Forget LPO, the future is LSO…

As part of our work in the LPO advisory market, Orbys recently carried out a series of structured interviews with managing  partners and senior LPO partners across the top 30 major law firms at the heart of the legal outsourcing market, during which detailed quantitative information was captured on the extent of current and future LPO and LSO (Legal Services Outsourcing) activity within enterprise legal functions and law firms.

The reason we concentrated our efforts on the top 30 major law firms is that they occupy a pivotal central role within the legal outsourcing market: they have a privileged view of the actual and future end-customer demand for LPO and LSO across the multiple enterprise legal functions that form their client base; they are providers of LPO solutions to enterprise legal functions via their subcontract relationships with offshore LPO providers; and they are also significant customers for LPO in their own right as they seek to drive down their own cost bases through the use of LPO.

From these interviews, a couple of things became immediately clear:

  • LPO will continue to spread to more organizations, be adopted more widely across organizations, and spread up the value chain. As a result, the volume of LPO activity is set to accelerate dramatically.
  • However, LPO is likely to remain essentially a collection of tactical point solutions even if these multiply in number and extent. As such, it is different to the wider strategic outsourcing relationships that have come to dominate other in-house functions such as IT, finance and HR and that will eventually become the norm for legal functions as well.

It is this wider legal outsourcing—outsourcing of the complete legal service on a full-spectrum or best-of-breed basis across one or more law firms with significant service and commercial obligations—that Orbys terms LSO and that we expect to eventually become more significant than the current LPO market.

The deal which started the trend early was Unilever’s 2007 transfer of its entire trademarks unit to Baker Mackenzie, which subsequently transferred the bulk of the work offshore to the Philippines. The deal, which is still in place, includes the operation and administration of its 160,000-mark trade mark portfolio.

Another significant milestone in the LSO story was the deal between Tyco and Eversheds in 2007. This involved consolidation down from over 200 different external law firm relationships to a primary strategic relationship with Eversheds and delivered Tyco a claimed 26% cost reduction. The deal moved towards a fixed fee with significant incentive bonuses and penalties based on key performance metrics such as litigation success ratios and overall legal spend.

Since then Eversheds have been blazing the trail, signing up Cisco, Samsung, Severn Trent Water, Akzo Nobel and DuPont for LSO deals. Other law firms are following suit, for example, Linde Group has signed an LSO consolidation deal with DLA Piper, and Levi-Strauss signed an LSO consolidation deal with Orrick, Herrington & Sutcliffe in 2009 which meant that, except for brand protection work, Orrick became sole law firm supporting Levi-Strauss.

But, despite this level of activity, Orbys found that many law firms (60%) where yet to even consider LSO. Our opinion is that as more firms start to embrace this new business model, probably following some ‘toe-dipping’ with LPO, the competitive pressure from clients will ensure that LSO reaches the strategic agenda soon enough.

As experienced advisors on all aspects of outsourcing, our guidance to anyone considering taking the LSO journey, law firms and clients alike, would be to consider carefully your overall objectives for the change, your strategy for achieving those objectives and what the most appropriate roadmap might look like – sometimes the shortest route is not always the best. There are significant benefits to be gained for both parties and only a well thought out deal will ensure that these are achieved.