In-house counsel survey on offshoring

Offshoring legal work still does not seem to be that attractive a prospect for in-house counsel, but they are taking the lessons from its cost-effectiveness and appear ready to force law firms to radically change the way they bill their clients.

Back in the autumn we set out to survey a group of senior in-house lawyers with the help of the Commerce & Industry Group and in conjunction with NewGalexy Partners, a legal offshoring company. C&I Group managed to net 52 respondents, but these 52 make up a select bunch. Our panel of respondents included heads of legal, senior and general counsel at FTSE 100 and FTSE 250 companies, as well as major IT outsourcing companies, manufacturing firms and the world of retail.

What in-house lawyers want

Allowing for the sample size, the answers made for very interesting reading. No doubt any offshoring company would want to see in-house counsel saying that they cannot wait to start sending work their way - but the respondents do not say anything like that. However, in-house lawyers, if this sample is anything to go by, seem to think that their law firms will be offshoring in a serious way in future.

We asked our group whether the downturn was pushing them either into outsourcing or into getting their firms to turn to outsourcing to cut costs - and the vast majority said no, with a small (but considering our sample, potentially interesting) minority saying yes.

But when asked how they thought legal offshoring might progress in future, 23 of our 52 respondents said they thought that ‘international firms will set up their own units’ and 16 said they thought ‘most large corporations will offshore’.

Surveys are always full of inconsistencies. Often these inconsistencies tell you something important - and almost half of our respondents said they thought international law firms would set up offshore in some way. Almost a third of respondents said corporates would branch out offshore for legal. Both of these things they see happening within the next five years. The ‘why’ here seems to be pressure on costs.

When we set out to ask about offshoring, what we really wanted to know was whether in-house lawyers are working out how to take work off their external firms.

Our respondents did not say they were thinking of offshoring in droves, in fact they said overwhelmingly that in the next two years they would not. But they did say they are ‘looking at new ways of working with external law firms to get maximum value’ (13 of 52) and, significantly, that they are looking to take the work they currently farm out to law firms in-house (17 of 52).

But the overview is even more informative. If one adds up all the answers that are, in essence, saying the respondent is looking to cut work sent to law firms in any way, almost half (25 of 52) are working out how to take work off your firm. Add to that the 13 respondents looking at new ways to push down fees, and that is a lot of potential pressure on law firms to drive down costs and drive up value. Whichever way you look at it, law firms will be feeling the squeeze in 2009/10 if these numbers are right.

Goodbye, billable hours

One of the questions we most wanted to ask in-house counsel was what kind of routes they are taking to cut the cost of outside help. We asked if they are considering any of the following: moving away from the billable hours model; e-billing; incentive fees; electronic job tracking; moving away from retainers to project-by-project payments; or none of the above. If you are running a firm whose future is pegged to hourly billing, one or two answers might be potentially worrying.

Two in five (20 of 52) said they were considering moving away from hourly billing. Just over one in five (12 of 52) are looking at e-billing. Almost the same proportion (nine of 52) are looking at ditching retainers. A significant number (seven of 52) are looking at cooking up incentive fees. Of course, alongside incentives come disincentives.

For nearly 40% of our sample to say they are looking at ditching hourly billing indicates a widespread dissatisfaction with the old way of doing things.

The attention e-billing is getting is also important. Commercial firms are working out how to offer e-billing to more clients, but if two out of 10 corporate counsel say they are looking at it now, it cannot be long before it is a must-have.

Behind the numbers

Types of work potentially
available offshore

Alongside the numbers we managed to capture some free text answers and these are, if anything, more useful than the bare maths.

Though most respondents said they were not going to send legal work offshore any time soon, this could be partly because their world depends on keeping the crown jewels in the building, and partly because in-house lawyers need to stay visibly in charge. Some months ago the head of legal at HP UK, an interview with whom we will run in early January, could not even use the words ‘offshoring’ or ‘outsourcing’ to me when we spoke – he preferred ‘out-tasking’, a term I have heard from others since.

This cautious approach from respondents may be more superficial than it seems, but we have no proof of that. We do, however, have some telling quotes.

A few submitted comments show a kind of ‘business as usual’ viewpoint: ‘I am only really comfortable with the idea of offshoring legal research – any transactional work is unsuitable for this treatment in my mind, as this needs personal attention full-time’ (head of legal, retail company).

‘We like our external lawyers to be close to the business and available to be physically present in meetings – so we are unlikely to engage in offshoring’ (private company, manufacturing sector).

But a more mature view of offshoring is apparent in larger corporates. ‘As long as you select the right areas for outsourcing, the benefits can be significant,’ said a senior legal counsel at a FTSE 250 company. ‘For me the most beneficial thing is that by outsourcing the lower-value work, I can focus the more expensive private practice resources on the higher-value-add work... Contracts management, commercial contracts/licences and due diligence are ideal for the offshoring treatment.’

Also heard among the free responses was the voice of experience: ‘We have found that, when we put the time into managing offshoring properly, the cost savings can be as much as 50-60%,’ said the general counsel at a FTSE 100 company.

Better still, this respondent general counsel has advice for others in the same position. ‘The key is to prioritise training around the cultural and business-specific needs of your company and make sure there’s the right level of supervision. This is how you can be sure that the theoretical cost and speed benefits can actually be achieved. Also, for us, finding the right offshoring company made the critical difference. We use an offshoring company and also encourage our private practice firms to include an element of offshoring in their service to us.’

Horses for courses

Offshoring change next five years

Almost everyone who responded about the issue seemed to think that the types of work they might offshore depended on not just how easy it might be, or how much it would save - security and confidentiality were vital. This in itself is hardly surprising: a head of legal that did not care deeply about those things would not be in a job for long. But the types of work being targeted for farming out are worth looking at because they denote the split between ‘safe’ and ‘entrepreneurial’.

A legal counsel at a big technology company told us that ‘anything that is not routine, or requires a good understanding of the business and the commercial issues it faces - M&A; high-value commercial work; strategic licensing; joint ventures - is, in my view, unsuitable for offshoring’. This view that it is only really commoditised work that can be farmed out safely and effectively is echoed by other respondents. ‘Most work carried out by in-house departments does not lend itself to offshoring as it is not “production line” type work,’ said the head of legal at a private technical research company.

But this is the ‘safe’ option, which is not shared by everyone. ‘I do expect to be offshoring up to 10% of our legal work over the next couple of years,’ said one legal consultant at a FTSE 250 company. This respondent did, however, rule out offshoring risk management ‘because of its proximity to the business’. ‘It’s about “horses for courses”,’ apparently, ‘but if you get it right, the opportunity is to get much more out of your legal resource and budget.’

Another head of legal at a FTSE 250 company points to ‘IP and IT legal work, also contracts management (although not review of commercial contracts)’ as good work to farm out. A general counsel with a retail company identified ‘litigation support, compliance support, legal research, IP and IT’ as logical candidates for offshoring.

So, making efficiencies at in-house departments will not just be about basement, bulk work. And though in-house lawyers say they will not be moving legal work offshore in the near future, they are putting increasing pressure on law firms to slash costs and expect them to offshore to deliver those savings. It would appear that if your firm has not thought about how to deal with these subjects, the oh-so-short Christmas break might be a good time to start.

Your work is our work

Almost half our respondents said they were looking to take work off their law firms, moving it either in-house, abroad, or both (yellow).

Another 25% said they were looking at new ways to get better value from firms (red).

Only a quarter of respondents said they were leaving things as they are with their firms (purple).