With no let-up from clients to cut costs, law firms are finally waking up to the need drive down legal process costs. Gerard Starkey and Anna Reynolds chart the growing trend of firms establishing low-cost outposts

Deutsche Bank's global head of compliance, Simon Dodds, is one of many senior in-house lawyers to have called on City-based law firms to farm out straightforward legal work to low-cost centres.

"Magic circle law firms in particular have a problem with their model. [They have] commoditised to some extent but lawyers are sitting in London – the most expensive place in the world," he told a Legal Week conference.

That was in May 2009.

Last month, Ashurst announced that it is to open a 150-strong legal service support centre in Glasgow while significantly trimming numbers in London. It will receive up to £2.4m in Government assistance should it create 300 jobs in Glasgow in the next five years. 

Its decision to open a legal support hub in Scotland came after Royal Bank of Scotland (RBS), one of its main clients, placed an emphasis on outsourcing in its latest panel review, with law firms required to demonstrate they have sufficient capabilities in place.

The high level of interest this move has generated suggests that the UK's leading law firms haven't exactly rushed to heed the call Dodds made back in 2009 for law firms to adopt innovative measures to drive down costs.

But the pressure has been steadily mounting, primarily, it seems, from banks such as Deutsche Bank, which in 2010 told law firms tendering for its panel that they should use legal process outsourcing (LPO) wherever possible. 

Research conducted by Legal Week reveals that the practice of separating out the straightforward and repetitive elements of legal work and using a variety of methods to carry out that work more cheaply has taken a firm hold within the ranks of the top 30 UK law firms.

Fifteen of the top 30 by revenue either have a formal arrangement with an LPO supplier or have set up their own dedicated service centres. Several other firms, including Norton Rose Fulbright and SJ Berwin are reviewing their options.

It is a far cry from the situation in the early 2000s, when legacy firm Lovells launched its 'Mexican wave' initiative to farm out low-cost property work to a panel of regional law firms.

At the time the initiative was heralded as an innovative way of outsourcing legal services. But there were few, if any, imitators. The scheme is still going strong.

Hogan Lovells calculates that it has handled 10,000 instructions using this model, which features an extranet that helps the participating firms monitor workflow and share relevant documents and know-how.

The first move

In 2007 Clifford Chance broke new ground when it set up a department – known as The Knowledge Centre – in its Delhi-based Global Shared Services Centre to provide transaction and case support to its lawyers. The project kicked off as a pilot, employing just four people, but has now grown to more than 60 legally skilled people. 

But it was only after the onset of the credit crisis that the trend began to gain real momentum.

It was initially in-house legal departments that were doing the running, most notably Microsoft and mining giant Rio Tinto. In 2009, both legal departments started sending lower-cost work to India after teaming up with Integreon and CPA Global respectively. Rio Tinto claimed that the arrangement shaved 20% off its legal spend. 

By November 2009, a survey of the top 30 UK law firms by Legal Week revealed that eight firms had already carried out some form of LPO, including Allen & Overy (A&O), Eversheds, Lovells, Pinsent Masons and Simmons & Simmons. 

Slaughter and May engaged CPA Global while Simmons & Simmons and Allen & Overy struck deals to send work such as document review to outsourcer Integreon's Mumbai office. Pinsents developed a relationship with South Africa-based LPO provider Exigent.

A common element of the first wave of LPOs was the offshore location of the service centres with work being channelled to India and South Africa.

The new generation

Then, in 2010, Addleshaw Goddard signalled the start of two new trends. The firm decided to set up its own LPO-style service centre – as opposed to teaming up with a third party – and it opted to establish the operation in Manchester.

Addleshaws' transactional services team (TST) was launched in Manchester to handle e-disclosure, due diligence, document management and review. Originally staffed by a handful of paralegals, it is on target to reach a headcount of 100 during the course of the summer.

TST is run by client delivery head Andrew Chamberlain (pictured). "Initially, the only option available was to use LPOs based in overseas destinations such as India," he says. 

"But it soon became apparent that sending work abroad was too big a jump. Clients didn't want to see work that was, for instance, being charged at £200 per hour in London go offshore for £35 per hour, but there was no middle-ground on offer.

