Whilst outsourcing has long been common in other industries, notably IT and telecommunications, it is only recently that such models have been used for the provision of legal services.
And even now there are few examples of a true outsource nature, with a transfer of assets, as opposed to a service contract covering pre-agreed areas of work.
So does this mean that this artisanal approach is a necessary part of practice and that legal services can’t be delivered in any other way? Many now think not, and there is a building consensus amongst buyers and sellers in the legal market that a new and innovative approach to legal work is not just encouraged but expected.
Before moving on to look in more detail at some of the new approaches to legal services, it’s worth being clear about what we mean by “outsourced” legal services. Colloquially, many people talk about any external provision of legal services as being “outsourced”, but is this correct?
Outsourcing conventionally means a third-party supplier taking on responsibility for a service area previously provided by an internal function, typically taking on all assets associated with the provision of the service (including people) and selling it back to the client as a service, normally at a reduced cost. This enables the customer to trade fixed cost for variable cost, typically with the service provided at a cheaper rate and with improved service and scalability.
The service provider normally provides a high level of assurance of the service through contractual metrics (service levels), usually with financial consequences for failure in the form of service credits.
Although a true outsourced model has some characteristics (notably asset transfer) that distinguish it from the other models of legal service provision, some of the other, newer models share some key elements with outsourcing that differentiate them from the more traditional types of legal service. These models provide service on a managed basis and it’s arguably much more useful to divide the different models of legal service into managed service-based models and their counterparts and engagement-based models – rather than outsourced models and everything else.
- Engagement models
Engagement models are based on the idea that the supplier is instructed to work on a specific matter. Even when a client has a long-standing relationship with the supplier and regularly instructs them, or where the work is framed by a panel appointment and an engagement letter, most work is treated as ad hoc, bespoke and non-recurring. When instructions are received, teams are assembled, advice is given and work done, and, once finished, the matter is closed. The team moves on to other work and the firm awaits a new instruction. There is no continuity of service in any meaningful sense and no management of multiple pieces of work as part of a wider, ongoing service. Pricing is also generally bespoke and input-based, derived from the time spent by the lawyers on the matter.
- Managed service models
In contrast, under a managed service model, the provision of work is treated as an ongoing enterprise and managed as a stream of activity. Typically this includes contracting for the work as an ongoing service with a clear scope and measurable characteristics and outcomes. Describing and measuring a given type of work and putting parameters around the way it is done allows a much greater standardisation of approach and charging. Pricing is much more likely to be pre-agreed, based more on value and as such output-, rather than input-, based. Teams are more likely to be dedicated fully or at least partially to a particular client. There will also be an element of service management of the work: a management “wrap” put around it to manage and monitor it. These differences represent a critical distinction and lead to a very different mindset in the supplier. As soon as work is considered as an ongoing, managed service, investment in standardisation and efficiency becomes much more logical, opening the way for work to be done better, cheaper and more flexibly, as discussed in more detail below.
There are a number of reasons why it should be possible to deliver some types of legal work under a managed service model for less than under an engagement-based model. Although it isn’t intrinsic to the model, there is often an element of labour arbitrage, with work being done in a cheaper location (offshore in India; Ireland; or simply outside London). However, there are other ways in which costs can be driven down. Work may be undertaken more efficiently through technology and process, as discussed in more detail under “Better”, below. Firms providing the services may operate with a lower cost-base than traditional law firms (for example, due to cheaper infrastructure) and may well be happy to run at a lower margin due to delivery outside an expensive partnership model. Work may also be priced on the basis of a high volume of relatively homogeneous recurring work, with an element of discount for certainty of revenue. A by-product of more standardised charging is that it produces a strong incentive for the supplier to drive for efficiency and to reduce their own cost, as any upside created is theirs. Again, this contrasts with the more traditional engagement-based legal models where more time spent means more time billed, with the only risk being the recovery rate.
Increasing the efficiency of legal work through technology and process-improvement is one of the real opportunities for managed service models and a key differentiator between them and engagement-based models. Where a relatively stable and recurring volume of similar work has been given to the supplier, the comparative certainty of ongoing work and the associated revenue means that investment in doing that work more efficiently is worthwhile. At its most simple, playbooks can be developed for different types of work, setting parameters for what is and isn’t acceptable in undertaking that work (for example, what positions can be agreed to in negotiations). These can embed the client’s formal governance and compliance standards and include a process for escalation if a non-standard position is requested by the person doing the work. Standard form clauses may be included, covering different positions, and in more sophisticated cases, the whole process may be subject to process mapping and automated workflow systems that track and measure outcomes. Underpinning much of this efficiency is the ability to identify what is important in the quality of the work and the efficiency of the team and to measure it. For example, response times; cycle time (the amount of time a piece of work or a sub-set of that work takes from start to finish); workload; compliance with governance standards; and customer satisfaction may all be key indicators that are measured and tracked. Once workable metrics are agreed, supplier performance can be assessed against formal service levels to ensure that performance meets expectations.
- More flexible
A client would typically expect work done under a service-based model to be more scalable than using its own in-house resource and allow it to trade the fixed cost of its own people and infrastructure for the flexible cost of the supplier’s service. As the work would usually be priced on an output-based model, possibly within volume bands, the client would expect to be able to simply buy more or less as they required. It may be that the supplier needs to put some constraints on this flexibility, for example with a minimum spend or volume guarantee, but typically it would be the supplier’s responsibility to manage resource to meet demand. Another element of flexibility is around expertise. A supplier would typically have a larger and more diverse resource pool of people than the client to deal with any specialist issues that arose in relation to the work and should be able to bring this to bear as and when needed. A managed service may or may not be more flexible than a traditional engagement-based service, but in most cases it will offer a more direct scalability in the ability to buy more or less of the same output at a known price.
Legal work: key characteristics
In order to understand which model of legal service delivery is likely to be the most suitable for an area of work, it is important to assess some of the key characteristics of that work.
The list below identifies some of these characteristics. It can be seen that in many ways these are analogous to the characteristics of legal services.
- Value / importancethe value or importance of the work to the organisation, monetary or otherwise
- Business intimacy how closely connected the work is to the business
- Complexity how complex is the work
- Novelty how novel the work is for the organisation
- Volume how much work is there
- Acceptable risk profile what is an acceptable risk profile for the work – to what technical standard does it need to be done? For example, what is the consequence of a technical error in the work likely to be
- Regulatory / compliance environment what is the regulatory or compliance environment for the work and what constraints does that put on the way the work is undertaken
These characteristics will be more or less important for different types of work. For example, high-end M&A needs a very different approach to doing legal research or summarising a sales contract for a sales team.