Outsourcing and Outcasting

Local government legal departments need a positioning strategy if they are to survive the forthcoming budget cuts in anything like their present forms, writes Paul Feild

Seems a dull title? Well the subject is not. How local government legal services define themselves has never been more vital.

This is why. Some years ago Harvard Business Professor Michael Porter came up with some very important notions. The first was to see business activities as a “value-chain”. I’ll explain – imagine a long building: at one end trees are delivered; they are stored and seasoned; the wood is used to make furniture by crafts people to a design from, say, Charles Eames; the furniture is polished, wrapped and then awaits dispatch in a warehouse.

You could see a similar process for many other activities or services such as for example public housing – from assessing a person as to whether they are homeless then offering an introductory tenancy and eventually arranging succession on their death. So too for safeguarding the vulnerable. You get the picture. So each stage adds something of value.

But over all these value-adding processes lurk the cost-sapping support services. These will be HR, Health and Safety, Employee Development, Finance, ICT, Building Maintenance, Security, Call Centres, Procurement, and Administration. Solution – why not make the support services more efficient by getting them done by a combined services company for a specified fee?

You could transfer the staff to the new combined services business by means of TUPE. In local government many of the support services from borough to borough and county to county are not really that different that they could not be done elsewhere or at least are not site specific. With the modern workforce being geared up for “hot desking” and paperless offices they don’t have to be on site or even in the same country (one operator calls it “right-shoring”!). If the reader thinks this is a scare story read the 21 January 2010 edition of The Economist to see how standard legal process work is already being out-sourced to India and South Africa. If one looks at legal services within a value chain, then a fair challenge would be why not purchase these services from an external supplier?

The big difference is it is not entirely clear how these changes will deliver savings and – more worryingly – they may actually increase costs and dependency. It therefore is of considerable commercial attraction to a services company to provide as many support services as possible to get the economy of scale. It can then offer the value which might make the outsourcing appeal to those who would want to concentrate on the value chain. If the idea gets accepted, it is going to be more difficult for a council to go it alone. If it becomes de rigueur that legal services are seen as a mere support service, then they are in danger of being outsourced everywhere.

So can you see now why the positioning of legal services is so important – is it a support service or is it part of the value chain? My view is that it is up to the profession to make the case for the position of value adding by being in the chain. This is where Porter’s second contribution is vital.

In his major business book Competitive Advantage, the professor argued that there are really only two stances to take – either compete on cost or on focus and quality of service. In my opinion local government lawyers should not and cannot sustain a position of competing on being low cost. Space limits me, but here are two of many reasons; firstly, because it will misdirect the clients to the value of the contribution and, with less engagement, drive the corporate strategy to place legal services with the other-to-be-outsourced support services; and secondly, local government lawyers are well placed (or ought to be) to know their clients and be able to be part of the process of adding value through a thorough knowledge of their clients’ activities. Surely this is better than a generic service contract.

We can see from Porter's observation that general support services are very different from specialist services, even within the same professional discipline. The use of outsourcing is a finely balanced question with professional services because there is the issue for the contractor of whether there is the ready availability of expertise and the necessary capital investment tied up in a team which may rarely be called upon to advise or do a specific specialisation.

Of course, some legal activities are open to business process analysis such as, say, housing conveyancing or debt collection, whereas specialisms like adoption or a regeneration development agreement do not lend themselves to such efficiencies. Our outsourcing company then has a challenge – do they offer a loss leader in such a niche or provide an augmented specialist legal service at a major fee premium?

The reality is that establishing potential capacity to provide high-quality legal services will be uneconomical, unless there is sufficient demand to create enough volume of fees to sustain the investment. But, as this is a new market, there could be real rewards for a services company which took the lead, so they are going to have a motivation to pitch some very aggressive competitive rates to get the income to cover the specialism capacity and then enjoy first mover advantage (There is, however, an intermediate strategy for the contractor to tackle the professional dilemma and that is to establish a strategic partnership with a law firm which does have the capacity – but exploring this is for another day).

For district councils, alas, their case for going it alone with their small legal unit is probably already lost. But that does not mean placing the work with support services companies – far better to work with the county council. But for unitary authorities the position argument for quality and focus is strong. Of course there is the temptation for legal managers to take the easy way out and draw an arbitrary line between part of the legal service being defined as the corporate value-adding centre with a client-facing role and the rest simply to be out-sourced as a support service. I think that would be a grave mistake as it would wreck flexibility and capacity and over time create dependency.

So can today’s local government lawyers get the positioning right? Worryingly, I can’t recall any prominent or influential commentator on local government legal practice in recent times who is not in the private sector having migrated from the public sector. So my message is the time has come to focus on strategic positioning and highlight the existing value added by the legal service across the board in everything it does and explore how to contribute more.

But I add one warning – the gains must be tangible. No magazine award or quality mark accreditation will cut any ice in the next few months; you must add value. The threat of being an external outcast is very real and you read it here first.

Paul Feild works as a solicitor in the public sector.