A recent article over on SIG on sourcing legal process outsourcing services did a great job of pointing out that sourcing legal services is not the same as sourcing other types of services if the goal is cost reduction or value generation. Traditionally, an outsourcing project looks for savings by way of:
- Headcount Reduction
by outsourcing FTE roles to resources who can do the same job at a lower cost
- External Spend Reduction
by moving spend to those firms that can perform a set of functions at an overall lower cost
Headcount reduction works fine for accounting, where there are rows and rows of AP/AR people reviewing invoices, collecting payments, and making payments, or marketing, where advertising, print media, video, and radio are best outsourced on a project by project basis than staffed in house. This doesn’t work that great for legal where, given the size of an average legal department, the scope of an LPO engagement may be 10 FTEs. Given that average in-house legal spend is 40% of total legal spend, that, on average, only 25% of these roles can be outsourced, and that the maximum savings is 50%, the maximum savings achievable is 5% of total legal spend. Average is probably about 3%. No outsourcing effort is worth it if only 3% can be saved.
And external spend reduction works great for marketing which has outsourced an entire project, including brand building, message generation, and print production to a single firm when brand building should have been outsourced to brand specialists, messaging to advertising specialists, and print production direct to a printing shop that can offer steep discounts for high volume. Bur for legal, where you are simply shifting cookie-cutter legal tasks (such as fixed-form document review, property titles, etc.) from a legal firm to an LPO, savings are minimal given that outsourced spend is typically 60%, less than 50% of the tasks will typically be transferrable, and savings will probably only be 20% as they are still skilled tasks, for a maximum savings of 6%, with an average savings of 3% to 4%. Again, not worth it.
Outsourcing legal is all about value identification and generation. First, as the article points out, the supply management team needs to figure out what legal services can be “unbundled”, which of these could be outsourced, and whether the savings opportunity is there. Then, when they have identified those opportunities that could generate enough savings to be worthwhile, supply management needs to determine how to maximize the non-financial value-generation opportunities that are quite real and more valuable than any cost savings that may be achieved. Specifically,
- Resource Re-Allocation
Existing legal staff needs to be focussed on high-value work as there are very limited resources. Legal staff should be focussed on risk-management, not document review. On forth-coming compliance requirements, not process improvement. And on supply management contract simplification, not one-time contract generation.
- Acquisition of New, Previously Unavailable, Services
There are only so many legal resources in-house, and their knowledge is limited. They will not be able to provide guidance on every potential market that the business might want to enter, or be aware of all of the impending regulations in the US, EU, and China that might affect the business, or provide detailed due diligence on every contract presented to the business by a potential customer.
In many legal departments, counsel spends 90% of their time reviewing every routine change requested by a counter-party in a legal negotiation instead of focussing on what the real risks are and how to negate them. They spend a lot of their time reviewing existing processes with respect to current compliance regulations to insure reasonable efforts are taken to ensure compliance instead of focussing on what is coming down the pipe and what significant organizational shifts will be required. And on generating a custom contract for each major supplier instead of optimizing a contract generation and management system that will allow negotiators to generate a customized starting contract with all relevant clauses and terms at the press of a button. That’s why in-house resources need to be focussed on high-value tasks.
And with global market penetration becoming more and more important as first-world economic growth declines by the year, the ability to access more expertise than can be found in house is becoming more and more critical.
Thus, a sourcing team that adopts a value-based approach to legal services can provide the organization with value that goes well beyond what any cost savings could possibly achieve.