Finding equilibrium

Outsourcing the provision and processing of knowledge presents clear business benefits, but where must firms draw the line in order to achieve the right balance of internal and external provision?

By Joanna Goodman

Outsourcing the provision and processing of routine and standardised know-how presents clear business benefits to firms of all sizes. The dilemma is knowing where to draw the line in order to achieve the right balance of internal and external provision: one that maximises efficiency and profitability, while retaining and enhancing the specialised knowledge and expertise that helps to differentiate a firm from its competitors.

What can be outsourced?
As David Jabbari, global head of know-how at Allen & Overy, observes, the threshold is shifting. “Law firms have been outsourcing IT and document production for several years, and some have even managed to outsource very basic legal work ,” he says. “Some standard legal knowledge has gone into the domain of free information, while basic research and routine updates are produced by commercial suppliers. Clearly there is no need for firms to duplicate these resources and their availability broadens the range of functions that can potentially be outsourced.” He adds that technology – the core enabler of outsourcing information and know-how provision – is extending the scope of outsourcing models, fuelling the growth of online and offshore services.

External know-how services offerings include legal updates, standard documentation, knowledge processing and other routine legal-support work, including due diligence. Many firms look to online subscription services, such as those provided by Practical Law Company (PLC), to complement their in-house know-how resources. Or, in the case of small firms which do not always employ professional support lawyers (PSLs), to provide them with a know-how infrastructure. PLC employs over 100 experienced PSLs to create and continuously update standardised documents, precedents and generic know-how. As Guy Baring, director of sales and marketing, explains, PLC’s service offering goes beyond information. “Our PSLs work in teams covering specific practice areas to produce intelligently filtered current awareness,” he says. “They review all the publicly available sources and make a judgement call on whether a particular case or regulatory development is relevant to the work of lawyers in that practice area.”

Duncan Ogilvy, KM partner at Mills & Reeve, has successfully developed the firm’s relationship with PLC into an extension of its in-house professional support teams. “If perfectly fit-for-purpose material is available within a subscription, there is no point in continually reinventing the wheel,” he says. “A well-managed outsourcing partnership frees PSLs from routine work, particularly in precedent-based areas like corporate and property and gives them a more interesting firm-specific role.”

Although PLC provides firms with sector-specific know-how, in-house PSLs still need to contribute the unique insight that the firm has gained from its experience of particular clients and transactions. According to Jabbari, “Our job is to deliver insight and client focus. The core differentiator of a law firm is our intellectual capital: demonstrating to our clients that we have superior knowledge and understanding of a particular area of the law. Clearly, we can’t outsource that.”

A clear business case
There is, however, a clear business case for firms of all sizes to outsource the delivery of standard know-how. Cost reduction is a key driver. Clients’ expectations have shifted: although they continue to expect high-quality services, in some practice areas the legal services industry is moving away from hourly billing towards fixed and capped fee-based arrangements. Commercial providers support this strategy by offering considerable economies of scale in delivering high-quality practical guidance. Hence outsourcing know-how is particularly prevalent among in-house legal departments, which tend to be under pressure to limit costs and headcount. For law firms, in addition to the cost implications, speedy access to additional external resources improves response time and helps know-how teams deliver efficient services to their internal and external clients.

Another driver is the transference of the risks associated with maintenance and monitoring activities as well as the demand on resources. As Baring explains, firms need significant numbers of experienced PSLs to keep large amounts of material up to date. “Many firms originally produced large amounts of know-how internally. However, they quickly create a monster as they then have to maintain it. So with every note they write, they increase the maintenance burden,” he says. “It is therefore important to think quite carefully about what to buy in and have maintained externally and what to build internally and take on the responsibility for maintaining. Firms have finite resources and a growing obligation to maintain know-how can be a real problem.”

Richard King, head of legal knowledge at Herbert Smith, agrees that outsourcing routine information gathering, updating and maintenance can reduce the burden on in-house PSLs. It also increases flexibility by providing access to extra PSL support to deal with high volumes of enquiries and cover additional or interim requirements. He adds that offshore outsourcing, which is becoming increasingly popular, also offers the benefit of out-of-hours support. However, he highlights potential issues around quality control and cultural synergy.

