After years of dealing with some of the highest support costs in the professional services sector, more and more law firms are looking to offshore outsourcing as a solution. Realising the benefits, however, can be difficult. Elliot Rose reports
The past couple of years have seen a paradigm shift towards digital dictation by law firms which allows them to electronically distribute dictated documents to centralised document production facilities, enabling more efficient processing of documents in electronic files, rather than physical audio tapes. This has led some firms to consider where their costly document production facilities should be located and whether they should be outsourced.
This trend is driving more firms to consider offshoring their support processes, especially as the legal industry has some of the highest support costs in the professional services sector. Some outsourcing vendors have established low-cost offshore processing centres in countries such as India, with claims of guaranteed quality, service and security levels. Already we have seen a number of firms, including Allen & Overy and Baker & McKenzie, piloting outsourcing arrangements with companies in India, the Philippines and Indonesia.
However, the experience of outsourcing in some industries that first considered offshore many years ago has shown that while there can be significant benefits — with cost savings of 40% — there is also significant risk of failure in benefit delivery. While there is substantial business value available through outsourcing, many companies are failing to achieve the potential business benefits (some by up to 70% of the target).
There are a number of key reasons for failure. One is the failure to find the ‘hidden costs’. In undertaking the due diligence to select the most appropriate vendor, organisations should plan adequate time and cost to assess offshore vendors in two ways. Firstly, there are the labour market issues to do with quality, demographics, supply and so on. Secondly, there are questions to do with infrastructure, incorporating property, technology, transport and utilities.
In addition to the time and cost involved in ensuring that proper due diligence is performed, there are many other types of cost — staff retraining and redeployment costs; loss of productivity during the transition to an offshored process; temporary staff costs to ensure a quality service is maintained during transition when the key experienced people are in greatest demand — for which organisations often fail to adequately plan.
Many potential outsourcers are also guilty of underestimating the impact of change in the organisation. New roles and responsibilities are required for those managing the contract. This takes time, effort and careful handling to achieve a positive result. Operations in different geographical locations need to be integrated, yet learn to appreciate each other’s ways of working.
Organisations looking to outsource may find they lack the right people, in the right place, at the right time, with the right levels of responsibility. In offshoring, they often find that they lose management control of the offshored process and fail to allocate the necessary resources to manage the service levels of the offshore vendor. This in turn can lead to rework and poor relations with the vendor in the long term.
Testing an exit strategy may seem to be assuming the worst before the contract even commences. However, many organisations do not consider or simulate the issues that may arise between the contracted parties if a failure of service occurs, which can make a failure even more painful.
To achieve success, law firms need to take a best practice approach based on what has been learned from other industries that have offshored. This will allow them to determine whether it is the best strategy for their firm and to fully explore and quantify the potential benefits. This approach should consist of four major steps.
Assessing the full impact of change
Offshoring has a large impact on an organisation and it is important to know what changes are required and, more importantly, what they will cost.
It is essential to put together a full business case for the offshoring service. This should identify the cost elements of technology (such as digital dictation technology, document management systems and workflow); infrastructure and logistics (such as computer networks, property, language, culture and political stability); managing trade unions and industrial action; bad publicity and the impact this may have on revenue generation; and managing the change and new service.
The benefits of offshoring can extend beyond cost savings to enhanced efficiency and these also need to be assessed. Many back office functions are notoriously inefficient and can often benefit from significant re-engineering. Offshoring provides a good opportunity to assess and, where necessary, rework processes.
Finally, the major risks associated with implementing an offshore service need to be identified. Even the most basic forms of offshoring can bring new risks to an organisation — political, economic, social, technological and operational.
Designing the framework
The stage of preparation and planning for change should include detailing the risks and issues, identifying and managing the ‘people’ issues, and designing the organisation and process changes necessary to support the revised way of working.
The firm must then make an informed choice of supplier, developing service acceptance criteria and agreeing the scope of service requirements, and define the right contractual model, quality standards and service level agreements (SLAs).
Project organisation structure, responsibilities, roles, reporting format, frequency and issue escalation routes need to be clarified and agreed as soon as possible. In addition, a single person should be given responsibility for making it all happen.
It is also critical to construct the contract and commercial requirements to accommodate change and flexibility. Firms should set predetermined points such as exit, benefits realisation, merger/acquisition, new product or service introduction or withdrawal, and technology refresh. They also need to plan to accommodate cyclical evolutions such as possible business volume variations, market patterns and profiles, new market entries or withdrawal from existing markets.
A re-engineering of business processes may need to be carried out as part of the change, or in advance to allow for an easier transition to the new offshore service. Finally, organisations should not forget to design business continuity plans and processes for disaster recovery, especially during the transition period.
Managing the transition
Only once all the assessment and design of the arrangements for offshoring have been performed should an organisation begin to manage the transition from the old process to the new offshored process. This transition presents a number of challenges. The firm must overcome logistical issues between firm and outsourcing supplier (such as language, culture, distance, time zones), must pilot the new service, must manage risks and identify and manage dependencies and must clearly communicate and engage with all relevant parties as to progress and reasons for change.
Operating the contract
Once the service is up and running, there is the ongoing task of operating and managing the contract. This task is often underestimated. Organisations need to employ a dedicated relationship manager whose key responsibilities should include reviewing the agreed quality standards and SLAs, assessing and incorporating improvements, resolving disputes and initiating reviews and changes to the service at the appropriate points agreed. Finally, as with all services, the firm should test its business continuity plans and disaster recovery processes that have been developed to ensure they remain appropriate.
Looking forward
The Legal Week/PA Consulting Group survey of law firms in 2003 identified that managing partners anticipate clients to be even more demanding in 2004, expecting firms not only to improve their core service offerings, but also to commit to increasing amounts of fixed fee and value-based work. More than 80% of managing partners expect there to be an increased demand from clients for fixed fee work in 2004 and there is a growing expectation that work from commercial arrangements of this type will soon represent over half a firm’s workload — almost double the previous year’s prediction by managing partners.
The competitive advantage offshore outsourcing can offer law firms may be of enormous benefit to them in keeping up with the increased pressure from clients for value for money and the demand for more fixed or value-based billing. To ensure the process is correctly carried out, law firms need to look to other industries which have successfully used it, such as insurance, and think beyond offshoring of document production. With developments in integrated case, practice and document management technology, law firms now have the technical enablers to begin to consider offshoring more widely.
