Bringing it Home: What the Decline of Offshore LPOs Means for Law Firms

Futurist and technology guru Richard Susskind recently envisioned a “decomposed” legal world where clients would pay less for processes and more for high-value advisory work.

Susskind’s prediction isn’t new and it appears he was right. Legal process outsourcing (LPO) dominated the Australian legal industry throughout 2015 as law firms searched for ways to cut costs and improve productivity, but declined quickly in 2016.

We take a look at how this passing trend started and examine what drove its recent turnaround.

The origin and rise of LPOs

Large law firms have been under enormous pressure over the past decade to cope with reduced legal spending from a new breed of savvy clients.

Speaking with the Law Institute of Victoria, Susskind notes that lawyers are facing the ‘more-for-less’ challenge above all else. That is, clients are less willing to spend money on legal services, however the amount of legal and compliance work that needs to be done today has increased.

“The only way of coping with [the rise of legal and compliance work] is to find new ways of doing the routine, repetitive work in law offices. Clients tell me they don’t mind paying for senior lawyers for their creativity and expertise, but so much of what goes on in the law is process-based,” said Susskind.

This decomposition or disaggregation of services has been a looming theme in the disruption game, but the legal industry found a cost-effective solution: outsourcing process-based work such as document review, discovery, due diligence and legal research to offshore jurisdictions at a much lower cost.

Today however, many reports including the 2016 Australia: State of the Legal Market report by Melbourne Law School and Thomson Reuters Peer Monitor®, indicate that many Australian law firms have in fact cut down on offshore outsourcing. So what has driven this change?

Bringing it closer to home

According to the report, the diminishing demand for LPO providers in countries such as India, the Philippines and South Africa is due to a number of reasons, including the fall in the Australian dollar, labour cost arbitrage and competition from onshore LPO providers.

Global legal practices are eschewing the offshore approach, and are bringing routine process work back to – or closer to – home.

Herbert Smith Freehills is one of the firms expanding its “nearshore” captive operations and leading this charge. In 2016, the firm established a global centre for alternative legal services in Melbourne to undertake high-volume, document-intensive work for its offices in Australia and abroad.

The Melbourne alternative business unit, known as ALT, has around 65 onshore employees including about 50 practitioners who provide a range of services including document review, technology services (examining email archives, voice recordings, online chat boards and even Twitter accounts for regulatory investigations and front end disputes), transactional support, due diligence and asset management for real estate clients.

A focus on better service in place of outsourcing

Libby Jackson, the firm’s global head of alternative legal services, said the firm has seen increasing interest from Australian clients who are highly focused on innovative and valuable service. They want access to cutting-edge technology, best-practice processes and cost-efficient solutions.

The firm’s Melbourne centre was built as part of a strategy to tailor its business to the needs of clients both in Australia and across the globe, bring together the disciplines of law and technology and focusing on global growth.

The firm has also discovered that while clients still have the option of dealing with offshore LPO providers, many prefer to use the ALT centres to keep their work within Herbert Smith Freehills.

“LPOs experienced a honeymoon period in Australia a few years ago, however one of the challenges raised by in-house counsel is making the interface between external lawyers and an LPO work seamlessly,” Jackson says.

While outsourcing is an option, “there is concern about communication, a fear of hidden costs and rising project management issues due to the gap between external lawyers and LPO providers.”

What sets the ALT business model apart from an LPO provider is that it’s an interwoven service where clients can access a cost-effective offering, which is “seamlessly part of the firm”.

“Our teams take responsibility for the output and deliver a high-quality service that is excellent value for money. Clients tell us this is reassuring and that it makes commercial sense to have the volume aspects of a matter conducted by the same firm that leads on the strategic advice.

“It means our service is risk-wrapped with no potential for accountability gaps in service delivery emerging between possible multiple providers.”

Disaggregate and innovate: looking to the future

Should law firms be concerned that LPOs are on the decline?

LPOs are powerful disruptive businesses that have introduced greater choice in the legal service market, and different models can only be of great benefit to clients and the industry at large.

“My view is that choice should be embraced. This is the nature of the market and I see greater competition as an exciting opportunity for innovation,” says Libby.

As clients continue to exercise choice in the market and seek disaggregated legal services to meet their complex needs, firms would do well to embrace the competition and find innovative ways to offer clients cost-effective and bespoke solutions.

“Openness to the necessary change required for innovation in legal service offerings is undeniably tough for lawyers”, notes Libby.

“This is not due to a lack of creativity, interest or commerciality, which lawyers certainly share with other professions. It’s simply that we are trained to be analytical, risk-aware (and risk-averse) and to deeply understand what the rules are to interpret them for the benefit of our clients. Innovation doesn’t follow rules or precedent. So unlike other professionals, it’s a twist in thinking for us.”

Embracing choice when finding solutions

Where should firms start when thinking about ways to innovate?

“It sounds obvious but start with your clients”, says Libby.

“Understand what’s important to your clients and wrap your initiatives firmly around their needs. Be ready to invest in technology, however appreciate the necessity to be commercial and do not over invest in one solution until you have tested, talked to clients and audited your results.”

For firms who want to innovate, one area to keep an eye on is artificial intelligence (AI). Just as the rise of LPOs ushered in the first disaggregation phase via labor arbitrage. AI has begun the second phase of legal delivery disaggregation.

According to Forbes magazine, technology, not labor arbitrage, is the “engine for a better, faster, cheaper delivery of certain legal services.” AI is fast becoming a useful tool for reviewing and standardising legal documents in firms and corporate legal departments.

Firms should also look at using document automation software to increase efficiency, reduce the time and costs associated with drafting manual documents and improve client relationships by providing a better service at a lower cost.

Greater competition in the legal service industry can either be seen as a negative, or an exciting opportunity. Firms that offer clients a choice between a cheaper solution and one that provides more assurance of a job well done are helping them decide on the best course of action for their needs.

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