Credit: Roberto Jiménez/ALM

Sullivan & Cromwell spends millions of dollars on technology, ensuring its equipment is accessible to its lawyers around the globe and that its digital security can keep clients safe. Chairman Joe Shenker, citing bank surveys, says the Wall Street firm's tech costs per lawyer are higher than any of its peers.

Still, Sullivan & Cromwell has managed to improve its profit margin while maintaining high-quality telecommunications, computers and servers. That financial success isn't tied only to the firm's lawyers. It's partly a result of back-office decisions.

Starting in 2017, the firm began outsourcing some of its technology functions and infrastructure. The change required about 30 high-level staffers, including engineers, to leave the firm and become employees of another business, HBR Consulting's managed services division.

It was a sea change in Sullivan & Cromwell's evolution, Shenker says.

"You can't keep up doing state-of-the-art, best-of-the-best [in technology]—which is what we try to do—doing it yourself," Shenker says. Law firms just can't compete with big tech companies, he says. Instead, "Let's focus on what we're great at and let other people focus on what they're great at."

Sullivan & Cromwell isn't alone. Big Law is embracing outsourcing. Not only are more firms doing it, but the industry is outsourcing a growing number of high-value departments, often shedding administrative and operations employees in the process. The decisions carry some risk, but also big rewards.

The outsourcing trend goes beyond law firms opening so-called "captive" operation centers, in which they move some back-office jobs to lower-cost locations with firm employees. More and more firms are moving departments and jobs outside the firm entirely.

Chris Petrini-Poli, executive chairman of HBR Consulting

HBR's managed services division has been hired by 17 Am Law 50 firms, including Sullivan & Cromwell, and about 25% of the Am Law 100, according to Chris Petrini-Poli, the company's executive chairman. In 2019 alone, seven new law firms hired HBR to outsource various functions, he says.

Another outsourcing provider for law firms, Williams Lea, does business with 25% of the Am Law 200, plus many other firms, CEO Clare Hart says. "It's increasing across the spectrum," she notes.

Technology jobs like the ones outsourced by Sullivan & Cromwell are a big part of the movement. The International Legal Technology Association's 2019 technology survey ­reported that 39% of law firm respondents outsourced infrastructure support, up from 28% the year before. Security outsourcing grew to 32%, up from 22%.

And it doesn't stop there. A group of Am Law 100 firms are working to develop a first-of-its-kind, shared back-office center in a low-cost location in the United States to handle functions including accounting, payroll, IT and data security, research and human resources. It's a sign of just how much outsourcing has taken hold in the industry in a short time—and, perhaps, an indication of how much further it might go.

Cutting Costs

Outsourcing can save law firms millions of dollars in the long run. They often spend between $15,000 and $25,000 per firm user on tech services, Petrini-Poli says. HBR can bring down costs by 20% to 30% for IT services, he says. An Am Law 100 firm could spend an average of $20 to $30 million a year on technology costs, meaning it could save about $4 to $6 million annually. Petrini-Poli wouldn't say how much HBR costs for firms, but its pricing is based on a flat cost per user each month.

HBR's managed services division now has more than 200 employees who oversee outsourcing of law firms' IT, procurement and research functions. Part of its pitch is that it seeks to provide firms with "the best in breed" in supplies and vendors, such as servers, telecommunications circuits, computers and data centers, Petrini-Poli says, adding that HBR can do so because it's buying products on a much larger scale than an individual firm. The company's message to firms is simple, he says: "Stop investing in the basics of IT; start investing in things that will shape your firms," including the technology that builds connections with clients.

When HBR hires staff from law firms, they often stay in their current cities, with more career and training opportunities, or take advantage of other opportunities, Petrini-Poli says. HBR's center in Dayton, Ohio, also offers IT, library ­research and procurement services to fill in any gaps that exist in a law firm's staff, he says.

Clare Hart, CEO of Williams Lea

Williams Lea, meanwhile, offers back-office support from low-cost centers in Wheeling, West Virginia; Normanton, England; and Columbus, Ohio. Beyond its traditional offerings of mail and copy centers, the company now provides law firm outsourcing for administrative, finance and accounting, human resources, facilities, marketing, document processing and records management, Hart says. Firms can see at least a 10% cost savings by utilizing the company's services, she says.

Hart cites a 2019 survey commissioned by Williams Lea to demonstrate the spread of law firm outsourcing. Seventy percent of law firm leaders reported outsourcing some or all of their back-office functions, up from 56% in 2018.

