In the course of two hour-plus long interviews over the past couple of weeks
with Ray Bayley, co-founder of NovusLaw, I learned that everything I thought
I knew about outsourcing was wrong. Or rather, that I hadn’t thought about
outsourcing, really, at all. Read on.
NovusLaw cruises under the radar online (barebones overstates the depth of
their website), but Ray has
an impressive background. He was the managing partner of business process outsourcing
at PriceWaterhouseCoopers when it was the #1 business process outsourcing ("BPO") organization in
the world, and he was also a member of the firm’s US management committee,
consisting of 15 people overseeing $9-billion in revenue in the US (PwC at
the time had 170,000 employees including 9,000 partners, almost half of whom
were in the US).
If you’re not familiar with BPO, in its simplest form it’s hiring another company to perform business activities for you. More fully, BPO is something you should consider when a necessary, but not “core,” activity could perhaps be performed externally by a more focused and efficient organization. We don’t think of hiring temps through an agency or making travel reservations as outsourcing, but that’s what they are. And it’s unimaginable that we’d generate electricity for our offices or write word-processing software, but once upon a time those were candidates for BPO as well. For that matter, when any Fortune 500 hires your law firm, they’re engaging in BPO right then and there–and your firm is the fortunate target.
In 1999, as Ray reports, Arthur Levitt began to break up the professional
service firms–Accenture came out of Andersen, BearingPoint out of KPMG, and
so forth. Meanwhile, the BPO business of PwC was sold to IBM and when Ray chose
not to follow, he asked himself the question: "Where can we apply our
knowledge of the global best practices learned at the largest professional
services firm in the world to provide value in some other professional services
industry?" (I
report on Ray’s background not to impress–which I suspect would estrange him
from anyone automatically impressed–but to provide context for what follows.
He’s not a newbie at this stuff.)
He embarked on two years of market research, meeting over 200 people in the legal industry in the US and the UK, including General Counsel’s, AmLaw 100 and UK 50 partners, and law school deans, trying to assess the market need. And the findings were that there were three market failures:
- On the demand side, "cost is the biggest issue on GCs’ minds when considering outside counsel." Consider these survey results: When asked "are law firms doing their best to reduce costs?," 84% of AmLaw partners agree, but only 6% of GC’s. The marketplace failure is in this disconnection: Law firms can be better off by being more innovative, and GCs can benefit by getting lower costs. Out of 45 GCs asked the question, 44 reported that they’d give a larger share of "wallet" to a law firm that could offer NovusLaw type services.
- On the supply side, new graduates from top law schools are being offered
enormous amounts of money to do work that they hate. Many studies, including
some by Professor William
Henderson of Indiana University Law School/Bloomington, and other work
by NALP, consistently show a statistically
significant negative correlation between associate income and job satisfaction.
(The correlation doesn’t mean more money makes people unhappy. It means that
the conditions that come with high associate income–high expectations for
billable hours, a low level of communication from partners about career prospects,
low communication about the state of the firm overall, no pretense of "work/life
balance"–make associates unhappy.) Also on the supply side, the changing
demographics in the US and the UK over the next ten to fifteen years will
further decrease the pool of available top-notch law school grads. - The third "market failure" is what Ray calls "legal work
that’s not lawyer work." Compare the healthcare industry, where about
4% of all workers are doctors: In the legal industry, more than half of all
workers are lawyers. "How much of the work done in the US legal industry
is legal work but not lawyer work?," Ray asks rhetorically. The
best estimates, he reports, are on the order of 70-80% according to the two
years of market research that he did, and he goes on to describe a study
done at the Institute of International Economics in which two economists
concluded that 77% of the US legal industry is susceptible to globalization.
So what does NovusLaw intend to do to address these failures?
First of all, let’s clarify some terminology. What everyone calls "outsourcing" is nothing other than the familiar "make vs. buy" decision. All law firms are already intimately familiar with this decision point, because corporate clients are already "outsourcing" complex legal work to their firms rather than doing it inhouse in the law department.