Unsurprisingly, the interest in outsourcing know-how has led to some unease among PSLs. However, contributors to this article agree that outsourcing will never entirely replace internal know-how support.

Deciding what to outsource
The key decision is what to outsource and what to retain in house. As Justin Harness, international know-how manager at Lovells explains, the starting point for all firms is to identify the core differentiating elements: the crown jewels that differentiate a firm from its competitors. This needs to be considered in the context of the business’ strategy and inside knowledge of a particular sector gained from dealing with clients and undertaking specialised matters

Catherine Kenwright-Cadman, head of legal information and KM services at Irwin Mitchell, estimates that this represents about 20 per cent of the firm’s know-how. The next step is to look at the remainder and find a balance of internal and external resources that best delivers the firm’s strategic objectives. Like any other business services, the economic drivers must be considered. What are the costs of providing knowledge/know-how in-house compared with using outsourced providers?

Another main consideration is deciding what constitutes standard documentation. “Although there is clearly scope to consider outsourcing some know-how resources, there are other specialised products which it makes little sense to seek to outsource as the required knowledge and expertise resides within the firm,” explains King, adding that there are also products which can fall into either category, depending on the firm and the practice area. “For example, some firms are rather sensitive about their model forms, while others are happy to utilise PLC to create and update them,” he says.

Clearly, deciding what know-how, if any, to outsource varies considerably by firm and by practice area. For example, in some specialist practice areas PSLs need to work very closely with fee earners and truly understand their clients and the legal work they undertake.

Wendy Small, head of KM at Eversheds, has adopted a business-like approach to know-how provision. “Every year we reassess our information and knowledge strategy against the needs of the business. As part of that process, we look at the possibilities of outsourcing – or insourcing – particular services. Although PSLs have up-to-date legal technical skills, they often end up doing routine work. If we can outsource that, we can focus their efforts on delivering the firm’s strategic objectives.”

Small has established a formal analysis and testing schedule to evaluate potential suppliers. “One of my team will work with the relevant practice lawyers to compare the external provision with our own. If we decide to invest in the service, the practice group has to put forward a strong business case to show how the resources being released by outsourcing will be rediverted to enhance profitability or service excellence,” she explains.

Ogilvy adds that although the process of achieving best value from external providers is far from straightforward, it helps the firm clarify its objectives in terms of know-how. “We recognised that maintenance responsibility was considerable and growing, so freeing ourselves from it has given us significant extra resource,” he says. “Deciding which resources should be maintained by PLC and which should be retained in-house also had the advantage of requiring us to define what we expected from our PSLs.”

The outsourcing decision is also severely limited by the availability of provision. This varies significantly by practice area, with most providers, including PLC, focusing on commercial work. As Kenwright-Cadman observes, although PLC provides high-quality commercial know-how, there is no similar provision in personal injury (PI) and other commoditised services, therefore firms specialising in these areas are obliged to create their own precedents and standard documentation. The same applies to specialist areas such as the high-end banking and finance work undertaken by Allen & Overy.

Different approaches
Although approaches vary between firms, they all involve combining internal and external resources and some degree of matrix management. Some firms seek to amalgamate all their knowledge resources seamlessly into a fully integrated know-how system. For example, fee earners at Mills & Reeve access one list of knowledge precedents, albeit that some originate from PLC and other suppliers while others are produced in-house. “The user simply posts their query on the KM system and the solution just pops up. The origin of the solution is a secondary matter,” says Ogilvy. PLC facilitates this approach by providing standard documents that in-house PSLs can annotate to produce tailored know-how. Figure one illustrates how PLC’s services can be combined with a firm’s proprietary know-how to support its lawyers.

Other firms prefer to make the original source of each standard document or precedent absolutely clear to the user. Clearly the best way of presenting know-how varies according to the profile of the firm. Although some practice groups within Lovells utilise PLC, the responsibility for managing and presenting know-how lies with the PSLs in each practice area, supported by the central know-how team. At Irwin Mitchell on the other hand, a small, centralised know-how team supports the entire firm managing the delivery of internal and external support to its eight offices and 2,300 staff.

