Casual or Committed?

Law firms working with outsourcers have pursued various strategies in their hunt for efficiency. Some have merged, while others prefer alliances or loose relationships. Which strategy will win out in the end?
Casual or Committed?
TIMOTHY MURPHY, A PARTNER at McMillan LLP, was having lunch with Christopher Sweeney, co-founder and CEO of ZSA Legal Recruitment, at a downtown Toronto restaurant called Reds when the conversation turned towards innovative programs McMillan was considering as it, like so many other law firms, looks to cut costs and deliver better value for clients. At the time, McMillan was looking at building a homegrown network of contract lawyers, tapping its alumni and lawyers on the Street who might be bumping up against mandatory retirement or who might prefer occasional work. Sweeney seized the opportunity to talk about LexLocom, a company ZSA started that provides outsourced contract lawyers, among other services. He suggested they talk about a possible deal.

A few weeks later, Sweeney and his partner Warren Bongard were in a McMillan boardroom meeting with Murphy and Peter Willis, another senior McMillan partner, and they made their pitch for a formal relationship with LexLocom. Willis says the ZSA partners were pleasantly surprised when McMillan said it wasn’t just interested in doing something, but “interested in doing something exclusive with them.”

That was the beginning of what was to become a partnership. It took a long time to get the deal actually signed because McMillan spent a great deal of time internally looking at various structures. It ultimately decided to set up a separate subsidiary law firm called Prefix Legal LLP that offers only contract lawyers. And those contract lawyers come only from LexLocom, with the work being reviewed by McMillan. LexLocom lawyers will be charged out at between $110 and $175 an hour.

Willis says that, before finalizing the arrangement, McMillan had discussions with the Law Society of Upper Canada about what they were planning to do and how they were proposing to structure it: “We wanted to get their input to make sure McMillan wasn’t doing anything that caused the Law Society concern.”

Blessing duly received, Prefix Legal LLP had to set up accounting, financial management, marketing and its own web page. The new subsidiary was officially unveiled this spring, about 18 months after that first lunch, with Peter Willis as its Chief Operating Officer. Will Prefix be looking at acquiring other types of legal outsourcing companies or technology in areas such as e-discovery, document management, contract management or due diligence? “No, we expect the growth from this point forward to happen organically,” Willis says, “but if something came our way that made sense, we wouldn’t rule it out.”

That’s kind of the problem. As firms like McMillan look at ways to bring down costs and grow revenue, they’re finding outsourcers that specialize in one thing and can offer a certain type of work at low cost and high quality. The question becomes not so much whether to use them and their platforms, but how.

Dating, going steady, marriage — or staying single and using the same tools to build from the ground up?

AT THE START OF THIS YEAR, there was something of a small revolution at McCarthy Tétrault LLP, and it speaks volumes about where the legal market is headed when it comes to outsourcers. The firm acquired Wortzmans, a respected firm with about 100 contract lawyers that specializes in litigation support and data governance. Unlike Prefix Legal and LexLocom, these firms aren’t going steady; this is a marriage. Wortzmans will remain in its existing office and retain its own email and document servers, but founder Susan Wortzman is now an equity partner at McCarthy. In Toronto, McCarthy’s e-discovery people moved over to the Wortzmans office at the start of the year.

Here’s where the revolution part comes in. While Wortzmans, now a division of McCarthy Tétrault, is maintaining its brand, it “will absolutely work with and continue taking mandates from other law firms and working with clients directly,” says Matthew Peters, McCarthy’s national innovation leader and a technology partner. Other law firms have been very receptive to the arrangement, he adds.

The financial arrangement? “Susan Wortzman is a partner at McCarthys and, while we’re keeping it as a separate division with separate servers, the financials are all part of McCarthys.” In other words, in the hyper-competitive Canadian legal marketplace, with firms grappling to grow revenue and market share, some law firms will be paying McCarthy for things like e-discovery, data searches and data management. It’s a whole new world in terms of the traditional law firm model.

McCarthy has also built a contract-management platform with a South African outsourcer it’s had a relationship with for four years. And it’s building an in-house due diligence program with a number of technology providers for use in mergers and acquisitions. “We’re testing it out on some deals right now,” Peters says. Neither of these will be made available to other law firms: they’re for McCarthy clients only. That’s important because M&A is frothy high-end legal work and due diligence is an essential piece of it. With a growing number of outsourcers offering due diligence, Peters says it’s a “defensive move” to keep the work inside the firm.

“We’re all competing for this type of work, and if law firm A can find a way to drive more value for certain types of litigation or M&A or whatever, that gives them a competitive advantage in the market.”

