Wednesday, March 31, 2010

Are Your Legal Processes Ready for Outsourcing?

As legal departments around the world look for ways to keep up with demands without growing their budgets, “legal process outsourcing” (LPO) appears to be taking root (1). LPO promises a way to offload certain work to vendors while containing costs and freeing up your in-house resources. LPO is not the same thing as hiring outside counsel, though some outside firms now offer or claim to offer LPO services. LPO is an effort to focus your legal department on its highest and best uses while diverting mundane tasks to those who specialize in them and have thus developed highly efficient workflow without sacrificing quality.

Before you decide whether LPO is right for your department (2), however, or look for a vendor, determine whether your legal processes are suitable for outsourcing. Just because work is done by someone in your office does not mean it is necessarily “legal” or a “legal process.” And just because it is a recurring task does not necessarily mean that it is ready to outsource. The best work for a legal department or firm to outsource is recurring, repeatable, capable of sound quality control and measurable. Anything less than that will be ripe for problems very likely to more than wipe out any cost savings you seek from outsourcing.

Is the process “recurring?”

Given the amount of effort that is necessary to assure results in line with outsourcing expectations, it makes little sense to use an LPO vendor for unique legal work. Traditional outside counsel would most likely outperform the LPO options once you take into consideration the learning curve, knowledge transfer efforts and other intangible aspects of establishing a viable LPO relationship.

However, just because the work is unusual or has come up very rarely does not itself make LPO unworkable. It could be that the project is so large and involves so many smaller recurring, repeatable, measurable processes that those tasks can be cost effective to outsource, leaving the remainder of the project handled in-house or by traditional outside counsel. Document review within an unusually-large litigation matter is one example of this situation. With ten million pages to review, LPO vendors may offer better cost-benefit ratios than hiring your own army of contract document review attorneys.

Is the process “repeatable?”

Not all legal work is ideally suited for outsourcing. Work that is unusual for your clients and for which a significant amount of strategic legal analysis is required will be better off kept in-house or sent to outside counsel. The work must be something you can quickly teach another lawyer to do well.

Look first for the tasks that require the least amount of judgment calls, legal analysis and iterative client approvals. You may already have nonlawyer staff performing these in your office. If you are using contract, temporary attorneys for any tasks, those are also prime candidates for LPO.

Ask yourself these things about the work to evaluate suitability for easy outsourcing:

1. Can I write out the exact steps to complete this task accurately?
2. Can I provide adequate written guidelines for any decision points in the task?
3. Can someone who has never set foot in my department complete the task using those instructions and guidelines?
4. Can someone on my staff easily monitor output quality and quantity?

The idea here is to fashion a set of written procedures so that the work can be done in efficient, repeatable steps by interchangeable outsiders without a lot of questions and direct oversight by your legal staff but with consistently high quality. In other words, work you can re-sell to your clients as your own without an apparent loss of value. Those are “repeatable legal processes.”

Is the process capable of solid quality control?

If you lose more sleep by outsourcing than you gain, then something is wrong. You need confidence in the vendor as well as the quality of their work. When deciding which tasks might be suitable for LPO, “begin with the end in mind,” as Steven Covey advises.

Take some time to envision the ideal LPO arrangement for each set of outsourced tasks:

1. What will the output look like?
2. How will my staff monitor progress and accuracy?
3. How easily can errors be identified and corrected?
4. Who will correct the errors?
5. Will my staff need to or be able to add value to the work product before delivering to our clients?

Is there a reliable way to measure the work?

Most LPO vendors will likely have alternative pricing options for the types of tasks you seek to outsource. Some can be priced by the “piece” (such as a set fee per page, like court reporters charge) while others are priced by the hour with a maximum cap for the project. Before you engage vendors, take some time to think about ways to measure and pay for the tasks. The billing arrangement should dramatically shift the risk of inefficiency to the LPO vendor. After all, you are primarily looking for ways to contain costs without sacrificing quality. Otherwise, the LPO route is not likely going to be attractive.

Taking a page from litigation support vendors, some LPO companies look for piece rate options and then seek to set a fee that provides ample margin for their expected inefficiencies and profit. Tasks such as document review, permit applications, routine contracts and routine correspondence (demand letters, notifications, etc.) fit in this category. It will help quite a bit if you already know how much the tasks cost your department before you field bids from LPO vendors. At the least, work through some formula that allocates salary, benefits, overhead and supervision to the work so you have a basis for evaluating bids.

Other LPO vendors request hourly rates that undercut outside counsel but still provide adequate margins for themselves. The key here is naming an acceptable guaranteed quantity per hour or day so you are assured of those savings, assuming quality is at least as high as the work by your own staff or present outside counsel. Legal research and briefing support typically fits in this category. Again, if you understand what the work costs you to perform in-house, you can better evaluate any bids from vendors. Also, determine the realistic turn-around time for your in-house staff. If they are capable of doing the work in less than four hours, but have two weeks of backlog ahead of the task, find a way to evaluate that “delay factor” in your analysis.

Have you considered all the pros AND cons?

There are many other aspects of beginning an LPO arrangement to consider, of course. (3) The points above are directed primarily at your evaluation of the work you want to outsource. Even so, LPO is a growing industry and large corporate legal departments such as General Electric and Rio Tinto have already made large moves to take advantage of the perceived potential benefits.


1 For a very thorough description of LPO by then-Tufts University 3L Maya Karwande, see: “Student Research examining the Legal Process Outsourcing.”

2 This post is addressed to counsel in for-profit businesses in the U.S., though the same considerations are generally applicable to government counsel, some law firms and some nonprofit legal counsel.

3 In another post, I will explore the ethical considerations for LPO work, including the differences between “near-shoring” and “off-shoring” the tasks for U.S. counsel.