Managing to Deliver?

As David B. Wilkins and Maria José Esteban argue in “Taking the ‘Alternative’ out of Alternative Legal Service Providers,” the market for so-called alternative legal services has matured to that point that it is no longer accurate to describe these providers as “alternatives.” As a recent Thomson Reuters study has documented, the alternative legal service provider (ALSP) market has expanded from an estimated $8.4 billion in 2015 to $10.7 billion just two years later—a compound annual growth rate of 12.9 percent. As the study details, part of that growth is taking place in the area of “managed services”—a segment of the market that the researchers value at $700 million, up from an estimated $250 million in the study two years prior. The researchers include ALSPs like UnitedLex and Elevate as representative examples within this managed services category, writing that “managed services providers contract for all or part of the function of an in-house legal team, typically ongoing work.” At the same time, a host of ALSPs are now employing the term “managed” to describe their service offerings, whether those services focus on document review, e-discovery, analytics, or other areas. Yet, while “managed services” has clearly entered the ALSP lexicon, the term itself remains somewhat ambiguous. Put simply, what exactly are managed (legal) services?

In this article, we examine this question from multiple vantage points. First, we take a step back and consider managed services more generally. Looking back to the rise of managed information technology (IT) services in the final quarter of the twentieth century, we explore what makes a service “managed.” Then, we turn to law and see how this framework has—and perhaps hasn’t—been adopted in the legal profession, weighing the challenges that likely await managed legal service providers if they hope to sustain their apparent trajectory. And finally, of course, this raises the question: What is next?

Managed services: A primer

“Managed services” can be an elusive term that is perhaps best explained through an example, and IT offers a particularly instructive case study—if for no other reason than it is the industry most closely associated with the concept. In the span of a few decades, IT’s presence in business processes had gone from niche to ubiquitous. Along this development, as increasingly sophisticated technology moved to the center of day-to-day business functions, the once-tenable break/fix model of IT services (whereby companies would take an ad hoc approach, addressing IT issues as they arose through outside providers) eventually gave way under the demand for a more consistent, sustainable dynamic. What ultimately emerged was the managed IT services model.

To help understand how these managed services worked in practice, we sat down with Robert Couture, who, prior to his current role as executive director of McGuireWoods, played a crucial role in the development of IBM’s Global Services business. Regardless of the industry, Couture emphasizes, at its core, “the concept of ‘managed’ means the organization that you hire to do the service is responsible for the outcome of the entire engagement. And that means they have a responsibility to deliver to you a result—including specific performance criteria defined in an SLA [service-level agreement].” There may be no singular definition of what constitutes a managed service, but, as Couture explains, some key factors are worth noting.

Efficiency. The marquee value proposition of a managed service is efficiency—greater cost-effectiveness without sacrificing quality. “The key for these managed services to work is that they’re able to do at least equal—if not better—work more efficiently,” Couture says. “The question is: How are you going to do that? Where is your value-add? Where is your secret sauce? And if I’m a client, I’m asking that before I agree to anything.” If the only cost-saving measure is cutting everyone’s health insurance, there is no real efficiency gain—just cutting. Instead, managed service providers focus on building expertise and investing in technology so that by the time clients come looking for help in those areas, they add immediate value. Key to the efficiency proposition offered by managed service providers is often a combination of well-developed workflow methodologies and increasingly the use of technology.

Scope. Some of the most salient questions in managed services hinge on the scope of the services to be managed. Discussions at the outset of a managed service contract define where the managed service provider’s role begins and ends—and by extension, what the managed service is. Thus, it is most accurate to think of a managed service as a continuous offering (as opposed to a spot contract) within a defined period of time (see below) rather than as discrete units like individual projects or tasks. “Essentially, it’s a performance contract,” explains Couture. “But here’s the problem clients would often have: You would lock in an agreement, and at the front end everybody would say it covers just what they need, but then within days something comes up that is outside that scope.” This tension between having a clear scope from the beginning and the unpredictability of subsequent issues was something IBM had to navigate as it entered the managed services market in the late 1980s/early 1990s. From this point of view, Couture stresses, managed services only work insofar as you are able to clearly define the scope of work to be managed—something to keep in mind in the context of managed services in the law.