IN THE OLD DAYS — just a few years ago in this fast-moving area — it used to be that the external legal advisor did everything on a deal. With an increasing number of in-house counsel coming from the ranks of big firms, many have found it’s a better value proposition to do a lot of this work in-house rather than getting a law firm to do it.

The next natural progression, Peters believes, would be for in-house law departments to either go directly to outsourcers or — far better from a law-firm perspective — partner with a law firm that can do the work using the same automation or platforms outsourcers do. “A client may only do five deals a year whereas the law firm should be doing 500,” says Peters. “That scale should allow the law firm to deliver it in a more high-value way.”

Is there some concern that in-house departments will start cutting out their law firms and working with outsourcers directly? Anne Ristic, who oversees business planning as co-managing partner of Stikeman Elliott LLP’s Toronto office, says it’s an excellent question. “We all think about it and talk about it in the lingo of disruptors, but are these disruptors that will replace what we do and put us out of business or are they useful tools that help us do our work for our clients more easily and efficiently?” She takes the latter view, at least in the short term.

“My hypothesis is that the world is always changing. There’s new stuff coming out all the time that does require that ‘human element’ trusted advisor, and that we should be focusing on that and trying to build the technology and outsourcing alternative staffing tools to free up more of our lawyer time to do those things.” Stikeman uses outsourcing mainly on e-discovery, and it relies on looser business relationships (the “dating” model).

The law firm tried a pilot project that used due diligence software a few years ago and a number of clients didn’t like the idea, so the firm abandoned it. But there have been some major changes in the technology, and it is running another due diligence pilot project this year. As self-learning AI systems are applied to outsourcing software, the technology is becoming increasingly interesting.

Matthew Peters of McCarthy Tétrault says that, at the end of the day, work like due diligence and contract management is not the kind of thing in-house departments really want to staff for anyway. “We’re having more and more of those conversations with clients” and they want to free their people up to do higher-value work. “So this actually presents an opportunity for law firms to take back some of the work that has gone in-house.”

SWEENEY OF ZSA, who is a seasoned legal services market-watcher, sees McCarthy’s acquisition of Wortzmans as emblematic of the tremendous scramble occurring to win corporate work. Clients are now putting everything out for RFP, he says. “Law firms that have worked with a client for years and years are finding all of a sudden that there’s a small piece of work — and they’ve got to bid for it?”

Firms might not be happy about it, but they do what they have to because the stakes are so high. Much of the “sexy high-end legal work associated with huge deals is increasingly not being done in Canada.” That’s because a lot of the expansion of Canadian businesses has been overseas, he says, pointing to the pension funds as an example. “When they go overseas, they don’t use Canadian law and they don’t use Canadian lawyers.”

Even in cross-border deals, which account for most of the high-end M&A deals that make headlines, “the lawyering’s being done in New York even if it’s a Canadian company. That’s the frothy work that is fairly price-insensitive. Clients don’t really care whether the legal bill is $2 million or $4 million on something like a $2-billion takeover.” What they do care about, he says, are the smaller pieces of work, “and they want firms to do it for, say, $300,000. If you say no, then they say they’ll go to someone else even though you’ve been their lawyer of choice for 20 years.”

Firms see some of the lower-end document review and due diligence work as a form of education for junior lawyers so, instead of putting an associate on it and billing them out at $350, they’ve been writing the time off. But at the end of the day, Sweeney says, “that model’s not sustainable. You’ve got to make money somehow.”

That pressure is why so many law firms are developing outsourcing strategies, if not outright relationships, with outsourcing firms. But it comes with a cost: those junior lawyers.

Sarah Millar, who heads the discovery management group at Osler, Hoskin & Harcourt LLP, says an increased use of outsourcing means “firms will take fewer juniors,” and it’s already caused law firms to rethink staffing, with overall student recruitment numbers much lower than a decade ago, she says. “But this work is at the lower end of sophisticated law work. It’s highly repeatable and highly commoditized, so it’s not particularly great training for sophisticated legal thinking … so I don’t see it as a huge concern.”

WHEN IT COMES TO MANAGING outsourcing strategy, Fasken Martineau DuMoulin LLP, like McMillan, sees “going steady” as the model that makes the most sense to them.

Vera Toppings, a partner in the litigation and dispute-resolution group in Toronto, says back in 2013, when the firm was wrestling with the explosion of big-document trials and how best to manage e-discovery, it narrowed down its options to building its own group or partnering with an existing provider. She says it quickly became apparent that building their own group would not be the most efficient way, partly because of the upfront investment needed, but also because of the ongoing costs of buying and constantly retraining its own people on quickly evolving technology.