"I think the LPOs missed the boat a little bit here as it was law firms like ourselves that decided to build their own low-cost centres in the UK, and only recently have we seen the third-party outsourcers look to come onshore."

In 2011, two major City-based law firms emulated Addleshaws, with the difference that Herbert Smith and Allen & Overy took advantage of Government subsidies to set up low-cost bases in Belfast.

Herbert Smith snapped up a Government grant of £734,000 to establish its low-cost outpost. Now known as Herbert Smith Freehills (HSF) Belfast, the office deals with volume work such as reviewing and analysing litigation documents, corporate due diligence and real estate support services.

Allen & Overy received a £2.5m subsidy in return for creating 300 new jobs in Belfast through its business and legal support centre.

Tony Williams, of legal consultants Jomati, is not surprised law firms are attracted to the idea of setting up their own centres. "There's an inherent preference to have the means of production under your own control," he argues. "The concern with outsourcing is that you get stuck in a five to 10-year deal that may not give you sufficient flexibility as the market changes."

But the LPO providers themselves have not been standing still. In January 2012, Integreon opened its first onshore UK delivery centre in Bristol covering document review, contract management, M&A due dilligence and compliance support. In November, it opened a 100-seat document review centre in London.

At the same time significant new LPO players have been entering the market. Elevate was launched by Integreon founder Liam Brown in 2011 and recently hired John Croft, Integreon's former president of business development, to set up a European arm. 

The company turned over approximately $5m (£3.3m) in its first year of trading and Croft says it is in talks with around 20 UK firms, including some within the magic circle.

Another new LPO provider is Capita. Already a well-respected business process management business, Capita moved into the legal market at the start of the year when it carried out a well-publicised piece of e-disclosure work for Pinsent Masons, which piloted Capita's new Krakow-based legal service outsourcing division.

Capita's director of legal services, James Cowan, says the legal division has carried out similar work for several other law firms. And he believes there is an opportunity for the outsourcer to team up with law firms to strike all-inclusive fixed contracts with companies. 

"We are currently seeing opportunities to replace panels for corporates that once used five or six firms but are now looking for one firm to offer a fixed-fee arrangement on a contract basis," Cowan says. 

With new LPO providers coming into the market and both Northern Ireland and Scotland offering subsidies for firms to set up their own service centres, the current state of the LPO market is a fluid one, with law firms and in-house legal departments adopting a variety of strategies to carry out low-value legal work more cheaply.

"We have seen how hundreds of companies and firms have worked with legal service providers, so using a third party clearly works for some," says Elevate's Croft. "On the flip side, doing it yourself means you have more control and can say to clients that nothing leaves your four walls, but it's a drain on capital and management resources for most law firms."

Bob Gogel (pictured), chief executive of Integreon, adds: "Outsourcing is a constant hot topic, most mid-to-large firms are consulting on it and each firm has its own economic model. The market is big enough to have all of these options coexist."

Indeed, HSF is keen to stress that the launch of its Belfast low-cost base has not stopped it working with LPO providers. 

"This is about clients and the market exercising choice," says Libby Jackson, director of HSF Belfast. "In that context, there is certainly a role for legal process outsourcing going forward and we value our relationships with LPO providers."

Hogan Lovells is similarly flexible in its approach to LPO. Alongside its Mexican wave initiative, the firm also works with several LPO suppliers operating from a variety of locations.

It cites a longstanding arrangement for Integreon's Indian office to handle large-scale document review that in one ongoing case involves "many millions of documents".

The legal sector may have been slow to embrace the benefits of outsourcing, but Legal Week's survey of the top 30 law firms suggests the market is reaching a tipping point beyond which firms that aren't seen to be outsourcing low-value legal work or setting up their own service centres will start having to answer some awkward questions.

"The tide cannot be turned," warns Croft. "There are enough people out there delivering legal services differently and more efficiently today that anyone with their head in the sand is likely to be severely disadvantaged." 

Additional reporting by Beau Edwards.

• Click here for the list of UK top 30 firms using low-cost service centres

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Outsourcing models must put quality first – general counsel reaction

Views from the desks of general counsel on LPO show considerable variety. For many lower volume purchasers of external legal services, it seems the buzzword above all else is quality, and that while any reductions brought about by outsourcing are to be welcomed, these cannot impinge upon the end product.

