Follow this link for Edward Fennell’s report on AOL and its cost-cutting strategies
To cut legal expenditure by 36 per cent in one year is a formidable achievement. What were the key components of this success? A combination of strategy and pragmatism.
As for strategy, AOL had to grapple in a systematic way with the pervasive more-for-less challenge: how to deliver more legal service at less cost. This is a challenge being laid down to in-house legal functions by most boards and investors. In response, general counsel have four possible strategies – as did AOL.
The first strategy is to focus on external law firms and urge them to change their ways: the way they charge for their services and the way they resource their work.
The gut reaction of many GCs has therefore been to invite their outside counsel to re-tender. In turn, they have been deluged with proposals for alternative fee arrangements and, to some extent, pitches for the outsourcing and off-shoring of legal work.
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On its own, however, this first strategy rarely yields a 36 per cent reduction of an organisation’s legal spend. The net savings from alternative pricing models, for example, are commonly around 10 per cent. Thus, re-tendering is a strategy that has attractions for GCs who believe that law firms are the problem and prefer not to subject their own departments to scrutiny and upheaval. It is not a strategy that attracted AOL.
In contrast, a second strategy obliges in-house departments to sort out their own shortcomings and inefficiencies rather than asking this of their suppliers.
This strategy, also not embraced by AOL, involves GCs asking some tough questions about what work really needs to be done in-house and how these tasks might be discharged most efficiently. This introspection and analysis leads to different conclusions for different organizations. Often a decrease in the size of the legal department will follow, but it is not uncommon to move in the opposite direction: to an increase in internal headcount, and, correspondingly, less work going to law firms. Horses for courses.
More frequently, though, GCs are recognizing that the savings they need call for innovation both by law firms and within their own departments. The third and fourth strategies are variations on this theme.
The third leads GCs to look internally and externally and then bring about incremental change. This is a legacy-based approach: the job is to look at what has been built so far and see how best to evolve from there.
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The fourth strategy is more ambitious but is rarely invoked. This is a vision-based approach: the GC takes a step back, undertakes a fundamental review of his or her organisation’s legal needs (primarily, the legal risks that must be managed and the daily operational tasks) and, starting with a blank sheet of paper, identifies the optimum way to source all of these needs.
The thinking is not driven by a desire to maintain the internal team or to retain particular external law firms, but by a dispassionate appraisal of what would be the most efficient configuration of lawyers and legal service providers.
AOL’s favoured strategy has been a hybrid of the third and fourth options, although it is nearer to the latter than the former. Sensibly, they have sought to get their own house in order as well as demanding considerable change from their outside advisers. They may not have undertaken a fundamental, full-scale legal needs analysis, and then designed a new legal services infrastructure from scratch, but their work on disaggregating legal supply chains suggests there is a genuine appetite for radically re-organizing the way in which AOL receives and provides legal services.
To some extent, this strategy mirrors the development of their core businesses. To survive, they have had to re-invent themselves, driven by a vision of the future of the online world. In their legal department, similarly, they recognize that the future is not going to look much like the past.
Aside from adopting a sound strategy, AOL has also secured its 36 per cent savings by being pragmatic in its alternative sourcing of legal services.
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There is much talk in the marketplace today about finding new ways of handling routine and repetitive tasks. The narrative here is that much of the work undertaken by junior and yet quite expensive lawyers is of a largely process-based and administrative nature, not requiring deep judgment or experience. In seeking to reduce costs, law firms and legal departments have acknowledged that it does not make commercial sense for this type of work to be conducted by costly lawyers in costly buildings in costly city centres. Accordingly, various alternative ways of resourcing have begun to emerge, including legal process outsourcing to third party providers, sub-contracting to lower cost law firms in provincial regions, leasing lawyers from agencies, and near-shoring (setting up capabilities in lower-cost countries within easy travelling distance).
Another option, and the pragmatic one chosen by AOL, is to make much greater use of paralegals. This may be a less exotic route to take but it can deliver substantial benefits in short order.
Paralegals – or paraprofessionals, to use AOL’s terminology – are trained and often experienced individuals who carry out and manage legally oriented work that does not require the legal knowledge and background of a qualified lawyer. The approach and business case is clear: a legal project is decomposed into tasks; when these tasks do not call for a lawyer, they are handled by paralegals, who cost much less than conventional legal practitioners. Paralegals can work within legal departments (AOL’s preferred structure), within law firms, as independents, or in dedicated paralegal businesses.
For lawyers who are wary of alternative sourcing to other jurisdictions, the engagement of paralegals is indeed a practical solution. Logistically, paralegals can often fit easily into the natural rhythm of a conventional law firm or legal department. So, as pressures on costs mount in the legal world, and as paralegals become increasingly professional and easier to accommodate, it is likely that they will play a growing and more significant role.
AOL’s particular deployment of paraprofessionals is instructive: they are paralegals with specialist expertise, they are schooled in process analysis and project management, and they are fully integrated members of the in-house team. AOL takes paraprofessionals seriously and regards them as core contributors to the legal effort.
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Looping back round to the question of strategy, AOL’s commitment to using paraprofessionals flows from its open-minded and inclusive approach, sitting as it does across the third and fourth strategies outlined above. The architects of this approach have been led by the needs of their business and not by the historical configuration of lawyers. This is best practice.
Professor Richard Susskind is President of the Society for Computers and Law, and IT Adviser to the Lord Chief Justice. You can follow him on Twitter @richardsusskind
Follow this link for Edward Fennell’s report on AOL and it cost-cutting strategies