Outsourcing: How to Do Better Than Flipping a Coin

Published in Law Journal Newsletters
By Rob Mattern, President of Mattern

The majority of law firm outsourcing engagements fail, and yet outsourcing is on the rise. This is the conundrum we find ourselves in.

In the past three iterations of its Law Firms in Transition Survey (2016-2019), Altman Weil has found that just under half of firms reporting their outsourcing engagements as successful — except for 2016 when under 40% of firms reported their outsourcing engagements as successful. And yet year over year during the same period, outsourcing is on the rise.

Why would firms increasingly pursue a strategy that delivers results that are slightly less reliably positive than flipping a coin?

The answer is: because the new law firm model demands it. The legal industry is on the cusp of transformational change making the “siren song” of a successful outsourcing engagement ever more alluring: increase expertise and flexibility while lowering costs, and significantly mitigating risk.

The 2020 Report on the State of the Legal Industry expands on this and divides that the surge in the use of ALSPS (alternative legal service providers) into these top five buckets:

  1. Litigation and Investigation Support
  2. Legal Research
  3. Document Review
  4. E-Discovery
  5. Regulatory Risk and Compliance

Hence, it is coming as no surprise to see these elite firms make these moves:

  • Hogan Lovells partners with Elevate for New U.S. Document Review Center.
  • Polsinelli teams up with UnitedLex for a new Litigation Solution Center called PolsinelliPLUS.
  • Allen & Overy’s blended services of its Advanced Delivery Solutions.
  • Sullivan & Cromwell’s recent outsourcing of its IT function.

As the outsourcing model increasing aligns with the transformation of the law firm business model, this brings more and more providers to the table, creating what is soon to be a crowded market of managed service providers and consultants vying for your firm’s outsourcing business.

This begs the question: who can you trust?

Who Can You Trust?

In a crowded market of providers, the goal is to find a consultant whose model incentivizes the right processes that will drive the optimal outcomes that are in the firm’s best interest — not the consultants’.

Case in point: A consultant that also delivers managed services in the area under question will be incentivized to stack the deck in favor of choosing managed services. Consultants that operate on a percentage of savings model also are not incentivized in the firm’s best interest as under this framework the consultant cannot help but to focus on the lowest cost by driving down labor dollars, locking you into equipment for a lower price, and not negotiating terms and conditions come with a cost that help you manage the contract. When you are dealing with labor or any type of strategic initiatives, contingency/percentage of savings-based fees don’t work.

A model that does incentivize the right process to optimize the firm’s outcomes is a vendor reimbursed fee. In this model, the winning service provider pays the consultant fee, removes outcome bias from the process, and ensures the firm can run a full request for proposal process without the focus on price.

Keep in mind: Your firm might not need to outsource at all, period. In-house operations can be equally expert and cost-efficient as an outsourced operation but there may be some internal inefficiencies that need to be corrected. If your firm is willing to put in the management time, invest in/procure your technology correctly and pay your people appropriately for their skills, then you can be as competitive and efficient as any outsourcing company can be.

The million-dollar question is — where do you want to invest your time?

The Process: Key Focus Items

Expertise should include a firm grasp on your costs, current obligations and service levels. An understanding of competitive outsourcing terms, what your projected savings should be, familiarity with the outsourcing marketplace and current technology. Just like attorneys are taught not to ask a question in the courtroom without knowing the answer, prior to beginning an outsourcing process, you should know what your costs and contractual terms will be at the completion of the contract.

Senior Executive Support and Involvement

Senior executive support is critical for any outsourcing initiative but especially when you are outsourcing in-house employees. Senior executives will be highly focused on the welfare of their employees, the impact to the bottom line and understanding whether outsourcing solves a problem or improves a situation.

Selecting the Right Service Provider

The only way to get optimal pricing and terms and ensure your firm selects and partners with the right service provider is to get proposals from multiple providers. The best way to do this is to create a Request for Proposal (RFP) which will create a level playing field for all providers. Investigating only one potential provider removes all context and negotiating position — and you won’t know the impact of this ‘myopia’ until it is too late.

Other key factors are:

  • Interviews with the people who will be managing your site on a day-to-day basis, including potential site manager candidates.
  • Answers to these questions:
    • How would you handle a transition of our employees?
    • What and when are benefits provided?
    • What training is provided for both on-site and backfill staff?
    • What is your retention for both exempt and non-exempt employees?
    • What percentage of your annual escalator is applied to employee increases?
    • What other services do you provide?
    • What type of flexibility do you offer for both staffing and MFD's?
  • Multiple rounds of pricing to drive to the benchmarks.
  • References: The best ones are not from the providers, but from your network.
  • Lost clients: Ask them for a list of clients they recently lost and why. Make sure the reasons are consistent. If they won’t provide them, your consultant should be able to.

A Properly Structured Contract

There are a few items that the service providers are not going to suggest and that firms probably don’t know, including:

Bi-furcated contracts. Consider separate contracts for equipment and services. Beware of the service provider that states they have the buying power to procure the best in breed equipment as it likely means that provider will apply a mark-up on it that will make it more expensive than if you went directly to the vendor yourself. If your firm is large enough to outsource, then your firm is large enough to go directly to market to procure the equipment yourself and get better pricing and terms.

Terms that restrict your actions in the event of a cancellation or termination. I have never seen an outsourcing contract negotiated by a firm that did not have non-solicitation. Non-solicitation is the payment to the service provider in the event your firm or another entity hires their employees during or at the end of your contract. This can range from a set dollar amount up to 50% of the employee’s annual salary. Who does this clause benefit? Not the employee who may miss out on an employment opportunity with the firm or the new entity who wants to hire this person but doesn’t want to pay a fee. This clause only benefits the company who lost the contract likely due to poor performance.

Service level-based contracts. Some service providers are proposing their services without defined headcount and very loose service level commitments. The advantage to the provider is that they are not under strict guidelines to staff the account per the mandatory headcount. Does it benefit the firm? Typically, there is a lower cost associated with this plan and only if there are detailed performance standards with dollar penalties so that it “pays” the provider to maintain the necessary staffing.

Ongoing Reporting and Communications

One of the biggest reasons for success of an outsourcing operation is maintaining an ongoing communication plan with the provider. If the reporting and scorecard is set-up properly, this should provide the basis for monthly meetings and discussions. The provider should be bringing to the table on a monthly basis recommendation for improving the operation, and cost reductions. The client should set the expectations of this meeting and not accept an opportunity for hearing a sales pitch on additional services.

Doing Better Than Flipping a Coin

Firms should investigate the viability of outsourcing back and middle office functions at their firm to see whether they have the in house expertise for a successful operation, or to see whether there is a service provider exists that can provide the service faster, cheaper, better.

Leveraging the expertise of a consultant is welcome by each stakeholder in the process.

Staff benefit from a consultant leading the project because consultants know how to protect them from a salary perspective, training and growth potential.

Service providers benefit from a consultant leading the project because the consultant will know what a fair price is for your engagement, so the negotiations won’t push a service vendor to the point that will hurt their profits and allocated labor dollars. The service providers know that if a good consultant is involved, the project will be on schedule, they will get a well-written request for proposal, and the firm will make a timely decision.

Lastly, your firm will thank you for using a consultant when the process has worked, and the service provider is doing an excellent job and bringing added value every day. Just make sure the consultant is on the firm’s side of the table — not their own.

See the article on Law Journal Newsletters: "Outsourcing: How to Do Better Than Flipping a Coin."