Meanwhile, GCs at larger financial institutions like Deutsche Bank, Royal Bank of Scotland and JP Morgan demand external advisers use offshoring and legal process outsourcing (LPO) to bring down cost. 

Some use low-cost centres themselves, with Deutsche counting LPO sites in Birmingham, Jacksonville and Mumbai, while Citigroup's legal team boasts a large back-office operation in Belfast.

For Tom Wood, head of professional services industry at Barclays, moves like Ashurst's are likely to have been driven in part by a push from clients. "Firms are under fee pressure from clients who expect more for less, or it could be that some areas of work are quieter than in previous years," he says.

"At many firms, core corporate work hasn't been as strong as it was and it's prudent to look at ways to improve margins."

Land Securities general counsel Adrian de Souza says he encourages London-based firms to look at undertaking low-cost work more effectively.

"We wouldn't make it a requirement, but our preference is for the same firm to manage all aspects of an individual asset portfolio throughout its lifecycle, so they are more likely to get instructions if they have access to a lower cost base elsewhere.  

"These offices need to be proper offices in the sense they are fully integrated and aligned with the overall objectives of the firm and provide a good cultural fit.

"Nabarro does it well with their Sheffield office and Hogan Lovells uses a form of it through its Mexican wave programme. Eversheds does it very successfully through its national network."

"We leave it to the law firms to decide their value/volume models," adds Ed Gretton, head of legal at Hanson. "Clients are of course often driven by pricing, and if that means the law firms being innovative to achieve value in today's market, then they have to consider low cost outsource models. 

"But quality and first class communication in legal services are always just as important, and law firms as well as clients need to manage the delivered outsource results extremely carefully, or they will very quickly lose value and the acclaimed costs savings could end up proving harmful."  

Quality is also the watchword for Gareth Williams, head of legal and company secretary at Countrywide, who says law firm outsourcing projects rarely translate into direct cost savings to the client.

"The most important thing for me in terms of legal process outsourcing is the quality of the advisers; at that Ashurst level, it's a given that the quality is there, but whenever we work with firms that use outsourcing, the minute the quality drops, we move on."

Alex Newman

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Case studies

Clifford Chance
In 2007 Clifford Chance launched a low-cost base, called The Knowledge Centre, in New Delhi, India (pictured). The magic circle firm became the first major firm to set up its own "offshore captive" legal process outsourcing operation.

The Knowledge Centre was formed in 2007, initially as a pilot with four people who were hired in June 2007. The Knowledge Centre, managed by New Delhi-based director Mark Ford, is now home to 60 staff, who in the firm's words, "provide support work to our legal teams outside India".

The centre does not provide any legal advice or practise Indian law, only working with the firm's own lawyers elsewhere in the Clifford Chance network, providing support work on routine or time-consuming matters such as research, analysis and document discovery.

In the 2012 annual review, the firm revealed that The Knowledge Centre provided support work to our legal teams in 27 offices outside of India and supported on a total of 850 matters providing almost 50,000 hours of support to London, Singapore, Paris, New York, Amsterdam, Washington, Hong Kong, Milan, Dubai, Madrid and Abu Dhabi.

Ashurst
Ashurst's new Glasgow (pictured) base will open later this year and is expected to house 150 staff within the next 12 months, including 30 legal analysts – a new role similar to that of a paralegal – and 120 business support staff. The firm is looking to recruit heavily in the Scottish market while some London support staff will be offered the opportunity to relocate to the new base.

The launch of the office is being supported by a £2.4m grant from Scots economic development agency Scottish Enterprise, based on the firm employing 300 staff at the base within five years. The office will be led by former Dundas & Wilson partner Michael Polson, who left the Scots firm last year.

The 30 legal analysts will support Ashurst's disputes and finance practice in London. Business support roles cover IT, business development, finance, human resources and compliance.

However, the move has received mixed reactions particularly among the Scottish legal market, with senior partners at Scots law firms questioning the government's funding initiative. One partner said: "We have a strong labour pool here – well respected – and with financial incentives offered it only works as a mechanism to provide outsourcing at a discount.

