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Practice Innovations - Managing in a changing legal environment
Gray Rule
Oct 2012 | VOLUME 13, NUMBER 4
Gray Rule
Build It and They Will Come: What Business Are You In?
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The Ins and Outs of SourcingLisa Gianakos, Director of Knowledge Management, Pillsbury Winthrop Shaw Pittman LLP, Washington, D.C.
Insourcing refers to moving work functions to a lower-cost market, but still staffing with firm employees, either by asking existing employees to relocate and/or hiring new employees in the new location.

By now you are probably tired of the word "outsourcing," which can draw the mental image of a bunch of 20-something Web developers in a cube farm somewhere in Asia. With the upcoming U.S. presidential election, the word outsourcing has become a negative weapon—implying that if you have anything to do with it, you must be heartless and un-American.

Despite these rather dubious assertions, law firms have been dabbling in outsourcing for years. Facilities management companies provided the earliest options for firms willing to have others manage their mail and copying services. In the past decade, we have seen other functions moved to outside companies—Help Desk, Word Processing, and Electronic Discovery proved to be the easiest targets. One large U.K.-based firm, Cameron McKenna, actually outsourced its entire information technology (IT) function to India several years ago. Yet despite this clear move to utilize outsourcing as a strategic staffing model, the jury is still out as to whether pushing more in this direction makes sense.

Enter "insourcing" as an option that can offer many of the benefits of outsourcing, but maybe without as many downsides. With insourcing, a firm will find a lower-cost location to house certain functions, but retain the employee/employer relationship. Generally, insourcing involves moving firmwide non-lawyer functions to a lower-cost location.

There are a few firms that have made strides in this area and it's beginning to feel like a trend. Perhaps the best-known restructuring effort in the legal industry, Orrick, Herrington & Sutcliffe's move to open an administrative office in Wheeling, W.Va., has stood out for 10 years as a bold and unique move to control the cost of running a law firm. Although not fast to follow, other firms have recently started similar projects and many other firms have taken notice:

  • Wilmer Hale has been sending non-legal work and document review to a new office in Dayton, Ohio since 2010
  • Baker & McKenzie "insourced/offshored" to its Manila office in the Philippines, where they perform administrative and other functions for the firm's worldwide operations
  • A few firms have gone with the more traditional outsourcing approach, including O'Melveny & Myers, which moved 75 positions to an outside provider

The most recent insourcing example is my own firm, Pillsbury Winthrop Shaw Pittman, which recently opened a Nashville, Tenn. office to house many non-legal positions. Do you wonder how Pillsbury went about considering this option, how it went, and whether they would do it again? Before we go there, let's start with a few definitions.

Outsourcing means replacing firm employees with a lower-cost service provider to fulfill certain job functions. The most commonly "sourced" functions include back-office operations such as accounting, human resources, call centers (Help Desk), research functions, and Web or software development. There is also a newer trend for hiring hourly or "staff" attorneys in smaller markets. Outsourcing that occurs within the current country is sometimes called domestic outsourcing or onshore outsourcing.

Insourcing refers to moving work functions to a lower-cost market, but still staffing them with firm employees, whether that means asking existing employees to relocate, or hiring new employees in the new location, or a mix thereof. This is also referred to as "captive." For instance, what Pillsbury did was an Onshore Captive (i.e., onshore insourcing), and what Baker & McKenzie did was Offshore Captive (i.e., offshore insourcing).

Onshoring/Offshoring – On- and offshoring refer to the physical location where the work is being performed. Onshoring for a U.S.-based company means the service provider is still somewhere in the country but instead of large, expensive cities such as New York, Chicago, or Los Angeles, the providers are located in smaller markets or even rural locations. Offshoring means the service location is quite far away from the company. In the U.S., it means the provider is not located within North America. For many, offshoring is a much more controversial decision as it means adding to unemployment within your own country.

Now that we're clear on terminology, let's see what Pillsbury's CIO, Martin Metz, has to say about the firm's recent insourcing project—the opening of a global operations center in Nashville, Tenn.:

Why did Pillsbury prefer the onshore captive model to offshoring and outsourcing?

