Outsourcers Beware: What LPOs Should Know About Law Firm Finances

Posted on: The American Lawyer
By Dan Packel

Law firms may have many reasons for offloading business operations to a third-party vendor—an opportunity to focus attention on areas of more strategic consequence, a way to gain access to greater expertise or, of course, a chance for savings.

But with UnitedLex’s joint venture with LeClairRyan back in the spotlight thanks to a blockbuster lawsuit filed last week by the defunct firm’s bankruptcy trustee, the failure of the deal offers a reminder to players on both sides that these arrangements should never be a pure financial play.

“If cost is the exclusive rationale, it may not go well,” said Chris Petrini-Poli, executive chairman of HBR Consulting, whose managed services division has been hired by at least 17 Am Law 100 firms.

Offloading back-office operations has been on the table for some time, and the LeClairRyan-UnitedLex deal isn’t the first such arrangement to fall short of expectations. In the late 2000s and early 2010s Integreon inked deals with U.K. firms CMS Cameron McKenna and Osbourne Clarke, before both firms announced they were scaling back the scope of these agreements in a one-week span in 2013.

“Outsourcing isn’t new,” Petrini-Poli said. “The difference now is that firms are taking arrangements that aren’t just about people; it’s about people, process and technology.”

Technology was certainly part of UnitedLex’s pitch when it announced its tie-up with LeClairRyan. And the structure of the deal was also qualitatively different from predecessors. But what at the time was presented as a groundbreaking joint venture with purported ramifications across the legal industry was in retrospect revealed to be a last gasp of air from a drowning firm.

“I don’t think there was some real long-term plan here. This was a desperate plea for the firm to try to save itself,” said law firm operations consultant Rob Mattern. “We really don’t see that in the legal marketplace.” 

The complaint filed last week suggests that UnitedLex was aware of LeClairRyan’s perilous status, renegotiating the deal after learning more about the firm’s finances and seeking legal guidance from Hinshaw & Culbertson about whether the structure of the joint venture passed ethical muster.

The company wasn’t alone in sounding out an opportunity with LeClairRyan. The firm also had discussions with Elevate that ultimately didn’t work out, according to founder and CEO Liam Brown.

“If LeClairRyan and Elevate had entered into a business relationship, that would have put Elevate in a very difficult place,” Brown said.

Due Diligence

While a nondisclosure agreement precludes Brown from talking further about his interactions with LeClairRyan, he did stress the importance of due diligence in any potential deal with a law firm.

“I’ve been working with law firms for decades now. I have learned to really think about the brittleness of their cash structures,” said Brown, who founded Integreon and led the company when it inked the deals with CMS Cameron McKenna and Osbourne Clarke but was fired before they were scaled back.

As firms generally avoid retaining earnings, paying out profits to partners on a yearly basis, it’s necessary to work harder to assess their financial fitness than would be required for a corporation. Brown looks to a series of quarterly financial statements and a firm’s balance sheet, but also to lateral hiring and lateral departures. In January, the company opened a litigation support center for Hogan Lovells in Phoenix.

“I try to understand, is their business growing because of a reliance on laterals, or growing because of successful organic growth,” he said. 

It’s also critical to assess the firm’s motivations for pursuing a deal: whether the goal is to gain access to a new talent pool or eliminate a process that’s become unwieldy, rather than simply cut costs. 

“If they’re just focusing on the dollars, it’s not a good sign,” Mattern said.

Another misguided motivation that the consultant has seen is firms approaching these contracts as business development opportunities. But that can backfire with regard to performance.

“It’s hard to hold their feet to the fire when they’re also a client,” he said.

Likewise, firms also must carefully evaluate potential managed services partners. As part of the RFP process, Mattern advises clients to demand financial statements from potential vendors. For entities that aren’t public and are reluctant to open the books, an NDA might become part of the process.

“We offer them the same thing we ask for,” Brown said, noting that firms will learn that Elevate has $20 million in cash on its balance sheet, the result of preparations for a potential recession in 2020 that predated the COVID-19 threat.

The pandemic is registering in another way, with some vendors taking a hit by not being able to have their staff on site. These deals aren’t inherently risky, but nor is a successful outcome guaranteed.

“You’d be almost foolish not to do more due diligence on the finances and ability of both sides,” Mattern said. 

To read the article in The American Lawyer, click here