Wednesday, September 19, 2007

Outsourcing and Offshoring Gain Traction in U.K. Legal Market

On the western edge of New Delhi, amid the glittering office developments of the suburb of Gurgaon, the newest part of Clifford Chance's global empire is open for business. Unlike the firm's other offices, however, this outpost is not practicing law, still a prohibited activity in India for overseas law firms. Instead, the Clifford Chance office houses a group of Indian IT and accounting specialists, part of the Magic Circle firm's back-office function. By moving these operations out of higher-cost offices in Europe and the United States, chief executive David Childs predicts, the firm will save £30 million ($60 million) during the next three years.

When it comes to outsourcing, the U.K. legal community still lags far behind many multinational corporations and major U.S. firms -- but U.K. firms are beginning to catch on. Clifford Chance's new Gurgaon facility makes it the first global firm to locate part of its support business in India. Two other Magic Circle firms -- Allen & Overy and Linklaters -- have already outsourced some back-office functions to Indian contractors, while Eversheds has outsourced a large chunk of its IT function to a U.K.-based specialist.

No major U.K. firms have gone so far as to outsource legal work, and not every British firm is convinced of the virtues of outsourcing even back-office functions. Freshfields Bruckhaus Deringer has yet to make a move in that direction, although chief executive Ted Burke admits that outsourcing is something that the firm will have to look at. Slaughter and May is even less interested. "Clifford Chance operates a different business model from ours in the approach to international legal services," says practice partner David Frank. "Their decision to outsource to India will be driven by economies of scale that are not relevant to us."

Lawyers and consultants attribute the legal sector's reticence to conservatism and concerns over confidentiality. But outsourcing companies such as Williams Lea are now targeting British law firms, confident that demand will grow. "Many of our other markets have reached a plateau, and we've noticed an upsurge in interest from the U.K. legal market," says Tony Davies, business development director for Williams Lea's legal division in the United Kingdom.

Among U.K. firms, A&O took the lead in 2003 when it signed an agreement with outsourcing specialist OfficeTiger to move part of its document management function to the Indian city of Chennai. In Linklaters' more modest foray offshore, it now draws IT support from India-based IT specialist Pro Systems.

Then there's Clifford Chance's more radical bid to cut costs. In 2004 the firm outsourced part of its document production function to an Indian center operated by Integreon Managed Solutions Inc., a global outsourcing specialist, which then advised Clifford Chance on setting up its own facility in New Delhi. To date, the firm has focused on moving basic accounting and IT functions to India, covering such things as payments to suppliers, invoices, expenses and IT system development.

In contrast to outsourcing efforts by other Magic Circle firms, Clifford Chance's Indian staff are all direct employees of the firm. "It's all fairly small-scale compared with what financial institutions have done, but having 100 people in New Delhi will be a big deal for us," Childs says. Two senior members of staff, operations director Wayne Phillips and financial controller Jo Harvey, have relocated to India to manage the office. By keeping the facility part of Clifford Chance, the firm maintains direct control while taking advantage of economies of scale. "You need to treat the offshore center as an integral part of the firm, with complete transparency between it and the rest of the firm," Childs says. "It sounds fairly obvious, but these are areas where you can make mistakes."

The question for Clifford Chance is how much of its business it can transfer overseas. So far it has only moved IT and accounting operations out of London, with New York and Germany next on the list. Childs refuses to comment on which, if any, business areas might follow. "We don't want to affect morale among what is a very good cadre of business services staff [in the U.K.]," Childs says. Outsourcing specialists such as Roy Marshall of Magellan Consultancy Services Ltd. suggest that paralegal work could be handled from a lower cost base offshore; marketing materials or pitch documents could also be prepared from a remote facility.

Outside the Magic Circle, Eversheds has undertaken one of the most ambitious outsourcing projects, signing a deal last December with European IT services provider Computacenter plc to outsource a large chunk of its IT operation. This agreement covers such functions as Eversheds' IT service desk and IT training and saw 79 former employees of the firm transfer to two U.K. Computacenter offices. U.K. managing partner Bryan Hughes describes the move as "largely cost-neutral." Instead, the drivers were access to more sophisticated IT systems and a realization that the IT function could be managed better by a dedicated supplier. "We're not IT experts," Hughes points out. Although Eversheds hasn't moved anything offshore, Hughes expects to visit India later this year to assess various options. "There is a hint of inevitability about it," he says.

To a large extent, the U.K. firms are catching up with many of their U.S. counterparts. Orrick, Herrington & Sutcliffe, perhaps the most aggressive outsourcer, first established its own global operations center in West Virginia in 2002 to handle some support services in IT, finance, human relations and marketing. Two years ago it outsourced the rump of its document management function to Williams Lea, again in West Virginia. Baker & McKenzie, meanwhile, was one of the first to transfer some support functions abroad to what it rather imaginatively calls an "insourced offshore facility" -- a 350-strong operation in Manila that handles various IT and marketing functions, saving Baker around $10 million a year.

Reducing overhead is at the top of the list for most firms considering the outsourcing route. A legal secretary in India, handling basic secretarial work such as transcribing files, costs £12,500-£14,000 ($26,000-$28,000) annually, compared with up to £35,000 ($70,000) in London. Suppliers and consultants, however, stress that it's not just about the bottom line. "Cost is the hook, but improved service levels and getting access to better qualified people are definitely ancillary benefits," says Magellan's Marshall. Having access to IT or secretarial support located overseas can mean that a firm is covered 24 hours a day and thus is better placed to cope with the demands of cross-border cases or deals.

Marshall admits that the whole concept of outsourcing still carries some negative connotations. "The gut reaction is that it's about call centers, but this has nothing to do with call centers," he says, alluding to the customer complaints that recently forced British companies Powergen Ltd. and Lloyds TSB Group plc to close their Indian call centers. Some firms have concerns over keeping client matters confidential. Williams Lea says that it has yet to have a security breach; keeping control of offshore operations, as Clifford Chance and Baker & McKenzie do, provides even more of a safeguard.

The pressure to improve profitability while associate wages and property costs continue to soar means that interest in outsourcing and offshoring among British firms will only grow. Clifford Chance's New Delhi pioneers can expect company soon.

Richard Lloyd
The American Lawyer

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