Ray also provided a brief history lesson in reminding us that the word "offshoring" was invented by John Kerry when he was running for President; before that, the conversation was simply about globalization, or the familiar notions of importing and exporting.
Where NovusLaw fits in this constellation is as a truly global company, and
Ray gave me the example of a current engagement knitting together a global
supply chain of legal ideas and legal work, where they’re providing services
to a GC in London, touching upon legal issues in Eastern Europe, based on a
contract written in Singapore, overseen by lawyers in Chicago, and where the
actual routine legal work is performed by people in India.
It doesn’t get much more global than that, and Ray offered this engagement
up as an example of truly "boundary-less" work, where people on the
project have no particular awareness of geopolitical, border, or time-zone
issues. (As has been said, "it’s always daytime somewhere.")
What marketplace resistance have they encountered?
"A few years ago, we would hear things about ‘the unauthorized practice
of law,’ various unspecified ‘unethical’ concerns, and the objection that
‘we can’t benefit from BPO–law is more an art than a science.’ Today we’ve
stopped hearing those things."
So what do you hear instead?
"Who’s done this before" is the big one. "In my mind," says Ray, " the key to resistance now is simply resistance to change. Nobody ever gets up in the morning deciding to change," as the Harvard Business School professor Rosabeth Moss Kantor has discussed.
But ultimately, what matters to NovusLaw is that there are leaders, laggards, and the vast group in the middle waiting to see what’s going to happen. "Maybe fewer than 10% of all the institutions we work with are true early adopters, but that’s all you need at this early point. Others are truly in denial about the immutable forces of economics–maybe 20-30% are in this category. They’ll say ‘It’s unethical, the ABA will never let it happen, it’s the unauthorized practice of law, no no no.’ But the vast middle isn’t hostile and isn’t adopting it; they’re waiting to see."
OK, I say, but what does NovusLaw actually do?
In two words: Document review.
They:
- collect
- filter
- process
- prepare for review
- review, and
- produce
documents. For example? "Well, litigation, obviously, but also M&A
transactions, Hart-Scott-Rodino second requests, contracts, regulatory documents,
and so forth, all in an effort to extract meaning to be able to tell lawyers
what the documents really mean without them having to spend excessive time
and money going through volumes of documents themselves."
And nothing else?
"Actually, no, nothing else. If you look at our offering memo, it says
that we plan to offer IP work such as patent applications and patent prosecutions,
but as we started exploring what that would require, we realized that they
were far different processes than document review, requiring different technology,
different processes, different personnel, and so forth, so we decided to
keep it simple and focus only on document review. If you read the management
and business literature on strategy, it’s a mainstay that if you try to do
too many things well you’ll confuse your clients and your own people; we’re
not going there. Michael Porter said
‘Being all things to all people is a recipe for strategic mediocrity,’ and
I believe he’s right."He continues: "Too many people who say they’re our competition
claim to do lots and lots of things; I just have to believe that’s an inadvisable
way to go." And who is your competition? "While
there are new companies coming into the industry every day with a lot of
different business models, I
don’t want to sound corny, but I really believe our biggest competition is
the status quo—the resistance to change. But you know what? That’s
fine. We
don’t necessarily need 100 or 200 clients; what we really want is half a
dozen, or 10 great clients."
How do you size the market?
"Well, if you assume that 70% of the typical Fortune 500 GC’s budget
goes to litigation, and that only 2% of cases go to trial, you know immediately
that discovery is an enormous slice of the pie. We also know that,
slicing up ‘discovery’ into interrogatories, depositions, and document review,
document review is by far the most labor-intensive and time-consuming. We
think it’s a reasonable guess that around 40% of the Fortune 500’s outside
legal spend goes to document review."
Let’s talk about quality: How do you measure it, how do you ensure your
clients it’s top-notch? Because I imagine one of the towering reservations
people have about operations like NovusLaw is that things won’t be done to
the exacting standards of BigLaw.
