralisation, providers should easily achieve efficiencies through economies of scale, removing duplication and deploying technology. However, many firms with fewer than 800-1,000 people might not have the scale in their support functions to generate significant savings. And it is here that the legal market eagerly waits for a service provider that can present a really attractive economic proposition, almost certainly by pooling the existing resources of a number of firms in a multi-firm version of the in-house shared-service centre.

It is worth taking some time developing your own internal-costing model that will give you an accurate statement of the current costs of providing a service in-house. It is easy to forget to add in the costs of training, periodic replacement and recruitment, emergency cover, overtime and other sundry expenses. It remains likely, however, that the service provider will have to achieve real efficiencies in order to reduce your costs by any margin if the intention is to transfer existing staff to them under TUPE regulations. Without these efficiencies, the deal can sometimes appear uncannily like being charged back the current cost of your people with an extra management charge and profit margin on top.

A final point on costs is to look for efficiencies to increase over time. Some of the best outsourcing deals see providers commit, based on their plans for improving the efficiency of the service, to delivering the same or better service quality for a decreasing annual cost over a number of years.

The challenge of defining quality service

Maintaining, preferably improving, the quality of service should always be a given in any outsourcing deal. The difficulty is in defining, in contractual terms, what ‘quality’ means. There isn’t the space available in this article to even scratch the surface of the subject of well-crafted service-level agreements (SLA). Suffice to say that experience, my own and that of the many outsourcing lawyers I have spoken to, suggests that this is where most outsourcing relationships fall down.

It is challenging, sometimes off-putting, to have to define and document what is expected from a service that has always been delivered internally with little measurement, aside from a blast down the phone from a senior partner when things go wrong. Nevertheless, it is a hugely valuable exercise to undertake. When a firm reaches the point of outsourcing this invariably signals the maturing of their approach to a service, requiring users to define what is most important to them and, for the first time, designing the service they really want.

There is an overlap with the cost dimension here. A law firm IT director recently challenged the feasibility of outsourcing his firm’s IT functions on the basis that the managing partner would not accept any restrictions on his ability to require a major office reorganisation, demanding large quantities of IT equipment to be moved, to take place over a weekend with one week’s notice. The fear was that an external provider would simply say that wasn’t covered by the SLA, in contrast to the IT director who ultimately would have to get the job done. My experience suggests that the external provider would in fact respond with a quote for the costs of the move, no doubt stretching to five figures, and the managing partner, horrified by the true costs, would revise his plans accordingly. And herein lies an often unheralded benefit of outsourcing services – achieving a level of transparency and cost predictability that even the best management-accounting infrastructure is not producing in today’s law firms.

The quality of the people providing the service is, self-evidently, paramount. Providers need to clearly state how they recruit and retain staff. Always examine their HR policies in detail and take as many references from other customers as possible. When your own staff are transferring across, they will expect the new regime to be no worse than the one operated by the firm itself. This can be a tricky area to navigate, but it is important to avoid a second-class citizen mentality among outsourced staff, particularly when they work on-site alongside directly employed staff.

Cover your back

For small and medium-sized firms in particular, achieving an acceptable level of cover in support roles is extremely difficult. With increasing pressure on margins, holding sufficient specialist staff to cover unplanned absences or even regular holidays is simply unaffordable. This is compounded by the demand from clients for 24/7 service availability. And for multi-site firms having to service often relatively small operations to a high standard, the problems are multiplied. It should therefore come as little surprise that many firms are already turning to outsourced providers to assist, dipping their toe into the water by signing up to cover-only contracts. These give the providers a good, if not especially lucrative, point of entry, enabling them to demonstrate how much more effective this around-the-clock service would be if fully integrated with existing permanent teams.

In the outsourcing contracts Osborne Clarke has entered into for document production, IT and reception services, the benefits of being able to access a high-quality, cost-effective resource to provide cover out of hours and in case of absence has been a major benefit and will feature heavily in all future outsourcing proposals.