Key risks and challenges
There is general agreement that depending on an external supplier for generic know-how resources involves an element of risk. First and foremost, maintaining quality is critical. “In order to do the insightful work well, you have to make sure that the underlying legal developments are covered comprehensively,” explains Jabbari. “If you outsource knowledge production, you have to be certain that it is of sufficiently high quality. Our strategy is to place reasonable reliance on third-party content, but always to retain overall control over what is delivered to our clients. Therefore, our PSLs cross check the quality of the data and add insight and opinion that demonstrates its significance to our clients.”

King agrees. “At Herbert Smith we invest in excellent information, people and resources and we’re not prepared to compromise on quality. Therefore, potential providers have to demonstrate that they can deliver a product that is at least as good as ours.” He adds that another challenge is around service-level agreements to ensure that legal research is delivered effectively, on time and to the requisite standards.

The same proviso applies to the processing of know-how. “The question is the degree to which external providers are able to classify content accurately, given that they would not have the same firm-specific business awareness as internal staff. This raises the issue of quality control,” says Harness.

Another critical factor is the risk associated with depending on an external provider for core business tools.

Harness highlights the necessity of devising an exit strategy and contingency plans to deal with the possibility of changes in the supplier relationship or service quality that might require transitional arrangements.

Small believes that increased competition in the market would help to address that risk.

The choice of provider is therefore key. In addition to the cost factor, Small identifies key considerations as “high-quality work, timely service, good reputation, knowledge of the legal industry and the marketplace, flexibility and, crucially, a willingness to understand and work with our business.”

Ogilvy also emphasises the importance of developing cultural synergy between the firm and its know-how providers, observing that close working relationships beyond the client-supplier relationship facilitates the prompt provision of appropriate guidance tailored to the requirements of the firm and its clients. Mills & Reeve enhances this by collaborating with PLC on some types of specialist know-how.

Kenwright-Cadman agrees, adding that Irwin Mitchell has created a specific know-how role dedicated to managing supplier relationships.

It is equally important to consider internal relationships and manage any changes sensitively. Any change to a firm’s know-how will also affect what is required of PSLs. A client-focused approach, which concentrates on highlighting business impacts and adding insight rather than creating and maintaining documents and precedents, requires PSLs to have a different skill set. “Although they don’t necessarily deal with clients directly, they work on products which are delivered to clients or help fee earners deliver excellent client service,” explains Small. “Effectively managed outsourcing improves the job satisfaction of internal staff by giving them more opportunity to be innovative, develop new products and utilise their skills.” Outsourcing routine research also reduces the opportunity for junior lawyers to learn on the job, so PSLs in some firms are becoming more involved in training and development.

The future of know-how provision
Know-how provision in the future is clearly influenced by the forthcoming changes in the legal services market, which is about to open up to external competition. This has driven more firms to explore the possibilities of outsourcing the provision and maintenance of non-core know-how and concentrating their internal know-how efforts on the unique knowledge and expertise that enables them to deliver a bespoke service to their key clients.

This trend suggests a move towards a sharper division between standardised generic know-how and firm-specific resources, shifting the know-how function from business support to an increasingly creative and consultative role, with more direct responsibility for developing and delivering client services.

Knowledge professionals would in effect become matrix managers, outsourcing various elements of a deal to the most appropriate suppliers while retaining control over the overall process – and, of course, the crown jewels. According to Small, “Anyone in the legal market who is not considering outsourcing or co-sourcing as an option is not taking a holistic view of how they might improve internal and external service delivery and utilise their staff in the best possible way. Outsourcing represents a big opportunity but it will never fully replace the internal offering.”

However, Small and others acknowledge that progress in this direction is severely restricted by the lack of choice. Although new suppliers are entering the market, PLC is still regarded as the industry standard for external professional support. Unless the external market in legal know-how provision expands, with more suppliers covering a broader range of specialisms, the potential of any knowledge outsourcing strategy will continue to be limited.

Until then, certainly in specialist firms and practice areas, PSLs will be required to continue producing and updating standard know-how, while those with access to high-quality external resources will be able to focus their efforts on enhancing the unique knowledge and expertise that differentiates their firm and underpins its position in a highly competitive business environment.