The economic dip has forced firms to reassess their costs.

One way to cut them is to outsource work - an idea embraced by Allen & Overy.

Philip Hoult examines the pros and cons of sending back-office work to a country such as India

The news that City firm Allen & Overy (A&O) is set to outsource part of its document production department to a company based in India will have made senior management at law firms across the City and beyond sit up and take notice - not least because the firm estimated that it could make an annual seven-figure saving.

And hot on the heels of this came the news of the first outsourcing company - established in Chennai by former City solicitor Milan Zala - exclusively targeting the legal sector (see [2003] Gazette, 25 September, 5).

After a successful pilot, A&O has agreed a deal with US/Indian company Office Tiger to set up an operation in Chennai in a move which may lead to up to 50 lay-offs among UK staff.

While the potential job losses may have grabbed the headlines, the fact that a law firm has decided to outsource part of its operations is actually nothing new - firms have contracted out a range of activities for years, from catering to public relations.

What is different now is the extent to which firms are prepared to outsource - more and more areas of the business are now considered suitable for this type of arrangement - and to base services overseas.

Even the role of the professional support lawyer is now seen as a potential area to outsource.

'There is a pressure to re-engineer costs to make sure that the businesses are being run in the best and most profitable way,' explains management consultant David Temporal of London-based Temporal Consulting.

'That law firms are doing this is no surprise because international organisations in competitive environments have got to look at how efficiencies can be achieved.'

This pressure on costs - and running a law firm is certainly a high-overhead business - has been accentuated by the slowing down in transactional work following the bursting of the dot-com bubble in the early part of this decade.

Since this shortfall in work has not been completely compensated for by any upturn in counter-cyclical areas such as litigation, corporate recovery and employment, managers at law firms have had to examine their cost bases closely in a bid to halt or at least slow any decline in profitability.

They are driven by the fear that any fall in profits relative to rivals will make their firms vulnerable to partner defections.

However, until now there have been several obstacles that have made law firm managers hesitant to introduce wide-scale outsourcing in the way that many of their clients have.

The most important of these has been the issue of security and confidentiality, both vital to a firm.

But technological advancements, including the use of 'virtual private networks', mean these concerns have largely been addressed to the satisfaction of firms' IT departments.

The likely quality of the outsourced service has also been a concern.

Speaking at the Law Society annual conference last month, John Heller, chief executive of bulk conveyancer Hammonds Direct, which has outsourced to India, said the firm was 'just taking it very slowly' because of this.

India has proved popular because graduate-level staff can be employed and the time difference allows for work to be turned around overnight.

North London solicitor Sunil Radia, who also runs outsourcing service UK Typing in India, says he handles the dictation of hundreds of fee-earners, including the claims unit of London firm KSB Law.

Word files containing digital dictation are e-mailed overnight to India, where they are transcribed by qualified legal secretaries - he has 90 working in three shifts, plus another 30 proof-readers - and he has set up a training scheme for secretaries there.

To counter any concerns about quality, the service has been modified so that now all documents are quality checked by legal secretaries in the UK before being returned to the fee-earner by 9am.

David Holme, director of business services company Exigent - which provides firms with offshore transcription, database management and data-profiling services - argues that if a service provider fails consistently to come up to scratch then it will not have a viable future.

Mr Holme adds that Exigent's original business model was cheaper than the one it operates on now.

'It was based on using typists but we now use PA-level people - they take more care, are more mature and are slightly older,' he says.

'As a result, the work is of better quality, with an extremely high degree of accuracy.

We may make less money in the short term but we are building a better reputation for the long term.'

According to City firm Charles Russell's IT director, Jon Gould, who outsourced much of the firm's IT infrastructure including servers earlier this year, to maintain quality it is crucial for a good working relationship to be established between the law firm and the service provider.

'As long as you are working with the right partners, you can achieve very good quality levels,' he says.

'You have got to have a great deal of trust and pragmatism though.

You must have the ability when things go wrong, and they do go wrong, to discuss the problem and move things forward.'

Another important hurdle that firms have had to get over has been the need to get stakeholders in the business, the ones who will use the outsourced service, to buy in to the idea.

One of the significant aspects of the A&O pilot was that it involved 'blind testing' of fee-earners and other users of the document production department - basically this means fee-earners had no idea whether their work was being done in London or India.

Allen & Overy's head of operational services, Steven Chernikeeff, says he also spent much time with various parts of the business to ensure they were happy with what was being proposed.

'It took a lot of influencing skills - we had to explain very carefully what we were trying to do,' he says.

'The senior partner, the managing partner and the finance director were all very supportive.'

Law firm managers have often shied away from outsourcing because of worries over the potential effect on staff morale, particularly among support services.

That staff might be worried about their future is not surprising, but outsourcing is not necessarily all about a firm cutting a swathe through its headcount.

Instead, it can be used as an opportunity to re-skill employees or to allow them to concentrate on more rewarding work.

Mr Gould says the firm's outsourcing of its IT infrastructure means the members of his IT department no longer have to do as much drudge work as in the past, such as all the backing-up that was required.

Instead, they can concentrate on the development work that can provide much greater benefit to the firm.

The arrangements at Charles Russell did not involve any job losses but have delivered significant cost savings.

Another reason why firms have gradually become more comfortable with outsourcing is that they have advised many of their clients on such projects.

They are now aware of many of the potential pitfalls and how best to avoid them, and are able to prepare service-level agreements that will deliver the predicted benefits.

'The problem in the past was that people did not know what they were letting themselves in for,' says Tony Williams, founder of management consultancy Jomati and former managing partner at both Clifford Chance and Andersen Legal.

'Firms know what they want and can put that into a service-level agreement.

The outsourcing industry started off with very big projects but is now coming down in scale and can operate in a way which is credible with law firms.'

As these barriers to outsourcing are gradually removed, more and more firms are likely to make the switch at least in some parts of their operations - Mr Radia says he is in talks to move beyond just secretarial work in India and into being a call centre for a personal injury firm and even handle insurance claims.

Exigent's Mr Holme, whose business has its headquarters in Cape Town, South Africa and counts regional firm Brachers among its clients, stresses that firms of all sizes can reap the benefits.

'It is practical for anyone, from a firm with four or five fee-earners but which has a lot of documentation to those practices with hundreds or even thousands of lawyers,' he says.

Not all firms will take the step - last month, Stockport-based bulk conveyancing firm Barnetts decided against outsourcing some of its operations overseas after investigating the possibility of sub-contracting work to India or the Philippines.

Senior partner Richard Barnett said at the time that although such a move was attractive in terms of cost, the firm felt that the same level of service could not be offered and there was a desire to keep all its operations under one roof.

Others, as Mr Barnett acknowledged, are likely to come to a different conclusion.

Mr Heller told the Law Society conference that Hammonds Direct had outsourced back-office operations to India because it offered 'tremendous flexibility' in expanding the practice.

Mr Chernikeeff stresses that A&O is not on an outsourcing 'bandwagon' and that there are quite a few occasions where outsourcing has been considered inappropriate.

However, he adds that 'we will look at all our services constantly and ask ourselves whether we are doing our best to provide the best service possible to fee-earners'.

With that as a guiding principle, it is inevitable that many firms will follow A&O's lead.

Philip Hoult is a freelance journalist