UK: "Bittersweet Synergy": Identifying and Managing the Risks of Legal Process Outsourcing

Legal Process Outsourcing has been a hot topic in the legal press for some time. Here we outline some of the key risk issues for firms considering following this route.

With "maintaining profits" top of any senior partner's agenda in today's turbulent economy, law firms are increasingly turning to legal process outsourcing (LPO) - by which routine, commoditised, or other process-driven legal work is outsourced - as a means of combating the recession, saving cost and gaining a competitive edge.

A number of large law firms are reported to have outsourced various legal processes within the past 12 months, in particular to India. Two clear LPO models have developed - the third party service provider (or "TPSP") route and the "captive" model.

But for each of these options what are the key risks of outsourcing legal processes, how are they managed and do they outweigh the apparent benefits?

Why Bother?

The theoretical business case for LPO is clear: time and personnel-intensive work can be off-shored at lower cost, liberating solicitors from process-based work and allowing them to focus their attention on more lucrative fee earning activities. These lower costs give law firms the competitive edge of greater flexibility to adopt fixed-fee arrangements (where the pricing risk is transferred to the firm). Time zone differences between the UK and India can result in 24/7 legal services being available at lower cost, which is attractive to both law firms and their clients in handling time critical and resource constrained projects. Using TPSPs or setting up, for example, an Indian captive, can also give law firms a head start in the Indian market, laying the foundations for an Indian practice once that legal market de-regulates.

At What Cost?

The top five issues to consider in adopting a TPSP or captive route to LPO are:

• Understand the business case - target commoditised and process-driven work rather than directing more complex work involving professional judgment and experience, such as assessing evidence, to lawyers not qualified within the jurisdiction or in possession of recent, relevant professional experience.
• Know your supplier - an LPO provider that does not understand the law firm's business, clients and culture can cause that firm serious and irreversible reputational damage. It is essential to visit and interview the LPO provider, understand its hiring practices and know whether it is providing outsourced services for any other law firms and, if so, what kinds of information barrier are in place to ensure client confidentiality is not open to compromise. 
• Similarly, assess and monitor data security (both physical security and e-security) on an ongoing basis and have proper safeguards in place for ensuring the confidentiality of data. The tale of the Bank of New York Mellon falling victim in 2008 to a data breach involving the theft of tapes containing personal information of around 12 million customers, while under the responsibility of an outsourcer, is a cautionary one.
• You get what you pay for - failure to deliver an outsourced service at a level of quality commensurate with the brand of the law firm, and at a saving to the client, will risk brand damage to the law firm which may be very difficult to undo. A degree of loss of control is inevitable, but can and should be managed in order to minimise potential risks. Define proper service levels at the outset, evolve strategies for quality checks at all levels, invest in blending the systems, processes and cultures of the LPO provider with those of the law firm and be prepared to bear a frontloading of costs in visiting the provider and training its staff. In turn, long-term monitoring and supervision of the LPO provider is critical from a business, security, and of course a regulatory, perspective.
• Remember that the law firm will retain overall responsibility towards its client - who, as a minimum, should be aware of and buy-in to the fact that its work is being outsourced - and that the firm bears the risk of liability in the event that something goes wrong. So the law firm should make sure it has disclosed its use of an LPO to its professional indemnity (PI) insurers, that it has PI cover for any claim arising from outsourced work, and that the LPO itself has its own PI cover at acceptable levels.

Conclusion

Rather like marriage, an LPO arrangement is not to be entered into unadvisedly or lightly, and requires mutual commitment on the part of the customer and the supplier if it is to work successfully. There are risks associated with the inevitable loss of control over the outsourced work, but with careful monitoring and supervision, and with both parties making clear their expectations and understanding their responsibilities, lasting success is possible. Given the downward pressure on fees, employee churn and the costs of maintaining "bench strength" faced by law firms today, it seems increasingly likely that, provided law firms create the necessary framework and processes to manage the key risks, it is only a matter of time before law firms acknowledge the business sense in outsourcing legal processes. 

TPSP or Captive?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.