Outsourcing the Right Things for the Right Reasons: Value From Legal Process Outsourcing (LPO)

- October 4, 2011 12:10 PM
Categories: Spend Management |

Spend Matters would like to welcome a guest post from Danny Ertel, Partner at Vantage Partners.

Recently, there has been much debate as to whether legal process outsourcing (LPO) is a good or bad thing. But much of the debate neglects to consider that LPO is not just “one thing.” To be carried out successfully, LPO programs have to be “fit for purpose,” and as the objectives to be met are quite different, LPO programs (including thoughts on what to outsource, to whom, under what terms, and subject to what governance) must also be different. Law firms, for example, might think about different kinds of outsourcing to meet very different objectives: from back office outsourcing aimed at reducing overhead costs (e.g., IT or Finance activities), or middle office outsourcing aimed at improving performance or competitiveness (e.g., knowledge management or business research), to front office outsourcing aimed at improving the cost effectiveness of delivery models (e.g., document review or due diligence). For additional thoughts on outsourcing for law firms, check out this post.

For those of you who are a part of in-house sourcing organizations, thinking about how to help your law departments explore outsourcing, the choices of value propositions (and their implications for selection, negotiation, and governance) are quite different:

  • Reducing internal headcount by shifting lower-value tasks to an LPO provider (offers limited savings; watch for upfront and governance costs)
  • Reducing external spend by shifting activities from outside counsel to an LPO provider (provides greater savings; due diligence and three-way governance are critical)
  • Shifting internal resources to more valuable work (enhances law department productivity rather than produces immediate savings; change management is crucial)
  • Providing new, previously unaffordable services to the business (brings new services rather than savings; good cultural fit and appropriate incentives are essential)

In addition to letting clear objectives shape your selection process, experience suggests there are a few other things to keep in mind, given the current immaturity of both buyers and providers of LPO services.

  • Craft an RFP that is “fit for purpose.” LPO services are at the more commoditized end of the legal services spectrum, but they are not actually commodities only differentiated by rates. If you ask them to “bid on your spreadsheet,” what you get back may have little to do with the law department’s objectives. An hour of time from one is not necessarily the equivalent of an hour of time from another, even for services described the same way. A good LPO provider should offer more than just lower cost labor. Their use of technology and effective process management, and the quality of the people they hire and train, will drive differences in quality, productivity, error rates, and more. To help you realize the potential value of outsourcing these activities, make sure your request allows providers to differentiate themselves in ways that matter to your outsourcing objectives.
  • Hold their feet to the fire on value. Your process should allow providers to “show off” what differentiates them and still enable you to make some direct comparisons of their pricing and value proposition. Hourly rates may be interesting indicators, but they don’t really tell you about value for money; in my experience, the number of hours they estimate the work to require varies more widely than their rates. In one recent engagement, for example, the law department set up a data room with materials from a prior, already-closed transaction and asked providers to use that data room as the common basis for their estimates of what a comparable summarization exercise would cost. Providers were asked not only to come up with an answer, but also to “show their work” so that the evaluation team could understand how they went about developing their estimates and what assumptions went into it.
  • Let them know early on that experience matters. There is a steep learning curve in delivering legal support services efficiently and with quality. Providers who cannot convincingly demonstrate that they have had sufficient experience delivering sufficiently similar services should not get your business, and they should know so before they waste their time (and yours). Ask about their experience in concrete terms (e.g., years delivering the service, volumes actually delivered, numbers of FTEs and teams, locations out of which they replicated their processes). Ask for case studies and relevant references. Ask providers to describe how they ascertain the quality of their work and what their data show.

Law departments have traditionally kept their sourcing colleagues at arm’s length. To help break down some of those barriers, you will need to show them that you understand their challenges, speak their language, and can add value. Helping facilitate an informed discussion about outsourcing objectives and how those objectives should drive the selection process is a great place to start.

– Danny Ertel, Partner at Vantage Partners

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