Outsourcing is here to stay. Whatever you call it, and whatever you think of its quality, clients have tasted of the fruit of the forbidden tree and they’re not going back. If document review can be conducted by Ivy League law school grads trained at white-shoe and Magic Circle firms for $50/hour instead of $350/hour, what’s not for a client to like?
Of course, “outsourcing” comes in many forms. Essentially, there are two dimensions to dividing this world, providing the always-handy matrix:
The population of the cells in this table is, rest assured, by no means exhaustive; it’s merely indicative and representative. (PR people for omitted firms, please hold your fire!)
The point is simpler: Every cell of the 2×2 matrix is occupied, and betting people would put money on the population of each cell growing, not diminishing.
A particularly interesting firm, which has ambitions you may deem admirable or frightening or a combination thereof, is CPA Global, which bills itself as the world’s leader in legal process outsourcing, and which raised a mere $700-million in a private placement in the UK this past spring. For that nice sum, the investors got what? 49%. Not even control. This is a war chest on a scale the AmLaw 10 and the Magic Circle, put together, would be very hard-pressed to match. And they’d probably have to cede control.
So far, that’s merely reality.
The more interesting question is, What do you do now?
Last month, McKinsey published an article called When companies underestimate low-cost rivals, which poses the dilemma thus:
When low-cost competitors appear, one of the toughest decisions facing executives in companies with premium products and brands is whether to respond. Should the company or business unit adjust its strategy to meet the low-cost threat or should it continue business as usual, with no change in strategy or tactics?
Of course, Clayton Christensen famously wrote about this topic in general in The Innovator’s Dilemma, which I always thought should actually be titled either The Innovatee’s Dilemma or The Incumbent’s Dilemma. Established firms are at existential risk of ignoring or surely underestimating the nature and magnitude of the challenge, and the crux of the dilemma is that the risk arises precisely from the incumbent firms doing what they ought to be doing, namely focusing on their existing clients and existing competitors.
As if that weren’t bad enough, there’s another dimension to the challenge posed by young and initially quality-compromised, unworthy, upstarts: It’s not just that they can steal market share from the relatively small slice of clients who are extraordinarily price-sensitive, it’s that they can slowly change client behavior.
As an example, McKinsey cites the entry of low-cost European airlines–Ryanair, easyJet, et al. It’s not just that they have taken market share from British Air, Air France, Lufthansa, etc., it’s that they’ve changed passenger behavior. People now think nothing of going abroad for the weekend, or even of commuting to another country for the workweek and returning home, by air, every weekend.
Another challenge is that down-market upstarts can, accretively and incrementally, begin to move upmarket. EasyJet has adopted this strategy, leaving Ryanair at the rock-bottom price point. In the US, Southwest may be moving in a similar direction to EasyJet; they’ve introduced some (modest, to be sure) upscale alternatives such as a “Business” offering that permits priority boarding for a fee.
This is where it really begins to get dangerous in law-firm land.
As McKinsey drily reports:
Customers are often quite keen to have more competition among suppliers and in some cases help low-cost suppliers upgrade their offerings by providing information and support.
The ambitions, and business strategy, of CPA Global and their ilk are no secret: Bypassing law firms altogether and marketing their offerings directly to clients. If another word for outsourcing is disintermediation, welcome to the ultimate disintermediation: They would like to take the law firm out of the equation altogether.
Before you throw up your hands and stop reading, consider the smoothness of the upward-rising curve of value in all the integrated services law firms provide. Ooops: Did I say integrated?
Traditionally that has surely been so, and there are arguments why all those services should come from one firm, but if the economics of chunking up those services and mixing and matching providers become compelling enough, sophisticated GCs may feel it worth a rethink.
For example: There are clear benefits to having the same team of lawyers that reviewed the critical documents prepare the witnesses and draft the briefs applying case law to the anticipated facts. But if all those activities are being performed at New York (or San Francisco, or Chicago) rates, the benefits of that integration better be strong. Because the CPA Globals of the world will offer to review the documents and deliver witness and exhibit binders at Bangalore, or at least at Fargo, rates.
And this is precisely where the independent outsourcing firms can have an impact. Once clients begin to get accustomed to the notion of being able to unbundle, or unchunk, legal engagements-be they disputed matters or transactional ones-there’s potentially little end to it.
First, clients hire, or “request” (read: demand) that you hire an outsourcing firm for, say, document review. Next, the outsourcing firm makes it known that it can prepare witness binders, and next, that it can aid in the preparation of witnesses.
Do they threaten the Supreme Court appellate practices, the white collar crime practices, the top-tier M&A, government investigatory or regulatory inquiries, etc.? Not on your life. But might they cause us to have to engage in serious re-examination of all the components of our business model? Here it comes.
The bad news is that the days of charging $300/hour to have Ivy League graduates review documents are over, but the good news is that that mind-numbing experience will no longer be a rite of passage and you might actually have to provide your associates with more interesting work clients will pay for. In the bargain, your associates will be speeding their development into becoming real lawyers.
This exposes the intersection between low-cost competition and the need for accelerated evolution of your firm’s core business model in the wake of the Great Reset. Ask yourself what are the implications of the following aspects of the new normal, taken together:
- Associate recruitment, and attrition, are down.
- Associate/partner leverage is probably in decline to a new, lower plateau.
- Clients are increasingly effective at insisting that associates deliver tangible contributions to matters if the firm expects to charge for them.
- And as we’ve seen, clients averse to paying our retail rates for our traditionally bundled services have new alternatives, the providers of which fully intend to move up the value chain.
I would argue the implication is clear (“stark,” if you prefer, but as for me, I’d choose “energizing,”or maybe even “chance of a lifetime”): our associates–indeed, your entire team–needs to move up the value chain even faster than your new competitors.
Serendipitously, the new normal landscape features far more favorable conditions in which you can do so:
- Fewer associates, with less attrition, means each must be more valuable to the firm (scarcity: economics 101)
- Enabling you to invest more in their professional development
- While they are freed from the intellectually vacuous scutwork of the past
- And as ever more powerful, sophisticated, and nuanced technology finally transforms Knowledge Management from a backwater (or a dream, or an irrelevance) into a daily, real world tool for professionals.
Finally, you might be surprised to hear that this all invites reflections on why your firm exists in its current configuration, and the market’s tolerance for it to continue in that form.
In 1937, Ronald Coase wrote one of the most famous, and shortest (a dozen pages or so) articles, The Nature of the Firm, for which he decades later won the Nobel Prize, in which he explained why firms exist at all.
Why create the management overhead, bureaucracy, and administrative friction entailed in any firm of scale? Why not just purchase whatever is needed, when it’s needed, on the open market?
Coase’s answer was that large groups will enjoy a systematic advantage over smaller ones when large-scale coordination is called for, using skills organized more effectively and economically through personal interactions than through the market, with its inevitable transaction costs.
As globalization and technology have diminished these transactions costs, the need for your for to continue to demonstrate its economic and market superiority is under stress.
Your response must be to assume the mantel of an innovator within your own walls. Because the innovators outside your walls are coming.