Legal expenses: finding bang for your buck

Ed Brooks gives his thoughts on how investment firms can benefit from changes in the legal profession.

Look at what has happened so far under the broad banner of Legal Process Outsourcing (LPO). It represents yet another profession impacted by change they can’t control. Investors see opportunity; lawyers see threats. Out goes the law firm monopoly over legal services, in comes choice.

Ed Brooks

Simply stated, traditional legal services have been broken down two parts: their value add (requiring approved legal qualifications) and transactional (requiring legal understanding and process expertise). By splitting the process into two parts, innovative and lower cost alternatives to law firms now exist.
 
Actually, LPO covers a broad range of transactional legal activities (e.g. contract management, document review, e-discovery, litigation support and so on). The common theme is that there are reputable suppliers who can do the same work at a fraction of the cost of the law firms and with a much better service and quality “wrap”.
 
As our 2012 Global LPO Study showed, the vast majority of business cases showed 30+ percent savings. In my experience, 50-60 percent savings are not unheard of – so the economics are not hard to work through.
 
The reaction from the law firms has been varied and pretty slow. Most law firms use LPOs on a project by project basis, but general counsel are now more often going directly to the LPOs for this kind of work.
 
For the investment community, there are three main opportunities arising from these changes:
 
AS CLIENTS
 
Where your business generates the need for legal work (for example around M&A work) there are now companies that will carry out pre-merger legal due diligence, research, post-merger support and other services at a fraction of the $200+ per hour that even a second year associate at a law firm would cost.
 
The value proposition is as much about cost as it is about quickly accessing a flexible and skilled pool of labour. Infosys tells a great story about being able to staff an LPO project and complete it before their contract with the client was even completed, and there are many similar stories throughout the industry.
 
Regardless of how you prefer to buy legal services, at least ask your law firms what their options are around LPO, speak with the LPO suppliers, and decide what you can gain from alternative delivery models.
 
FOR YOUR INVESTMENTS
 
As investors, you expect the recipients of your funds to have a tight control over their cost base. Legal expenses are a great litmus test of this, as it is often one of the untouchable areas of spending in many organisations, controlled fully by the general counsel.

With headline brands like Microsoft, Cisco, and Pfizer openly using LPO, this is not some passing trend that your investments can ride out

 
Our 2012 LPO study found that the government sector (unsurprisingly) was untouched by legal outsourcing and some sectors that had been booming (such as oil and gas) had been relatively low volume users. However, every other sector reported growing use, to the point of LPO almost becoming the norm. With headline brands like Microsoft, Cisco, and Pfizer openly using LPO, this is not some passing trend that your investments can ride out.
 
At a more fundamental level, corporations are purchasing legal services from a range of specialists, of whom law firms are just one option. It goes beyond the savings profiles that are available, and into areas that law firms struggle to adapt to. In particular, this relates to service, transparency, high volume quality control, and having clear and commercial service levels backed up by penalties for failure.
 
AS AN OPPORTUNITY FOR INVESTORS
 
The unique opportunity from LPO is that it allows investors to buy into the legal sector in a way that was prohibited before. Anyone focusing on this sector will be aware of the massive changes that have happened in the UK, with law firms now able to accept up to 25 percent of their investment from outsiders (i.e., non-lawyers).
 
The UK model will happen in the US, just not yet, which is another reason why the LPO sector is so attractive. In addition, the huge savings that can be generated for clients also means that there are healthy margins left on the table for the LPO suppliers. These margins certainly exceed other areas of outsourcing, such as Business Process Outsourcing (BPO).
 
Law firms are finding it hard to react. Less than 10 percent of the Amlaw100 have a strategic response to the shift in the market. Larger firms will invest $25 million just trying to keep up. However, even after that investment, the 10 percent will struggle to beat the LPOs in a head to head competitive situation. For any user of legal services, now is the time to explore alternatives and get used to managing in the legal world of the future.
 
Ed Brooks is the founder of The LPO Program and the 2012 Global LPO study can be accessed HERE.