Timeline. Given the complexity of setting up a managed service, they are designed to be relatively long-term arrangements. Couture notes that at IBM their early managed service contracts were at least 10 years in duration. “These were long engagements,” says Couture. “At IBM, at least in those early days, we never cut a deal less than 10 years because in order for it to become profitable for us, we needed time.” Even managed services that offer subscription-based agreements hew closer to an ongoing model rather than a more punctuated timeline. To take an analogy outside of managed services, while Netflix technically offers a subscription-based service—which is to say it bills month-to-month at a consistent rate—many customers likely expect to retain that service past the end of the month. This long-term nature of managed services also hints at the difference between a traditional managed service offering and, say, project management or labor arbitrage arrangements, which are often linked to a particular need at a particular time—and therefore are not necessarily preestablished, long-term deals. To extend the Netflix analogy, customers purchase the service to gain unlimited and prospective access to a suite of titles versus purchasing each individual title on an as-needed basis.

Payment. The payment for managed services is another consideration, though one closely related to the scope of the work. Couture stresses that payment for IBM’s managed IT services was always fixed, meaning that determining the scope of the work to be managed was critical. Likewise, if clients want services that lie outside of the agreed-upon scope, they would need to pay extra for them. From this context, defining scope is again of paramount importance.

Operations. Although managed services are often augmented by technology—which often represents an investment by the managed service provider that can ultimately bring cost savings to the client—they are not reducible to software or technology alone. The people doing the work remain vital to a managed service and, depending on how a given managed service contract is structured, they might be organized in different ways. In the following section, we see many of the client’s IT employees actually became part of the managed service provider. In these cases, managed service providers might do little more than add a project manager to oversee the melding of process and people. Meanwhile, other managed service providers might have more of their own staff ready to be deployed to a new assignment. The model can change, but the priority remains the same: cost-savings without sacrificing quality.

IBM’s Kodak moment

It is important to remember that managed services did not burst out of the gates as a fully realized solution to businesses’ IT problems. The IBM–Kodak partnership in the waning years of the twentieth century—among IBM’s earlier forays into managed services—in particular demonstrates the benefits, drawbacks, and growing pains of stretching the managed services model to fit an industry.

When we went into Kodak, we didn’t know how to price it in the sense that we had never done it before.

Robert Couture, McGuireWoods

“We didn’t call it ‘managed services’ when we first started it,” recalls Couture. “We called it ‘IT outsourcing’ back then.” Competing in this space with companies like Electronic Data Systems Corporation (EDS) and Andersen Consulting (known today as Accenture), IBM struck a deal with Kodak in the late 1980s that—due in many respects to the two big names involved—boosted the viability of IT outsourcing in the eyes of clients. As Lawrence Loh and N. Venkatraman wrote in 1992, “IT outsourcing suddenly became a serious strategic choice for firms, and the ‘consideration of outsourcing’ emerged as one of the top ten issues for success (or survival) in the 1990s.”

IBM’s managed services capacity was, however, still in its nascent stages when the agreement was first made. “We didn’t have any consulting group, we didn’t have any global services or anything like that yet,” remembers Couture. “It was in fact the internal IT guys at IBM who said to Kodak, ‘Hey, we think we can run this for you.’” He continues:

Our argument at the time was, “You’re not in the IT business. Let us do that.” When we went into Kodak, we didn’t know how to price it in the sense that we had never done it before. We just said, “How much does it cost you to do IT today?” And then, whatever it was, we said we’d do it for less. We knew we had expertise that they simply didn’t have, and so the thinking was we would just improve efficiencies of operation based on what we knew about running our own IT business. And for a long time, that was the basis for how we bid and how we ran and won our IT outsourcing business.