"The Scottish legal profession contributes a huge amount to the economy but incoming firms from London will now be in the position to offer higher salaries, although lower than in London, which Scottish firms will be unable to match – and all subsidised by the taxpayer."

Hogan Lovells
Hogan Lovells launched its Mexican wave initiative in 2002, since when it has handled more than 10,000 instructions. The principle behind this initiative is that Hogan Lovells carries out the higher grade legal work and the more routine work is outsourced to a panel of regional law firms.

The benefits are cost and administration savings for the client and a dedicated portfolio of higher-value work for Hogan Lovells. According to Hogan Lovells, "the operation is supported by a unique extranet which supports workflow management and the management of all relevant knowledge and documentation around transactions".

Hogan Lovells also outsources legal work to LPOs Exigent and Integreon. South African-based Exigent carries out document support work for Hogan Lovells while a deal with Integreon has been in place for several years and has, according to the firm, "proved highly effective on large and complex litigation matters that require document review exercises on a significant scale".

Currently, Hogan Lovells is using Integreon's Indian office "for the review of documents relating to a large on-going litigation matter for a major client involving many millions of documents".

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Qualified roles under threat

The rising tendency for law firms to either call upon LPOs or set up their own low-cost legal centres – or both – has led to concerns that the number of legally qualified roles on offer at law firms will fall as a consequence. 

The argument is the increasing prominence of the paralegal carrying out process elements of work, such as document review or due diligence, which would otherwise be handled by junior lawyers, and on some occasions partners, could lead to a reduction in training contracts and newly qualified positions. 

However, with law graduates already struggling to secure contracts, some feel the growth in legal outsourcing offers people an alternative career path to the traditional law firm. 

Addleshaw Goddard's head of client delivery, Andrew Chamberlain, believes the legal industry is bursting at the seams and a sea change is required. 

"It's not good that this country has thousands of law graduates who can't get training contracts," he says. "The industry is at over capacity and needs to undergo major change, after which I think we'll arrive at a new normal where there will be a range of different skills and experiences in law firms compared to those we see today, and more generally different resourcing models."

Chamberlain set up Addleshaws' Manchester-based Transaction Service Team (TST) which has grown from five paralegals to approaching 100. With the typical paralegal salaries ranging from £16,000-£20,000, the savings available to the firm are palpable. 

Addleshaws says it is committed to offering its TST staff career progression and is currently developing long-term career paths. In addition, the more talented individuals have been parachuted into the final rounds of the training contract application process with a handful finding success. Meanwhile, Herbert Smith and Allen & Overy are both considering offering training contracts to legal assistants employed at their Belfast nearshoring ventures.

John Croft, UK head of LPO Elevate (pictured), says: "There will inevitably be a slightly different look and feel to law firms in the future. With organisations such as ourselves, Axiom and Riverview, there will be a raft of new job opportunities that didn't exist a couple of years ago. 

"There is now a career alternative for law graduates to join legal service providers like us as a long term employee, rather than going down the associate/partner career path at a law firm and that's appealing to some people."

Although the new roles being created by the change do not offer the route to qualification graduates perhaps would hope, the alternative of working outside the legal sector or even of unemployment is hardly appealing either. 

Parabis Scotland head Tom O'Malley believes Ashurst's move into Glasgow offers local legal talent looking for work a potential stepping stone on to greater things. 

"Scotland has a large number of law graduates and paralegals struggling to find work so the offer of 150 jobs provides a real boost," he says. 

"The talent pool here is big and while the jobs on offer may not be at a qualified level, the people are pragmatic and commercially aware enough to understand that a year or two in a paralegal role will be a foot in the door and benefit the CV."

Law Society of Scotland president Lorna Jack concurs that people should not look down their noses at the lower grade jobs but is unsure whether the rise in LPO use will be the sole reason for a potential slowing down in newly qualified lawyers.

"This in itself shouldn't affect the number of qualified Scottish lawyers coming through but instead provide a good law-based job for law graduates and possibly act as a stepping stone to traineeship at a law firm or a number of other legal roles."

• For more, see Near-shoring and LPO takes hold as more top 30 firms eye moves