10.30.07
Legal Process Outsourcing - how to make it grow
In recent years, legal fees of major law firms have grown dramatically, both on a per-attorney and per-matter basis. Individual attorney fees can be as high as $300/hour for a first year attorney. For complex mergers and acquisitions, litigations and patent prosecutions, fees can easily reach into seven figures. This growth has historically gone unchecked and has been begrudgingly accepted by institutional clients. But things are beginning to change – and, like in many industries, outsourcing is playing a key role.
Outsourcing of legal services is not a new concept. It is, however, just beginning its exponential growth. Fed in part by the undisciplined increase in firm fees, in part by industries growing comfort with outsourcing and in part because of improving skills and capabilities in the marketplace, high growth in this market is a given. Full exploitation of these capabilities, however, has been delayed by several factors, including in-house counsel reluctance and perverse incentives for law firms. As processes and methodologies improve, in-house reluctance will ultimately decrease and in-house counsel will, for economic reasons, lead the charge to offshore services.
Still, far too many companies are not yet taking advantage of these great, high-value, but relatively low cost services. Certainly, a company may be cautious about exposing its innermost legal secrets to outsiders – particularly ones that are thousands of miles away. Yet those same companies have little concern about sending their customer data to the four corners of the earth. Also, most lawyers (including this author) will claim that what they do is somehow unique or special. While there is certain truth to this, the simple fact is that many facets of a law practice are neither unique nor special. It is these tasks that are ripe for LPO services. That LPO services has remained a relatively small, but consistently growing trend, indicates that certain market forces must be effectively retarding the growth of LPO services.
Ultimately, I believe that the reluctance comes from two discreet, but related areas: law department management shortcomings and law firm reluctance. The combined forces of these two factors has kept companies from realizing significant savings in their receipt of legal services and facilitated the unfettered rise in overall legal fees, even while the economy is slowing.
Historically, lawyers have not made the best managers. Many times, those elevated to management positions in organizations, while often brilliant lawyers, have had little formal management training. In addition, and unlike most business management, law department managers are still lawyers first and managers second. The number and complexity of matters dealt with by a senior attorney in any given day can vary greatly, and rarely is there sufficient time to clear one’s calendar to deal with internal management tasks.
Staff counsel are reluctant to promote outsourcing as well. Law, like all professions, operates with a little mystique – mystique that will be potentially compromised if the same work can be done at one-fifth the cost offshore. Furthermore, after seeing outsourcing related reductions-in-force throughout their organizations, staff counsel are reasonably concerned about keeping their jobs.
Still, the average in-house law department is significantly understaffed given the workload that they face. However, budget constraints discourage the use of expensive outside resources, meaning that long hours and unfinished work are more the norm than the exception. In these situations, LPO services can significantly add value to the in-house law department.
Lowering litigation costs offers another benefit to a law department. Litigation is often seen as a wildcard in the budgeting process – after all, one never knows when costly, complex litigation will strike. Employing lower-cost offshore resources in support roles can decrease the amplitude of litigation costs and add more predictability to the budgeting process.
Law firms present another roadblock to a company using LPO services. It is simply not in a law firm’s best interest to outsource less-complex, but highly profitable services to offshore locations. Many years ago, law firms justified the use of high-cost junior associates as necessary to the training and apprenticeship process. Unfortunately, due to high associate attrition rates (some studies show that between about 20-50% of junior associates leave their position within the first three years); the value of this training may be severely compromised.
A modern law firm operates under a model that represents a very steep pyramid. At the top are the equity partners with the largest “books of business.†Under that are lesser equity partners, non-equity partners, of counsel (basically, non partner-track attorneys) and associates (effectively, an apprentice pool). It is the equity partners’ charge to keep these other, rather expensive people busy – very busy – and to weed out, at an alarmingly high rate, those deemed not to have “equity partner potential.â€
It is a simple fact that law firms make the most money on their junior- to mid-level associates. These people are kept busy doing a variety of tasks, some complex, but many very simple. With rates of first-year attorneys’ at large firms now at $300 or more, and with work goals of about 1,900 – 2,100 hours per year/per associate, the economics become clear. A first year associate may be worth $600,000 or more in revenue during his or her first year of service. Yet the fully loaded cost of such an associate is around $275,000 or so. Keeping these people busy – at the client’s expense – is among the highest of priorities within a major law firm.
Interestingly, many of those lower- to mid-level tasks can be outsourced or offshored to substantially lower-cost resources. However, doing so could remove these highly profitable workers from the mix, drastically cutting into a firms profits-per-partner, particularly in jurisdictions requiring disclosure of fee sharing and subcontracting arrangements (California, for instance). It is no wonder why most major firms have been reluctant to embrace outsourcing.
Given that the firms are disincentivized from outsourcing and that most law departments do not have the resources to manage outsourcing, it is no wonder that LPO services are just beginning their upward thrust. The economics, however, are staggering – and will drive more and more companies to these cost-effective options.
Most LPO’s tend to focus on relatively straightforward matters, such as document review, legal research, due diligence, patent searching, document coding and transcription. Except for transcription and document coding, these tasks are often assigned to young associates – at nearly $300/hour. Large deals and large litigations, where substantial due diligence and document review often occur, are literally gold-mines for major law firms, offering substantial opportunities to staff large numbers of associates on relatively low-value, but high-profit work. It is clear that a law firm has little incentive to move work offshore!
Given the incentives, it is ultimately up to the law departments of commercial clients to encourage and manage LPO relationships. To do so, law departments will have to become more skilled at management – and may even need to hire a skilled vendor manager to properly allocate and control the workflow. It will then be up to the law department to insist that their outside law firms use the contracted offshore resources.
While this may seem to be a significant and difficult task, the financial and services benefits can be great. With lower personnel costs, offshore resources could be deployed to assist various business units within the organization, doing more to support their clients for less money. Furthermore, the peaks and valleys of work could be evened out a bit, allowing in-house attorneys to take a more strategic role as business partner with their clients.
At the end of the day, it will be up to the client, not the law firm, to compel the use of these less expensive options. It is time for them to do so.