Once the scope of the work was determined, IBM took over multiple Kodak IT centers, and overnight hundreds of Kodak employees became IBM employees. There remained a core of IT management left at Kodak, such as the company’s chief information officer, with whom IBM would liaise for the managed service, but the transfer of human capital was otherwise nearly absolute. “They were sitting in the same place—we didn’t move them,” Couture says. “What we did do is move project managers from IBM in with them. We typically would add only a few people because we knew we had a lot of ground to make up.” The contract was structured to provide a long runway for IBM to put its people, systems, and process in place, however, and IBM was positioned such that it could be patient while the deal enhanced profitability.

Despite its wave-making effects in the IT outsourcing industry when the agreement was made, cracks began to form in the IBM–Kodak model as technology continued its rapid development and concurrent march to the center of even everyday business functionality. “These types of deals often became problematic for the clients because they were locked in,” Couture says. For all the flexibility managed services afforded clients, the irony they discovered in IT was that such an arrangement was only flexible for noncore functions. As IT began to reveal itself as a core function across industries, the managed services model proved particularly inflexible if the client wanted to transform IT into a more strategic asset for the company. “Eventually these large companies started to realize that IT really was one of their core businesses,” Couture continues. “And that’s when they started to take it back.”

Notwithstanding the decline of these types of managed IT services, the model persists today in various forms. On the whole, managed services offer clients a means of reducing spend by leveraging process-driven, efficiency-based systems under fixed-cost contracts—contracts that explicitly define the scope of work. Today, managed services have moved beyond just IT to areas such as tax (see the recent deal between PwC and GE), human resources (for example, payroll, professional development), compliance, logistics and supply chain management, and even public relations and marketing. Given the proliferation of areas of managed services, the question has therefore become: Is law next?

Managed services come to law

Managed services are now beginning to arrive in the legal profession—and not just to augment HR and IT departments. Today, corporate legal clients and law firms have a range of managed legal service options available to them, including both discrete managed functions like e-discovery and document review as well as whole in-house functions akin to the Kodak–IBM deal (for example, the recent partnership between DXC and UnitedLex). Indeed, evidence in the Thomson Reuters report suggests that in some ways the revolution has already happened—after all, by the researchers’ estimation, a $700 million managed services market among ALSPs already exists.

To better understand what to make of managed legal services now and going forward, The Practice spoke with two individuals with deep insight on managed services and perspective from the legal profession. Couture, apart from his previous work at IBM, is now the executive director of a major law firm and has operated at the ground level where these negotiations are (and aren’t) being made between legal service incumbents and new players. William Henderson, the Stephen F. Burns Professor of Law at Indiana University’s Maurer School of Law, has researched and written extensively about legal service delivery. With the help of Couture and Henderson, we consider the current state and future prospects of managed services in law through their years of experience and academic research.

To begin, Henderson notes that there is a general understanding of what managed legal services are—or at least the type of work they are involved in. “Managed legal services are typically recurring work that was previously done in the legal department,” he explains. “It’s too expensive to be done in the law firm. It’s amenable to process and technology, and the legal department often lacks the budget or the expertise to do it on their own.” Henderson observes that while there certainly has been an uptick in the use of managed legal service providers by some particularly innovative clients (for more on this, see “Everyone’s a Law Company”), he is somewhat surprised that bigger inroads have not been made. “The data suggests that they [managed legal services] deliver a lot of value, so it’s almost startling that we haven’t seen more uptake,” he says. “You have to ask yourself why.” Henderson prefers to think about the challenges facing managed legal services in terms of innovation diffusion theory—which, he writes, holds “that the diffusion of innovation is a process that occurs through a social system.” In particular, he applies five factors that tend to impact the adoption of innovations across various social systems: relative advantage, cultural compatibility, complexity, trialability, and observability.

Managed legal services are typically recurring work that was previously done in the legal department.