"I don't think there's a law firm that isn't thinking about outsourcing some of these services," Hart says. "The benefits are so real."

Economies of Scale

The way Shenker sees it, outsourcing some of Sullivan & Cromwell's nonlegal functions allows the firm the benefit of having skilled talent oversee the work, as well as having enough scale to lower costs, much like large corporations do when they purchase products and services in bulk.

Firms are constantly buying the latest hardware, including servers and computers. But even the largest law firms are just medium-sized business consumers. They all bring in much less revenue than Fortune 500 companies and financial institutions that can easily drive down technology costs.

"Middle-market businesses are actually paying for the discounts that others are enjoying," Shenker says. "The middle-market consumer is really bearing the brunt of it."

Meanwhile, law firms are competing every year for the top technology and engineering talent and processes. "I'm not Google," Shenker says. "How do I keep up?"

Joe Shenker, chairman of Sullivan & Cromwell

In search of an answer, Sullivan & Cromwell turned to HBR and then began to outsource some of its functions on a slow, rolling basis. HBR reviewed the firm's technology and telecommunications contracts to see where it could improve quality and costs, finding opportunities to negotiate a better price or combine contracts with a vendor while maintaining or increasing quality, Shenker says. The firm has outsourced staff handling enterprise applications, such as the software lawyers use, and infrastructure, such as servers and other hardware. HBR ensures that computer programs are working, security patches are installed and software is regularly being updated on attorneys' devices. For the firm's disaster recovery system, in particular, working with HBR is advantageous, giving the firm multiple backup data centers, Shenker says.

A significant portion of the firm's IT is now outsourced, Shenker says, but it is still overseeing user development and the way lawyers interface with technology.

The 30 people who left Sullivan & Cromwell to join HBR continue to work on behalf of the firm, as well as other accounts, Shenker says. The change has given those workers opportunities for career advancement, he says.

For instance, Brian Post, who worked with Sullivan & Cromwell's server infrastructure and networks, switched to HBR in May 2017 after working at the law firm for 25 years. At first, he was uncertain.

"All of a sudden, different company, new bosses, new culture," Post says. "It make you a little nervous of the unknown."  But Post says the job change has ultimately been positive for him. He's still working on site at the firm's office, and HBR and the firm provided him coaching, training and expanded responsibilities, including weekly meetings with top firm personnel about technology issues.

"I'm now more involved. I have a seat at the table," Post says. "I feel it gives me more opportunities."

Post also says he's happy with his pay and benefits at HBR, declining to discuss specific changes.

As the HBR arrangement continues, Shenker envisions more of the firm's back-office functions will be outsourced and the number of firm staff who join HBR will grow. No one at Sullivan & Cromwell has yet lost their job in the process, but he says it's possible some positions will disappear and others will be created as technology evolves.

"The purpose of this is not to cut jobs," Shenker says. "The purpose of this is to get better service, better quality, and it's nice to get better pricing."

It has also allowed the firm to invest in technology that can improve client service, Shenker says. Sullivan & Cromwell is now taking the opportunity to explore how more sophisticated AI can help its lawyers.

Outsourcing has allowed Sullivan & Cromwell to see at least a 20% cost savings since it began, Shenker says, noting that it helped drive the firm's profit margin improvements. The American Lawyer has reported the firm's margins grew from 50% to 51.5% in 2018, while its profits per equity partner grew 5.6%. Shenker declines to quantify the firm's total savings and what it pays HBR, but he expects more returns in 2019, allowing the firm to save and invest more.

Michael Caplan, chief operating officer of Goodwin Procter

The firm's outsourcing benefits are not unique. Goodwin Procter has saved $3 to $5 million by outsourcing over the last several years, the firm's chief operating officer, Michael Caplan, says. Goodwin outsources services for a variety of functions, including accounts payable, some marketing and business development functions, media services such as videoconferencing and studio support, a portion of technology security, travel services, facilities management and recruiting, according to Caplan and David Fleming, Goodwin's chief information officer. To do so, it turns to a variety of vendors. Williams Lea handles document processing and videoconferencing, while Goodwin has outsourced help desk support for attorneys and staff in need of technical assistance to Keno Kozie Associates, Fleming says.

While there are some areas Goodwin avoids in outsourcing, such as secretarial services, the firm is considering outsourcing more work in the future. Most of the outsourced staff are in the U.S., or even in Goodwin's office, as is the case for audio-visual support for videoconferencing. The firm hasn't seen layoffs as a result of the outsourcing because some employees keep their jobs afterward, even when their department's services are outsourced to third-party providers, Caplan says.