"Obviously it starts with who we hire: with recruitment. The
average lawyer at NovusLaw has approximately eight years of experience,
and we believe we’ve been able to attract talent on a par of those in AmLaw
100 firms with comparable experience. Everyone interviews with me and
each of my partners, as well as going through nearly a half
dozen other interviews to ensure cultural compatibility. NovusLaw is
not for everyone. If
you can work independently, have a strong work ethic, and if you’re smart
about BPO—and
if you have a sense of adventure—then you’re a good candidate for us. And
I think our attrition statistics bear this out: Only 3-4%/year. It’s
a tough process to get in, but once you’re in, you’re in."
Skeptics would say that brings you to parity with the AmLaw. What else
are you doing?
"Quality is one of our ‘cornerstone’ initiatives, along with ethics,
security, and business continuity planning—all of which report directly
to me. In
fact, we started our quality program before we even started the company. But
now our ‘lean six Sigma’ processes and quality control programs are certified
by Underwriters’ Labs, with full-time six sigma black
belts on board that do nothing else but focus on quality. ‘Lean,’
which is a term that comes from the Toyota
Production System, stands for the methodology
used to eliminate non-value-added time and activity, a/k/a waste. ‘Waste,’
in turn, has a very simple definition: Anything the client wouldn’t
want pay for if they were given a choice."Six Sigma is what we use to eliminate defects as we measure and analyze
our work processes. Typically, undocumented processes will yield 20,000—60,000
defects per million opportunities. Six Sigma is designed to get that
down to fewer than 4/million. On our most recent document review we
performed at Five Sigma, or approximately 200 defects per
million. By
the way, that’s about 200 times better than the average in the legal industry
today."
Ray is on a roll.
"Every other portion of corporate America has been re-engineered, ‘Six
Sigma’d,’ and so forth—just look at finance, IT, HR, marketing, supply
chains, R&D, you name it. The only function that’s been immune
is the legal function. I think part of the reason is that lawyers don’t
think in terms of BPO and often don’t understand it. That leads them
to believe that legal processes cannot be systematized or statistically measured,
which isn’t the case."I’ll give you an example. One of the things we need to be able
to do very very well is forecast what the costs of a document review engagement
will be, because we price our services on a fixed-fee basis. We
want people to pay for our work, not for our time, so we detest
the billable hour. But
this means that in calculating our price we can’t afford to be wrong."So
we’ve built a model using multiple regression analyses and have
determined there are 17 independent variables influencing the cost of a document
review project. You
can imagine what some of them are—number
of documents/pages, turnaround time, what shape the documents are in when
they’re delivered, etc.—and when we tell people this they’re usually
at some stage of disbelief. An AmLaw
100 partner said, ‘The document review process is an oral tradition; there
are no checklists or ways to measure it,’ but we’re finding that there are
actually several ways to measure quality and predict costs."
Tell me more about cost and pricing, then. Where do you stack
up against doing the same work in the US or the UK under the conventional model?
"We’re typically 50—80% less, but the important point is that
it’s not just about having people on the other side of the world. That’s
why words like ‘outsourcing’ or ‘offshoring’ don’t describe what NovusLaw
is: A truly global, ‘boundary-less’ organization. Of course
people are cheaper in some jurisdictions than others, but only about half
our overall cost savings come from personnel; the other half, and the interesting
and important half, come from process optimization, quality management and
technology, the things we put into place at PricewaterhouseCoopers."We’re not in the business of ‘lifting & shifting:’ Taking what’s
done here and moving it to a cheaper jurisdiction in order to do it the same
way. That’s
a brute force approach that adds nothing to the quality, reliability, and
repeatability of the work. It’s fundamentally an unsustainable business
model."
