Editor: We recently read an article in the Wall Street Journal mentioning the firm's use of "Capture" to facilitate "outsourcing" arrangements that can greatly improved the profitability of a business by reducing its operating costs. Tell us about "outsourcing."
Hamilton: Let me give you one example: we are working on a billion dollar network outsourcing transaction for a bank that is going to receive telephone and data services to all its sites in over 50 countries around the world.
We tend to act for large corporations and banks who are handing over a wide range of back-office and IT functions to specialist providers and buying these functions back as services. Activities that can be outsourced include HR departments, finance and accounting, procurement, computer support, software development, building management - basically anything that a company does but which it doesn't consider is a "core" activity, can be outsourced. We typically work on outsourcing transactions around the world typically involving between 10 million and several billion dollars in terms of the amount that is paid by the customer under these contracts.
Outsourcing is no longer considered a novel strategy by corporations. It's a recognized management tool for effectively increasing profitability by not only reducing costs, but also by freeing up management to focus on core activities.
Editor: How does Capture expedite outsourcing and save legal cost?
Hamilton: One of the key initial activities that we help clients with is building a robust contract or request for proposals that describes the services, performance standards, pricing models, governance models and all the other topics that need to be addressed to make an outsourcing relationship work. On complex deals this can often take up two months.
The problem at the beginning of a deal is that the client is still trying to work out what direction it wants the deal to take, and often struggles to articulate what its requirements are. Up to now, lawyers and consultants usually ended up by pulling out a previous similar deal and through much anguish and pain for both client and counsel marking-up the prototype to suit the deal.
This struck me as absurd - there had to be a better way to get these deals underway faster by extracting from our clients in as painless a way as possible what their requirements are so that we can actually draft documents that had some bearing on what they really wanted in the deal. Latham came up with Capture to solve this problem. It's based on the kind of functionality that has only recently become available in Acrobat PDFs.
Capture is an interactive set of forms that are completed by the client's team. As the client answers a question, other relevant questions automatically follow. We send them a suite of forms at the beginning of the deal, and the client's team fills in answers to the questions and sends the forms back. The critical thing is that the forms are dynamic and interactive - only questions that are relevant to the transaction are asked. The answers allow us to deliver a first set of documents that is much closer to the final document and is much better structured because they are drafted with a good understanding of what the client wants, speeding up the process and saving costs for the client.
We've managed to reduce the two month process to just four weeks for even the most complex of deals. In addition, because we have a much greater confidence that we can manage the process of drafting a contract, we can give the client a fixed price for at least that part of the transaction that is very competitive.
Not only is the cost saving a benefit but the real value is in expediting the contract and doing better deals which provide the client with greater savings long term.
Another very gratifying effect is that we are able to spend more time working through the important issues with the client, rather than having to spend so much time on the less important details. With time always a premium on these deals, we are definitely able to use that time better having introduced Capture. This means that clients are doing better, more thought-through deals.
Editor: Please mention the types of deals that Capture might be used in.
Hamilton: Currently, we've been using it primarily in the outsourcing area - not just the terms and conditions of the outsourcing deal but also the full service descriptions, pricing models and other schedules used in such deals. We're currently adapting it to be used in the context of transitional services agreements in M&A deals, and we're going to keep rolling it out into other areas because the technology and approach is so powerful. It is a tool adaptable to any big, complex transaction which doesn't traditionally have a term sheet.
Editor: And by virtue of this tool you might pick up things that would not be in the old-fashioned term sheet?
Hamilton: Absolutely, it drives a high level of rigor into the process. It's also a fantastic way of capturing know-how - you have kind of "if, then" or syllogistic thinking owing to the interactivity of the forms. This kind of knowledge can't readily be captured in linear word documents, but the logic that sits behind Capture is a perfect way of describing lots of what lawyers know.
Editor: So basically this is a tool used by the firm to more effectively service clients so that you end up with a comprehensive roadmap, which provides guidance through the various steps of a deal. It can be applied when you receive a request for a proposal and you can follow a logical sequence as to what the deal requires.
Hamilton: That's exactly right. Also, by using this tool we can actually save money for the client since the process for getting to contract are clearly defined, and we can be much more efficient in how we operate. One of the key points of Capture is to allow us to fix prices for the creation of the contract.
Editor: I assume that the Capture program uses different forms for different deals?
Hamilton: Right, we have a suite of forms for outsourcing deals and within that suite are different forms for different flavors of outsourcing. We are producing forms for other areas.
Editor: By knowing about your service and directing a client to it, a general counsel could save his company more than just legal costs since there's immense leverage in using an outsourcing program such as Capture.
Hamilton: When you use a tool like Capture you save money in a number of ways: You speed up the delivery of savings under the outsourcing deal, you save on internal resources required to be involved in the transaction and you also save money on the legal costs of doing the transaction.
Editor: Therefore, companies can obtain a great deal of leverage in terms of cost savings by outsourcing using your firm's Capture technology on the premise that companies are better off to stick to their knitting and contract out a job that a skilled team with its specialized technology can better accomplish. A general counsel would be doing two things: one of the most important things is to help his business save a lot of money and also get a fix on the legal costs.
Hamilton: Exactly. Just by knowing that our client will use Capture, we can offer a lower fixed legal fee for the contract-creation part of a transaction as the whole process has become structured and manageable, rather than an open ended journey of meetings and contract iterations.
Editor: Why do you believe that the combination of private equity and outsourcing is a compelling one with the potential to transform the performance of portfolio companies?
Hamilton: All the indications are that outsourcing will play an increasingly important role in the private equity industry. The overlap has great potential when outsourcing is used to transform investee companies whose future development is dependent upon adding business capability - contracting out is an attractive alternative to a buy-and-build program. Indeed, it may provide more certain business planning since it can reduce the risk of not being able to complete the transforming M&A transaction.
Not only are portfolio companies more likely to be outsourcing as part of business as usual or their investment strategy but we also believe that there are excellent opportunities for putting in place outsourcing arrangements that support the broader portfolio without limiting the ability of the private equity house to divest individual portfolio companies.
In this scenario, there is the opportunity for private equity houses to put in place framework outsourcing agreements that can be drawn on by a number of portfolio companies to deliver economies of scale and improved savings. This requires a carefully thought-through structure to ensure that the portfolio companies can operate independently, but these structures are now workable.
We're also, more generally, seeing an increasing use of outsourcing as a result of M&A activity - acquirers are more likely than ever to use outsourcing to support target businesses rather than try to create the new back-office departments in-house.
Editor: Let's assume that a company needs help in finding areas that it can profitably outsource, where does that company go for advice? Do they go to you or do they go to a management consultant?
Hamilton: They would typically bring in a management consultant for help with identifying which area to outsource. Having said that, the Latham & Watkins outsourcing team tends to do more than most law firms in terms of our level of involvement with the technical and commercial aspects of the transactions. We help our client's structure deals, set up their governance process and help them build their pricing and service level models. I don't think we could have come up with something like Capture without our being deeply involved in all aspects of the deal and not just focused on the legal issues.
Editor: The general counsel now, as you know, is increasingly one of the four or five top officers in a company and serves on the executive committee in many and is encouraged to participate in discussions of business opportunities.
Hamilton: I think the general counsel can absolutely have a key role in the conversations about what's core and not core within an organization and the strategic approach supporting the outsourcing project. Often the decision to investigate outsourcing has enabled the general counsel to influence other parts of the organization about what they should look at to enhance profitability and how to deliver successful transactions. We would be pleased to discuss the opportunities offered by outsourcing with general counsel or members of the legal department.