"Like all law firms, besides revenue, we're very focused on building a strategy to secure future profits," he says. "Outsourcing will help us do that."

Proceed With Caution

Fleming recommends that all law firms consider outsourcing, but that they pursue it carefully, looking closely at their service agreements and who their vendors are hiring. At the end of the day, the vendors need to be up to a law firm's standards, he says, because they could be viewed as an extension of the department providing the services.

"I've had situations where I've had to manage vendor performance," he says. "We had to escalate vendor management and take corrective action."

Shenker is happy with Sullivan & Cromwell's outsourcing changes, but the firm is moving ahead cautiously, he says. It's a challenge to make outsourcing seamless, and to make sure employees are happy and everything works as it should, he says.

"One slip-up on security or anything else torpedoes the project," he says.

Vendor quality is not the only concern. Firms have faced employment suits when employees who lost their jobs in the course of outsourcing believed other factors were at play. Dechert, for instance, was forced to respond to a 2018 lawsuit by two former payroll staffers who claimed that age and sex discrimination led to their firing. Dechert said in court filings that their termination was related to outsourcing.

"Dechert moved to a cloud-based application for finance and human resources and then outsourced its payroll function to streamline processes, improve efficiencies and implement needed controls," the firm said in court. "As a result, the positions held by plaintiffs were eliminated."

A Dechert representative declined to comment for this story.

Ultimately, when law firms outsource jobs, individual employees have much to lose—or gain—depending on their circumstances. For instance, when Katten Muchin Rosenman outsourced its law library a few years ago to LAC Group, some lost their jobs, but the majority remained.

"Some of my former colleagues were told there was no role for them," Beth Schubert, a library staff member, said in an article on the American Association of Law Libraries' website. "Upon hearing that, some said bad things about being outsourced. I understand being upset; I was worried I might not have a job. But many more of us were kept and given a better career path for more pay."

Even though Schubert's direct employer switched, she remained on site at Katten. "I was pleased to see a pay increase in addition to having more responsibility and the chance to start making changes that I (and others) had wanted implemented for quite some time," she added.

'Co-Sourcing'

Despite some of the challenges, Fleming says the legal industry is starting to outsource more "high-value functions," including technology software and infrastructure, compared with years ago, when more commoditized services were ­outsourced. The results are showing on both sides. The popularity of HBR's managed services division has fueled the company's own top-line growth. Its revenue rose 157% in three years to hit $70.8 million in 2018.

Law firm outsourcing is "growing pretty quickly and pretty silently. Firms are doing this without making much noise," HBR's Petrini-Poli says. Based on requests from law firm clients, the company is now interested in expanding its outsourcing services to other areas, he says, though he declines to be more specific. Law firms are also helping drive growth at Williams Lea, where Hart says they account for half of the company's revenue.

Meanwhile, as a growing number of firms are outsourcing departments, some are experimenting with another method entirely. Several Am Law 100 firms are in discussions to create a shared back-office center that would handle a variety of functions, according to J. Mark Santiago, a law firm management consultant at SB2 Consultants, which is working with the firms to create the center.

The idea is still tentative, but the center, which could open as early as spring 2021, would be the first shared among multiple Am Law 200 firms, says Santiago, a former Deloitte partner who previously helped Akin Gump Strauss Hauer & Feld outsource back-office jobs to a third party in Oklahoma and advised Orrick, Herrington & Sutcliffe on moving jobs to Wheeling in 2001.

The firms in discussions, which Santiago declines to name, would pay membership fees in exchange for potentially moving up to 85% of an outsourced department to the center. The center would lower a firm's administrative and operating costs and improve the quality of its services, Santiago says, citing potential savings of 20% or more. For instance, instead of paying a senior-level accountant an $80,000 salary in New York or Washington, D.C., the firms could pay a $55,000 salary to an accountant in a lower-cost area, he says. Employees in the center would only work for one law firm but would share common facilities.

"We call it co-sourcing," Santiago says.

The idea was driven by law firms' increasing desire to pay star partners competitive pay packages while general counsel are demanding services for less and compensation for associates is rising, he says.

"All these pressures—salaries are going up, general counsel trying to keep fees down, technology spend increases," Santiago says. "All of that is eating into profits."

Outsourcing has become one tool for law firms to help stem the tide.

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