I ask Ray if this doesn’t mean he foresees a future of disaggregation in the
delivery of legal services. And of course he absolutely does. I
have written about how Hollywood movie production relies on bringing together
"just in time" teams to create a movie: A director, producers,
actors, scene, lighting and costume designers, scriptwriters, as well as everything
from location scouts to cameramen, grips, and catering crews, and Ray mentions
the same analogy: Imagine assembling an on-the-spot team to staff a case
or a transaction. Of course, to a large extent this is already what happens
inside law firms when a new matter comes in. But imagine extending it
outside the firm to include other individuals and firms with specific expertise
that you couldn’t get inside.
According to Michael Hammer (Harvard
Business School professor and expert on operational efficiency), the adoption
curve of BPO follows this trajectory:
- You get it;
- You adopt it internally across your firm; and finally
- You integrate it across suppliers and clients.
Another industry, Ray notes, that has "in its gene pool" a facility for assembling
ad hoc just-in-time teams is the construction industry. The combination
of developers, architects, designers, general and sub-contractors that comes
together to build any building of reasonable size or scope never existed before
and will never exist again.
This leads me to venture the following thought experiment:
"You said that you could go into virtually any AmLaw 100 firm today
and reduce the cost of the document review process 25% to 40% using process
optimization, quality management, and technology. That
gives me an idea. The first reaction of any partner to that type of
discontinuous disruption will be to resist, but I wonder if there isn’t an
opportunity here. We
know the cost—economic and human—of associate attrition seems
never to have been higher, and one of the reasons all those departing will
cite is the mind-numbing nature of much of what junior associates do, which
is document review."What if a firm could get NovusLaw to do 95% of the document review,
leaving just enough for the associates to have the exposure to it that they
need so that they understand what’s truly involved—but not such an overdose
that these Ivy League thoroughbreds revolt at the repetitiveness of it all? Wouldn’t
that address both clients’ increasingly vocal concerns about fees and, at
least to some measurable extent, the shocking level of associate attrition?"
Ray elaborates on the thought:
"We’ve thought of offering our clients the opportunity to ‘second’
associates to us for a period of months so that we could teach them a
new way to manage e-discovery from start to finish and learn how to manage
a global team. Wouldn’t
that be a terrifically exciting career opportunity? But so far, no
one has taken us up on it."
Why, I wonder, stop there? If Michael Hammer is right that BPO can extend
outside the walls of the firm to suppliers and vendors, it shouldn’t be seen
as an exercise in throwing something over the transom and hoping it comes back
nicely wrapped up with a bow on top. (This is the blunt instrument model
where the law firm pushes document review out to NovusLaw, who performs their
magic and returns the results on time and on budget but without much if any
interaction.)
Why not envision a reciprocal, embedded relationship—a busy two-way
street, if you will—where the law firm and NovusLaw collaborate on defining
the strategic and client-oriented goals of the document review? The goal
would be to ensure not just the document review is done professionally, on
time and on budget, and so forth, but to achieve a joint consensus on why these
documents are being reviewed to begin with: What are we attempting to
demonstrate? Is that the most valuable/compelling use of this set of
documents for our client? What are we missing? What is the other
side going to attempt to demonstrate from this same set of documents? What
should we be on the lookout for that we’re not expecting (for better or worse)? And
so forth.
This brings us back to Ray’s initial resistance to the term "outsourcing,"
and what he derides as the "lift & shift" model. If that’s
all there is to it, intellectually you have accomplished little more than cutting
your personnel costs, and you have taken the first step towards positioning
your firm as one that competes on price alone. Once you have one foot
on that down escalator, it’s hard to keep the other planted in the land of
elite quality. Ray reminds us that John Ruskin once said, "There’s hardly
anything in the world that someone cannot make a little worse and sell a little
cheaper."
Again, why not envision something completely different:
- An intimate strategic alliance;
- Permitting you to do things better, with less waste, and with greater reliability
by orders of magnitude; and - With the potential to liberate your expensive, highly-tuned, high-performance
associates from being sentenced to years of repetitive clerk-work?
Now that actually sounds like "business process optimization" with a vengeance.
