Remember the Clash song “Should I Stay or Should I Go”? The opening chords and lyrics come to mind when the “Do I insource or outsource?” question is raised. And that is happening a lot these days- both the question and the flashbacks.
The insource/outsource issue usually involves corporate legal departments — do the work internally or source it to a law firm or service provider? The pendulum is tipping towards in-house — at least as to the “legal” work — as many companies have bulked up their legal departments at the same time they have reduced the number of outside firms (“convergence”) while utilizing service providers for certain high-volume/low-value tasks. Translation: law firms are feeling the squeeze.
But the insource/outsource question also applies to law firms; what functions do they retain versus outsource? Some examples include: staffing attorneys/secondment, low-cost service centers, and data management.
Law Firm Challenges in the Legal Marketplace
Law firms are confronting a flat demand for their core services. Competition for “premium work” is intense and often involves RFP’s, reverse auctions, fixed pricing, or steep discounts from hourly matters. Then there is convergence coupled with more work being taken in house. Finally, there is a growing slice of firm work now being directed to service providers who are rapidly gaining market share and also moving up the complexity chain.
All this intensifies pressure on firms —- that must pay top dollar to rainmakers lest they lose them (see recent defections from Cravath and Kirkland) —- to find ways to make money (oh, and to service clients, too). One possibility is to compete with service providers by creating “subsidiaries.” But this is not so easy, especially when going up against elite providers.
Firms Doing It Themselves
In an effort to stanch the bleeding, a number of law firms have created in-house solutions to the IT and process management delivery components offered by providers. This includes: low-cost service centers (typically in middle-market locations removed from the population centers where the firm maintains offices); staffing arms; IT subsidiaries; and consultancies. The reasons for insourcing are numerous and understandable: (1) revenue generation/retention; (2) client/supply chain control; (3) reduced internal cost; and (4) the appearance of doing something in a rapidly shifting delivery landscape.
But this approach is expensive, risky, and a new business (and model) for law firms. And there are several reasons why it’s tough for them to compete against elite service providers. One is their partnership structure. Law firms — at least U.S. ones –cannot accept institutional funding and, so, do not invest in IT and process to the degree well-capitalized service providers can. Another is that law firm “equity” is an annual split of profit among a handful of participating partners, not a corporate liquidity event that rewards multiple shareholders. Translation: most law firms have adopt a” future is now” strategy to maximize PPP. Plus, they generally do not offer a meaningful seat at the management table for key IT and process contributors. For most law firms, it’s still about lawyers and short-term profit maximization.
Finally, law firms have different DNA than service providers, consultancies, and the Big Four. They continue to regard legal services as somehow detached from broader business challenges. The legal expertise hangover is hard to shake. The competition, however, has a business-based DNA, not a legal one. Service providers and others “not engaged in the practice of law” understand that business is about solutions, not eloquent arguments or clever briefs. Service providers understand that legal delivery is a means to an end, not an end to itself. And they appreciate “value” not from their own perspective but from the client’s.
The Power of the Collaborative Model
It’s not in the mindset of most law firms to engage in voluntary collaboration with service providers, because for so long law firms did it all themselves. But there are rewards to be reaped from efficient collaboration between firms and providers. Two examples come to mind.
The first involves the collaboration between DLA and “agile” staffing provider Lawyers on Demand. Under their arrangement, DLA utilizes the lower-priced but highly trained legal expertise of LOD lawyers (many of whom are DLA alums). LOD attorneys bill at significantly lower price points because they are deployed from a service provider model. DLA does not have to “carry” niche lawyers who may not have enough work — or the desire — to meet the 2,000 plus hour annual threshold required to sustain overhead and reap a commensurate profit. Clients receive the necessary level of experience and expertise at the “right” price; DLA differentiates itself in the marketplace; and LOD benefits from the engagement. Everybody wins.
Another example of effective collaboration involves several AmLaw 100 firms locking arms with legal business provider UnitedLex (ULX) that provides “solution centers.” The law firm provides clients with legal expertise, and ULX delivers IT and process expertise to support key practice support and legal delivery functions including: data management (the entire lifecycle), contract management, IP support and monetization, and cyber security. Clients benefit from the right people with the right expertise doing the appropriate tasks; risk is mitigated; and cost is reduced. The law firm focuses on functions requiring legal expertise and judgment and maintains client control while shaving millions of dollars of overhead with no sunk cost. And ULX drives revenue, too. Again, it’s an “everybody wins” alignment of expertise and economics.
So do you stay or do you go? Buyers and sellers have a range of options to consider. Collaboration might prove an attractive one for buyers and providers as they navigate the paradigmatic shift that is playing out in the marketplace.