The State of Sourcing

Despite the compelling needs of outsourcing, there have been instances in the recent past where some companies (although for different reasons) have shifted work back to their roots (onshore). This has been primarily seen in verticals including banking, financial services, retail, etc.

Bringing back the (offshored) operations in-house is not an attractive option for any company, as it eventually adds to their costs. However, there must be some compelling reason that forced companies to take work back onshore/in-house. The reasons might vary from….not enough cost savings, unsatisfactory results, quality not as expected to not a right choice of vendor.

Last year, we had conducted a survey of US and UK based law firms, which threw an interesting finding – “10% of the survey respondents tried and rejected offshoring”. During our course of research, we found a number of buyers who cited unsatisfactory work quality for abandoning their offshoring initiatives. Could this mean not enough groundwork done before selecting a vendor? Possibly!

Continue reading ‘Vendor selection – How important is it?’ »

The LPO industry has not grown as fast as was had estimated earlier. The industry growth rate (CAGR of 40+% over 2003-07) dropped to 28% in 2007-08, and further slipped to 16% for 2008-09.

As the global legal industry suffered, the offshore industry could not escape the negative impact (although short-term). The slow down in the buyer market impacted the offshore industry resulting in a drop in the growth rate. Revenues from the offshore legal services industry were US$320 million for 2008 and are expected to reach $440 million by end 2010, according to a recent ValueNotes study titled ‘Legal Process Outsourcing: Crisis Creates New Opportunities‘. Consequently, there has been a shakeout in the industry. Over the last two years, >20% of the total number of service providers exited the LPO business. Is this an unusual situation? Textbooks of micro-economic theory talk about firms exiting an industry all the time. This is probably a live and recent example they can update their texts with. As profits diminished, smaller firms that could not take the hit exited. In an uncertain economy, mid-sized and smaller service providers are the worst affected by margin pressures. However, over-hyped prospects and ease of entry in this industry led entrants to believe that getting business would be easy. Few bothered about the potential risks or competitive dynamics, resulting in many weaker players fading away in the current environment.

In the current scenario, almost all offshore legal service providers are in fact, battling. While in some cases billing rates have come under pressure, in others the volume of work has shrunk. A pertinent question is, in this situation, which company is best positioned to sustain the growth? While the smaller businesses battle with survival issues, service providers with multiple service capability will be better positioned to weather the storm. ‘Multi-service capability’ will become critical not just for sustaining growth but also for the very survival of service providers! Incidentally, we have recently released the ValueNotes Sourcing Prism: Legal Outsourcing Edition that presents a list of service providers who are currently best positioned in the industry. Follow this link to find out more about the product.

In one of my previous posts, ‘UK Law Firms: Catching up on offshoring‘, I shared my views about UK based law firms opening up to the idea of offshoring. The growing interest amongst the buyer community was also evident at a recent conference that I attended on ‘Legal Process Outsourcing and Offshoring‘, organized by the Lawyer magazine in London.

The fact that several partners and attorneys participated in the session reflects the high level of interest in the subject. Several law firms indicated that their clients are increasingly suggesting using offshore service providers. The motive behind corporates pressurizing law firms is quite obvious – lower costs.

Continue reading ‘Wake up call to law firms!’ »

The year 2008-09 will be remembered for the collapse of Lehman Brothers (the largest bankruptcy in the US history so far!) and also for all the numerous individuals, companies and cities that have withered under the pressure of the financial crisis. There are thousands of companies that have gone bankrupt. A total of 1,306,315 bankruptcy cases filed from June 2008 to June 2009 period (a 35% jump compared to the number of cases filed over the previous year), as per the Administrative Office of the US Courts. And the list of failed companies is only growing longer. Well, that’s the impact of the global economic meltdown, which has seen many corporations closing down due to bankruptcies leading to layoffs across the globe.

Business filings jumped by 63% to 55,021 for June 2009 from 33,822 filings reported in June 30, 2008. Recession hit several individuals and businesses. Even  cities in the US have not been able to escape the impact. Some are facing financial hardships  given the foreclosures, court damages, city wages, pension-plan losses, etc. Orange County, California in 1994 was the largest bankruptcy filed by a city in the US history so far! Last year, Philadelphia, Phoenix and Atlanta requested the Treasury Department for a $50 billion of the $700 billion from the “Troubled Asset Relief Program” in order to boost the local economies.

Continue reading ‘Gone to the wall!’ »

“Law firm axes attorneys, associates and staff positions” – News like this has been hitting the headlines frequently over the last one year.

Since mid-2008, law firms such as Clifford Chance, Eversheds started trimming their staff strength (lawyers, associates and support staff) while others like Thelen Reid Brown Raysman & Steiner LLP have discontinued operations. The market conditions had a severe impact on the financial performance of most law firms, who reported significant drop in revenues. Drop in legal spend, shrinking budgets and corporates moving their work in-house has impacted law firms adversely. Corporates looking to reduce expenditure are making attorney fees a soft target for cost reduction. The last eight months have been more severe for law firms and have further hit their revenues and profitability. As a result, several law firms (including Am Law 200, Magic circle firms and other law firms) resorted to cutting their staff strength. Law firms dealing largely with mergers and acquisitions are the hit hardest. With the housing market taking a dip, the US and UK conveyancers have seen a drop in their business.