Get to the heart of the ‘value add’

If you can’t easily and confidently identify the value an outsourced provider will add to the service you receive, stop the process and return to the drawing board. Underlying the whole principle of outsourcing, as noted earlier, is that the provider has a deep focus and specialisation in the service.

The potential provider should make the value this expertise and experience of managing services will bring to your business crystal clear. Efficiencies should be easier to achieve, through access to specialist skills, proven systems and processes, and economies of scale. Access to experts in various aspects of the service and to a wide range of experience at other sites should deliver a constant stream of innovation and improvements to your business. It is important to clearly establish how this expertise and experience will be transferred into your firm, especially if your existing people will do most or all of the actual work. In particular, understand how the technical specialists and senior managers in the provider’s business can be leveraged in supporting your contract – there should be an integral consultancy element to every outsourcing service included at no extra charge.

There are three areas that can contribute significantly to the overall value add compared to what firms can achieve in-house – training programmes, procurement and specialist IT systems.

Extracting the opportunity cost of managing the service

Every outsourcing relationship promises that it will allow the customer’s management to ‘focus on its core business’. This is an essentially sensible proposition, which underpins many of the pro-outsourcing arguments throughout this article. However, too few firms identify how the time freed
up will be used to benefit the ‘core business’ and fewer still measure that benefit over time.

I have certainly learnt the hard way, via the first few outsourcing contracts Osborne Clarke entered into, that you will not achieve your aims by passing over responsibility for managing the service to an external provider and walking away. There is a management overhead to each contract and we have found that the most effective results are achieved where there is a dialogue at the most senior level between law firm senior management (this could be the FD, chief operational officer, IT director or similar) and the directors of the outsourced service provider. This effort, along with regular liaison and contact in order to feedback and review SLA performance, can certainly add up, making the savings in management time appear meagre.

It is important, nevertheless, to consider in detail the potential time saved across a range of roles due to the service being managed externally, taking particular care not to forget the HR team and training function. How will this time be effectively redeployed? Too often firms let themselves off with a simplistic, ‘we will have more time to do the other things better’, but harder examination should reveal more measurable benefits. For example, if the operation outsourced is large enough, a full management role could be saved.

The biggest cultural misconception – this should really be good for your people

To say anything is the biggest cultural misconception in an area strewn with misconceptions, is quite an assertion. But many of the concerns that law firms have about outsourcing can be attributed to the unfounded fear of the disruption that would be triggered by a negative staff reaction. I have heard two recent anecdotes about the initial communication of outsourcing proposals to existing staff. They both followed the same trajectory – internal management got staff together and delivered the news on day one. Widespread discontent, rumour and despondency follows. On day two, the outsourced provider’s management team run tailored communication sessions with the workforce, explaining the TUPE process and the ethos, practices and, crucially, opportunities within the business. The result is widespread relief, turning to excitement and anticipation way before go-live day.

This cycle is natural and underlines one very significant point – the glass ceiling most staff experience in all but the largest law firms is often entirely absent in the specialist business they are transferring into. The opportunities for development and growth are significantly enhanced, without having to leave the company. The training and specialist development are better. Less tangibly, but more importantly perhaps, they are now working in a business entirely founded around their work or profession.

Law firms are defined by their reputation for their legal advice, the profits and pay of their lawyers, and the legal cases they work on. Lawyers naturally thrive in this environment. Other professionals in law firms will get the same buzz from working in a specialist business whose reputation is built on their specialism.

The previous few paragraphs assume a high-level of competence in communicating the positive message and in managing staff effectively once transferred. It is clear that not every outsourced service provider is equally gifted in these respects. Nonetheless, the underlying point is that there is a genuinely positive message for staff that are transferred.

Perhaps the best way to sum up the potential for outsourcing to deliver positive benefits across many fronts is enshrined in the principles devised at Osborne Clarke – that the firm, the provider and the staff involved must all benefit from the proposal. I believe that all firms can achieve this guiding principle across a range of business processes and functions.

Chris Bull is chief operating officer at Osborne Clarke. He can be contacted at Chris.bull@osborneclarke.com.