In the spring of 2014, the firm put out a request for proposal and eventually signed a “managed-services” agreement with PwC, which came into force in the fall of last year. PwC has the technology capability as well as worldwide access to e-discovery experts for Fasken’s clients in Asia, South America “or anywhere in the world,” Toppings points out.

“Before, you’d need a whole team flying from Toronto to somewhere in Asia to do the data collection, you’d need translators — there’d be a whole symphony you’d have to create every single time. We have clients all around the world, and PwC operates all over the world. They have people on the ground who have the resources, the infrastructure and the language capabilities to assist our clients directly where they work.”

USING OUTSOURCERS IS “an absolute fact of life,” these days, says Sarah Millar at Osler, which is taking a different approach from that of McMillan, McCarthy and Fasken. Osler favours playing the field — for now. The firm uses a variety of legal services outsourcers, with Deloitte LLP as one of its main suppliers in e-discovery and due diligence.

In 2014, Deloitte acquired ATD Legal Services, an e-discovery firm launched by former Davies Ward Phillips & Vineberg LLP partner Shelby Austin, and last spring it announced the formation of Conduit Law LLP. “I’m not sure what their plans are for their new firm, but it is certainly going to eat our lunch to some extent,” says Millar. Deloitte declined to be interviewed.

But Osler is not interested in going steady in any event, says Millar. She points to the alliance formed between Fasken Martineau and PwC for e-discovery services as an example of why not. PwC often acts as the auditor on a file, she says, so they may end up being excluded. Also, an Osler client may have its own relationships to bear in mind, and may want a say in who does the work. Millar sees formal alliances between law firms and outsourcers as “window dressing to some extent. I think a lot of it is a rush by firms to look like they’re reacting to changes in the market. People want to look like they’re being proactive and minimizing costs by pushing stuff out to outsourcers.”

Toppings at Faskens says that is absolutely not correct. In arriving at a deal with PwC, she says, the firm negotiated a bulk rate: “The rates our clients are paying are far below what they’d be paying if they just went and scoped out providers each and every time. The goal was ensuring that the rates are significantly below what the market rate would otherwise be.” She also says Fasken’s clients aren’t bound by the PwC arrangement if they have an outsourcer they prefer, and that the law firm has a backup provider in place to handle conflict work, if needed, at the same PwC rate.

Back at Osler, while the firm is using multiple outsourcers, it is also building its own low-cost centre called Osler Works. Based in Ottawa, the 22-person group offers some of the same services an outsourcer would, such as e-discovery. On the transactional side, Osler Works does due diligence and contract analysis and management, which Millar calls “the growing piece right now.” It, too, offers the same software as the outsourcers and has its own servers. So far, the firm only has the scale to handle smaller pieces of work but is looking at building up, she says.

Torys LLP has something similar. In 2015 it started Torys Legal Services Centre in Halifax. The lower-cost centre has five lawyers and a paralegal who do corporate work that has a repetitive element such as due diligence, contract review and corporate-reorganization implementation in support of lawyers in Torys’ other offices. In short, no firm is immune to the clamour for better value.

Borden Ladner Gervais LLP believes building up internal capacity while using various partners is the way to do that, says Chief Operating Officer Rob Morris. Take e-discovery. BLG has 22 lawyers in-house and “we’ve been investing heavily in our platform for discovery services.” The firm has a hosted e-discovery solution with KPMG using what he calls “the latest and greatest” software. What it doesn’t have is a firm tie-up with KPMG; it’s what Morris calls a “best-friends” arrangement. On very large files, BLG’s e-discovery team can bring in outside contract labour “if we want to go down that route.”

In some areas where law firms have been going outside for the past few years, technology and automation is superseding labour, says Morris — which means more work can be kept inside the firm. “Before you had very clunky technology … so it took a huge amount of time and effort. Therefore, you needed that labour arbitrage. What you’re seeing now is, you’ve got really good sophisticated software, so what you need is really good practitioners who can use the software with a scalable platform. That’s what we’ve done.”

Morris says the firm is looking at a number of outside partners that have platforms in other areas, although he won’t reveal whether due diligence, document management, document review or contract management are on the table. “I can’t disclose that at the moment,” he says. “I would say for you, though, that for the most part we are trying to do a lot of that with technology. When you’ve been doing procurement as long as I have, everyone says outsourcing is the Holy Grail for getting efficiencies and cost savings. But it’s not always — it all depends on technology.”

With high-quality outsourcers replacing law-firm lawyers, and automated technology with artificial intelligence having the potential to replace high-quality outsourcers, only one thing is certain. The traditional law firm model is gone for good and it isn’t coming back. The bottom line for law firms? Fail to adapt at your peril.

Sandra Rubin is a Toronto-based writer and strategic consultant.