A number of US and UK law firms, including Allen & Overy, White & Case and Shearman & Sterling, Clifford Chance, Freshfields Bruckhaus Deringer and Lovells have temporarily halted recruitment of associate positions and have announced corresponding cuts to starting salaries. (Some are also re-looking their compensation model!)

Continue reading ‘Challenging times for law firms’ »

When Clifford Chance, the world’s largest law firm decided to offshore in 2007, the news came as a huge surprise and law firms the world over (especially in the UK) took notice. What appeared to be a bold move is actually an imperative today.

Over the last two years, several other firms have started giving offshoring a serious thought. Some of the well-known names in this area are Allen & Overy, Linklaters, Lovells, Eversheds. Recently, Pinsent Masons and Osborne Clarke joined the list where Pinsent Masons outsourced its litigation work to South African LPO, Exigent and Osborne Clarke awarded a legal services outsourcing contract to Integreon. While most of these firms have primarily outsourced their IT and F&A functions, few of the recent deals include the legal services component along with support services. Even within the legal services, activities offshored by law firms so far are limited to services such as word processing, legal transcription, coding, indexing and scanning documents, contract drafting, legal research and trademark searches.

As businesses globalize, UK law firms are looking to cut costs of maintaining their international networks, to be able to compete with the US law firms. Cost cutting (especially in these challenging times) and better utilization of in-house lawyers by outsourcing low value tasks is a compelling reason for law firms to consider outsourcing/offshoring in their strategy. Further, offshoring and its cost-economics will lead to a situation where in-house lawyers will be able to focus on high value and wider range of legal services.

Continue reading ‘UK Law Firms: Catching up on offshoring!’ »

“No more offshoring for us. We have not been convinced about the service providers’ ability to maintain quality.” This was the reaction from one of the disgruntled customers, a US based Law Firm that tried & rejected offshoring.

There are some law firms and corporates that have tried and rejected the offshoring initiatives. During our course of research, we found a number of buyers who cited unsatisfactory work quality for abandoning their offshoring initiatives. Several of them were unhappy about the inconsistency of the work delivered and non-receipt of the quality promised. Understandably, taking into account the delicate nature of legal work, quality of work delivered is of paramount importance in this industry.

Why the low score on quality? Outsourcing is not a simple process, and takes considerable commitment from not just the service providers’ side but also (and more importantly) from the buyers’ side. Most problems arise because buyers expect a lot, and/or service providers promise more than they can deliver. One of the most critical success factors is setting and communicating realistic (and achievable) expectations before the commencement of a project. A managing partner at a law firm rightly puts it, “Regular communication, internal preparation and preparation of documentation and setting processes for smooth transitioning - these are crucial to make a success out of offshoring.”

Continue reading ‘No Compromise on Quality!’ »

“How do law firms select their offshore legal service providers?” one of my colleagues asked me. Aren’t the fundamentals more or less same across verticals or segments, was my initial thought. I’ve seen my own marketing team ponder and debate on what might impress (and what might put off) a prospective customer.

Luckily, I had an answer for my colleague from the recently conducted ValueNotes survey of US and UK based law firms. The survey findings revealed that the strength of the management team, company reputation and end-to-end service capability are the most important criteria when selecting an offshore legal service provider.

Continue reading ‘How do law firms select suppliers?’ »

In his 2009-10 budget speech, Finance Minister Pranab Mukherjee said: “I propose to extend service tax on advice, consultancy or technical assistance provided in the field of law. This tax would not be applicable in case the service provider or the service receiver is an individual.”

Law firms across the country are unhappy about the application of service tax, especially at a time of economic downturn. Not that law firms have been doing badly! With the increase in the number of cross border transactions over the last two years, the legal services industry in India has grown at a rapid pace. A large number of multinationals are also expanding their existing operations in India. On the other hand, several Indian corporations are aggressively venturing into global markets (acquiring companies or expanding their operations). These companies typically require legal advice on financing, mergers and acquisitions, immigration, etc., which translates into greater work for Indian law firms. However, of late the slowdown has affected the transactional practice done by corporate law firms. The imposition of service tax will also hurt some of the LPOs who are catering to the domestic market. While lawyers have expressed their disappointment and displeasure on the imposition of service tax, it is likely that the service tax burden will shift to litigants.

Of course, a commonly held view outside the legal industry is that law firms have been pampered with the exemption of service tax. The finance minister appears to agree with this view. But obviously, this view is not shared by the legal industry!

Continue reading ‘Legally Taxed!’ »

While the offshore legal services industry garnered a lot of media attention, the recent survey of US and UK based law firms conducted by ValueNotes revealed that less than 3% of the respondents had any past experience of offshoring legal services.

Initially, even I was intrigued by this finding. But when we started digging deeper, we found that a sizable proportion of the legal community has not considered outsourcing legal services to lower cost destinations. There is a low perceived benefit of outsourcing legal services amongst law firms.

Continue reading ‘Lawyers Shy Away from Offshoring’ »