William Henderson, Indiana University’s Maurer School of Law

Relative advantage. Managed legal service providers will need to convince clients that the value they would provide is worth the tradeoffs. As we see in “Everyone’s a Law Company,” clients may indeed be more receptive to this prospect than they have been in the past. At the same time, the legal profession presents challenges that are not as simple as being the cheaper of two options. Henderson muses, “Lawyers will be saying, ‘I’m going to go to all this trouble to outsource a bunch of legal, or I’m going to fire people in my legal department to outsource this and save how much?’”

Relatedly, when Couture hears an ALSP claim it has a better process that will save his firm money, his response is “Show me.” To him, offerings like “legal project management” often lack vital context to be considered a viable alternative to how the firm handles any of its work. Instead, he wants to know the methodology a provider would apply to consider whether their services produce real efficiencies. He explains:

For the ALSPs, I want to see that process or methodology—and I want to know who came up with it. Oftentimes, I think we see organizations with very good project management teams—and project management skills are super important—but they also have to have a sound methodology. Let me put that another way: I don’t have a project to manage until I’ve got a methodology that I’m following. The two are not the same.

Cultural compatibility. Lawyers are trained in ethics and professional responsibility, so perhaps it should come as no surprise that they may be reluctant to hand over any part of a legal matter without full confidence in the legal minds that are taking the reins. And beyond that initial skepticism lie other cultural mismatches between law and managed services that may be difficult to square. For example, the legal industry has historically had a difficult time making fixed-fee arrangements palatable for all sides of the table. Certainly some of that has to do with the complexity of legal work (as we explore next), but a part of it is rooted in the culture of law firms and corporate legal departments that shapes how business gets done (see “Everyone’s a Law Company” for more on how this may be evolving from a human-capital mindset to a process-oriented mindset). “This is unfortunate because what you want to do is encourage people to do something more effectively or efficiently,” says Couture. “Perhaps the bigger problem is nobody has figured out a better measuring stick than using input metrics like billable hours.”

Complexity. It is undoubtedly true that legal work is complex, though it is equally true that not every piece of legal work requires a bespoke service. This creates opportunities for managed services around some of the more routine work, but it also arguably creates opportunities for more complex work provided it can be scope. The challenge, therefore, becomes how to accurately define scope within law. While it may be easier for routine work and harder for more complex work, as Couture explains, without a defined scope there is nothing to manage in either case—at least from the perspective of a traditionally defined managed service provider. In other words, even an efficiently managed process or a well-grounded methodology is only as good as the ability to articulate the goals and parameters of the service.

Trialability. The legal profession presents another challenge for managed services when it comes to establishing quality: How can managed legal service providers prove that their services deliver and that they are thus worthy of handling clients’ matters without first offering their services and handling clients’ matters? Crossing even that threshold can present a significant investment on both sides of the deal. “It’s hard to not burn so much of the candle just doing trialability-type taste testing,” shrugs Henderson. “These managed legal service providers are going to have to think hard about, ‘Am I going to get a transformative uptake and payoff?’”

Observability. At first glance, the assumed results of using a managed legal service are straightforward—faster, lower-cost, more-effective services. But these metrics, while important, do not speak to the deeper fear lawyers might reasonably raise: How do you know the work product of a managed legal service is controlled for quality? Possibly owing in part to the complexity of the work and the culture of the industry, potential clients of managed legal services may still seek value through established measures like reputation and credentials. As we see in “Everyone’s a Law Company,” the undercurrent in this (and really each) factor is that concern about quality, which only adds significance to efforts underway to develop clear quality metrics in law.

As Henderson’s framing suggests, managed legal services may still be in their nascent stages of moving beyond simple back-office administrative tasks to take on bona fide legal work. Again, an example to watch going forward is the recently formed partnership between UnitedLex and DXC, which Modern Counsel describes as “the largest managed-services legal transaction ever performed.” At the close of 2017, DXC, once a division within HP and now an IT company in its own right, agreed to outsource much of its in-house legal function to UnitedLex—arguably more akin to managed IT services and on a far larger scale than any managed legal service agreement to date. Time will tell whether, to borrow from the parlance of innovation diffusion theory, this will render DLX as an innovator or early adopter of managed legal services.