The firm had several mergers over the past 10 years and has been keenly focused on how to create the best staffing model to serve its many offices. And the economic crisis of 2008 forced change and challenges on our profession that continue to shape what a law firm will look like for years to come. The need to run leanly, while maintaining a strong service approach, has never been more important. We thought about all options, but realistically, we were looking at making a change to all of our administrative services–no company we knew of really offered this range of legal support services on an outsourced basis. "Insourcing" became favored for many reasons–not least of which was the idea that we would be able to retain more of our staff. We didn't really want to lose that relationship with our employees and the institutional knowledge they have. There are some huge risks involved in making a move like this, and insourcing was an easier path to gain acceptance within the firm–and we just felt better about it. It also penciled out as less costly in the long run and after all, reducing cost was one of our most important goals.

And our timing was excellent. Our San Francisco office lease was ending and we had more than 100 non-lawyer staff that would need to either move into a new space along with the lawyers, or be relocated to a lower cost building separated from the lawyers. We decided that if we were going to separate the legal from the non-legal, we should consider moving the staff to an even lower-cost area, not just a lower-cost building. So, timing helped, but when we did the analysis, it just made great sense because we had so many administrative staff spread throughout the U.S. in our major offices. Moving all of them, not just those from San Francisco, into a new location would dramatically reduce costs and improve services.

How did the firm go about determining if the approach would work?

I was asked to participate on the review team, including our CFO, CHRO, and COO, and we enlisted support from some of our most experienced office administrators and key financial analysts who would help us build the pros, cons, and implications, and develop financial models needed to compare our options. The basic metrics and potential benefits were presented to the Board to seek their general approval to proceed with an in-depth study. The Board authorized the hiring of Deloitte's relocation consultancy, which had helped Wilmer go through a similar analysis the year before. The study took about six months. Getting leadership on board early was critical—you sure wouldn't want to do an in-depth study like this without knowing a positive conclusion was possible.

How did the firm determine locations to consider and ultimately choose Nashville?

Deloitte's location strategy consultants helped us identify our evaluation criteria and to compare those criteria with more than 300 metropolitan areas in their database. Our criteria included cost differentials, labor quality and availability, potential for natural disasters, accessibility, quality of living, and the like. Narrowing the list to 10 cities based on the criteria established, we then studied these 10 more carefully. From there we selected four cities for in-depth review. This meant two full-day visits with the local chambers of commerce and meetings with city officials, local universities, employment agencies, and other companies that built shared-services centers and moved to their chosen city from distant locations. We ultimately selected Nashville because it offered the best combination of low-costs with high quality labor, along with the most appeal for existing employees who may wish to relocate. It wasn't the city that offered the most savings using a pure financial model, but it was the city that we felt best fit the culture of our firm.

What functions were moved to Nashville?

We moved the firm-wide components of the finance, accounting, IT, training, conflicts, marketing, human resources, and document processing teams to Nashville. In fact, we are still in the process of doing so—our office just opened in June 2012. It takes time to make such a change and it was important that we maintain services along the way. Altogether, more than 150 positions are being moved.

What is the expected payback period for the large investment the firm is making in Nashville?

Shockingly, not as long as you might think. We are building out a new office, but doing so thoughtfully—we want a state-of-the-art center that becomes the administrative hub of a vibrant firm. Although the cost of making this move is not for the faint of heart, the payback period is compelling. Although I'm not at liberty to give specifics, we think we will be close to achieving our expectations in breaking even on this investment. While we certainly are saving in terms of rent and facilities, the big win for the firm is the lower cost of overall labor. For IT specifically, there is an added benefit. Due to the various mergers completed several years ago, we had three IT hubs—San Francisco, Washington, D.C., and New York. Being able to have all of IT under a single roof will help improve efficiency, communication, and coordination, not to mention increasing the sense of being part of a more unified team. This can probably be extended to a few other teams that were spread out across offices.

Any final remarks you would like to share?

Making a move like this means separating from some long time employees. We encouraged our team to make the move and helped them do so as well. We were thrilled that 28 people, including our CFO and me, joined us to get us off the ground and running fast. We worked very hard to cushion the impact to those who decided not to go to Nashville. We, of course, have to refill those positions in Nashville and that has gone very well so far. It has been an amazing transition with exceptional support between our various teams. Finally, I would like to say that I believe this is indeed a tipping point—more firms will follow if the interest we have seen from other firms about this project is any indication.

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