December 05, 2019

Much like business processes in every other sector, law firm operations can be divided up into 3 distinct categories:

1. Core activities: the essential, defining activities of the firm (i.e., providing legal services). If the firm handed these activities over to an external party, it would either be creating a competitor or dissolving itself.
2. Critical but non-core activities: these are activities that, if not performed exceptionally well, will cause unnecessary operational risk or put the firm at a competitive disadvantage. In large law firms, marketing, IT and Finance are good examples of these activities.
3. Non-critical, non-core activities: these activities, although important, confer no competitive advantage. Even if performed poorly, they are unlikely to seriously harm an organization in the short term. Examples include cleaning, catering and security.

Over the past three decades, as companies in virtually every business sector have found themselves in some form of economic transition, the outsourcing of both critical non-core activities and non-critical non-core activities has been incredibly useful for controlling costs and for improving the level of service for such activities. Massive outsourcing companies like Wipro, Capgemini, Cognizant and Accenture now employ millions of people worldwide, performing all of these non-core services at levels of efficiency previously unseen, and at far lower costs than were ever attainable inside their clients’ walls.

It’s not a stretch to say that in virtually every corner of the corporate world, the outsourcing of non-core activities is seen as a key tool for meaningfully improving a company’s bottom line.

Except for many large law firms.

We estimate that non-core activities make up approximately $100 per hour billed by a lawyer to a client! Firms such as Clifford Chance and Baker & McKenzie claim to save $20–40m per annum by running these non-core activities more efficiently. So, in these challenging economic times, the question law firms increasingly face is not whether they will do something with their non-core activities – it’s what they will do with them.

Specifically: will they outsource these non-core activities to a third party, or will they keep these activities in-house and move them to a lower-cost location? This is the classic “make versus buy” conundrum, and virtually every Global 250 law firm is facing this decision, just as their corporate clients have for decades.

The firms that have chosen to “make” (i.e., build) operations in lower-cost locations include Pillsbury (Nashville, TN), Orrick (Wheeling, WV), and Wilmer (Dayton, OH), Bingham (Lexington, KY), Allen & Overy (Belfast, Northern Ireland), Herbert Smith (Belfast, Northern Ireland), White & Case (Manila) Clifford Chance (Gurgaon, India – after using a third party to Build, Operate and Transfer), and Baker & McKenzie (Manila).

As for the firms that have chosen to “buy”, law firms typically don’t make press announcements about these deals, but many firms have engaged third parties to manage non-core services, including DLA Piper, Paul Hastings, Cleary Gottlieb, Dentons, Freshfields, Latham & Watkins, CMS Cameron McKenna. For a fascinating discussion of the structure of, and business case for, LeClairRyan’s legal solutions center in Richmond, VA, see Understanding the UnitedLex – LeClairRyan Deal: Interviews with Management by Ron Friedmann).

Note that even when a firm “makes” a captive, they often “buy” some of their support services from third-party service providers. Bingham, Orrick, White & Case, and Allen & Overy are good examples of this “hybrid” approach.

So, the key question for the remainder of the Global 250 law firms is: what are the advantages and challenges of each of the two approaches? Again, the collective experience of the corporate world provides very simple, obvious answers.

One obvious advantage that both “make” and “buy” have is that each approach saves money over current operations on a purely labor arbitrage basis. That is: the same or similarly-skilled people doing the same work for the same or lower wages in a facility with lower operating costs. Thus, make versus buy appears to be a push. Unfortunately, that’s a surface-level judgment.

In reality, because law firms are ill equipped to build and operate lean, best-in-class operations, the cost savings that are achieved pale in comparison to the buy approach. This is a critical point that will be explored in detail in a future article, but experiences with “make” decisions in all other sectors are almost universal on this point. Capital expenditures and other up-front costs are just the tip of the iceberg in terms of the financial challenges law firms immediately face when choosing make over buy.

But firms also choose to build their own operations due to concerns over a potential loss of control in relation to the non-core activities. In this context, “control” can encompass both risk management and commercial elements, and it includes considerations such as (1) control over quality of service, (2) control over personnel (including hiring/firing), (3) control in terms of investments in, and ownership of, infrastructure (e.g., capital assets), (4) control in terms of data security, confidentiality or intellectual property, and (5) control in terms of ownership of something of value (e.g., the actual operation itself). It can also just be a somewhat-unexplainable discomfort (e.g., “I just mean control, you know?”).

No matter how the concept of “control” is expressed, outsourcing companies long ago learned how to help their clients maintain control in the “buy” environment. This topic will also be explored in detail in a future article, but suffice to say that a top tier outsourcing company will provide its clients with a host of options and alternatives regarding the outsourced environment (e.g., facilities, people, technology in use, transfer of capital ownership, etc.) in order to ensure that such clients’ concerns in this regard are resolved.

This is a key point: outsourcing companies are in the business of implementing strategic transformation. They are unmatched in two critical respects that relate to concerns over control: (a) minimizing and managing operational risk and (b) efficiently performing non-core services. Restated, the services that outsourcers provide, while non-core to other businesses, are core to them!

It’s that simple: to be profitably in business, the outsourcer must effectively minimize and manage risk, while providing a higher level of service, at a lower cost, than could otherwise be achieved by their clients. Successful outsourcing providers do all of these things effectively; those that can’t are not viable businesses and don’t last.

Thus, going the “buy” route not only has the advantages of significantly lower need for capital, faster time to launch, and higher cost savings over time, but it is also a transformative construct that minimizes operational risk and improves the levels of service for a firm’s non-core activities.

So, for those firms that are thinking about “make versus buy”, the good news is that both approaches will improve your bottom line – and you can do both. But, if law firm management truly wants to (a) maximize the firm’s cost savings, (b) achieve long-term operational efficiencies, (c) remove distractions associated with non-core activities, and thus (d) place a greater focus on the firm’s core activities, “buy” will always win. Hands down.