Possible futures

According to the two Thomson Reuters ALSP reports, the market for managed legal services is increasing, but what comes next remains unclear. Will we see the rise of Accenture-like managed legal service firms that offer wide-ranging managed services for legal clients? Will the Big Four accounting firms take on that role? Or will we see a more fragmented market, wherein companies with specific areas of expertise provide more discrete, bespoke managed services among other types of offerings? Henderson and Couture weigh in on some of the possibilities.

Specialize and roll up? For Henderson, talk of managed legal services embedded in an integrated services model may be premature. This is not to say that the managed legal services market could not one day come to be characterized by relatively few large players offering broad managed legal services, but, as he explains, that could still be a ways off. “The specialized solution will always be the one that can make the sale,” says Henderson. “And today you see these [managed legal service] businesses have built up by being very effective point solutions.” In other words, more than large, all-encompassing managed legal service firms, we see companies forming around specific, targeted solutions like e-discovery. As Henderson explains, this is a natural starting point that could easily evolve into a less fragmented market. He continues:

When you get down to the very bottom level, you begin to realize how complicated the structure of the legal industry is and that the only place to begin is specialization. You actually have to come up with a specialized thinking of a gap, and there’s an urgency with people that are trying to fill a gap. Then you have to build up from there. Eventually you get enough point solutions that you can begin to get some economies of scale and scope by rolling these things together. You can have people that are sharing sales teams, and you can have all sorts of support so you can actually begin to control your operating costs by rolling up. But a roll-up like that could potentially require a lot of point solutions. It could be five years from now, it could be 10 years from now, it could be 15, but I can see that kind of roll-up ultimately making sense.

Legal as a strategic asset? For Couture, law can learn from IT’s journey. To businesses ostensibly in the photography, banking, or automotive manufacturing industries, IT was once a secondary consideration and thus worth making as inexpensive as possible. Managed services provided a means of doing that without sacrificing quality. In hindsight, it turns out there were significant drawbacks all the same, much to the chagrin of those businesses who took the leap with managed services. “Now, guess what? You can’t do anything without technology!” Couture exclaims, contrasting businesses’ past thinking against this now-banal fact of life. Indeed, businesses in many industries eventually took their IT back in-house, realizing that perhaps it was not so far outside the core as they once imagined. Legal departments should heed that lesson, argues Couture. “We need to explore whether or not there is a strategic use of legal departments that is not being realized today,” he says. “If someone is going to outsource their whole legal department to somebody else, then they think it’s just a cost. And that thinking may be shortsighted.”

Couture touches on a growing tension in corporate legal departments today. On the one hand, in-house legal departments are often viewed as cost centers within their respective companies. On the other hand, general counsel are increasingly positioning themselves as occupying broader roles beyond simply managing the legal functions of their companies, moving up into areas like public policy, sustainability, and corporate good governance. Consider the elevation of lawyers like Brad Smith (once general counsel at Microsoft and now its president and chief legal officer), Kent Walker (once general counsel at Google and now its senior vice president of global affairs), and Kim Rivera (once HP’s chief legal officer and general counsel and now its president of strategy and business management). There is both the steady drumbeat of “efficiency as a top priority” and the developing knowledge that lawyers bring value to an organization apart from their ability to perform the legal task set before them—that there are other benefits that come with in-house lawyers’ proximity to and longevity with the business.

This dichotomy has big implications for the future of not just managed services but how legal work is broken apart, completed, and reassembled. Are managed legal services an inevitable future or a temporary phase in clients’ evolving mindset around their own legal functions’ value? As Couture and Henderson make clear, the question is far from settled.