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March 20, 2013

Managing outsourcing and eDiscovery (Part 1 of 2)

By Matt Hassett, Jim Hassett, and Mike Egnatchik

At a time when clients are demanding to pay less for legal services, it is easy to see the benefit of getting work done for lower hourly rates. Law firms and their clients are looking at each step in legal processes and asking the question, “Can I hire somebody else to do this step at a lower cost, or do it better, or both?”

Outsourcing is a growing trend, and it is leading to new challenges in managing work.

Some types of legal work are relatively easy to outsource. Here’s how Pat Lamb has explained the underlying rationale:

The four-buckets rule—developed by Jeffrey Carr, general counsel of FMC Technologies—is that that legal work fits into one of four buckets: process, content, advocacy and counseling. The Carr corollary is that general counsel are willing to pay generously for advocacy and counseling, but believe process and content should be free, or at least much less expensive, while law firms make the bulk of their revenue from the process and content buckets.

In one widely quoted discussion of outsourcing, Legal OnRamp founder Paul Lippe has argued that about 25% of all legal work falls into Carr’s process bucket:

Moving information from one place to another to create legal work product, typically either generating or analyzing contracts, or working through discovery-based work in litigation or investigation…. Process work will continue to grow, but it will increasingly be managed… with a combination of lower-cost people, process and technology.

Lippe went on to note that “large law firms charge from $150/hour (paralegal) to $400/hour (mid-level associate) for process work.” He then listed these lower cost alternatives:

  • “In-house teams can execute process work for $100-200/hour, and much less if they organize for it as Cisco has.
  • Non-traditional providers like Axiom charge perhaps $125-250/hour for process work, but are still often advantageous for clients, because they represent a variable, not fixed, cost, and don’t require supervision.
  • Legal process outsourcers (LPOs) can deliver process work (including onshore lawyers, technology and process) for around $60/hour with predictable quality, integrated with legal departments and with formal methods for delivering and ensuring quality.
  • Law firms have started to create their own ‘captive’ LPOs, like Orrick in Wheeling, W.Va., Wilmer in Dayton, Ohio, Allen & Overy in Belfast and Baker McKenzie in Manila.”

In his new book Tomorrow’s Lawyers: An Introduction to Your Future (p. 33) Richard Susskind takes this much further:

In the past, when confronted with a legal job, a client had a single choice: undertake it internally or pass it out to an external law firm (or perhaps a blend of the two). The legal world has now changed, so that new alternative sources of legal service are now available. I have identified 15 ways of sourcing legal work.

The key point here is that the identification and management of outsourcing alternatives will become an important task for firms that want to compete in the new normal.

The field of legal project management includes a variety of best practices for managing the activities of an internal legal team. If your team includes contract lawyers and other external non-traditional staff, many of these same principles apply

The challenge of managing subcontractors is familiar in other professions. The tenth edition of Harold Kerzner’s widely quoted textbook  Project Management has an entire chapter devoted to working with external suppliers. The perspective is interesting, since the chapter makes it clear that a firm using an external source for some of its work on a matter is now in a role reversal. The firm is a client of the outsourcer it has hired, and has the same responsibilities to monitor that outsource supplier that its own client has to monitor the firm’s work.

If XYZ Corporation has hired your firm for a matter, the legal department of XYZ had the job of hiring you in the first place and has the responsibility to monitor your work. Similarly, if you hire supplier DIS for discovery work, you had the job of hiring DIS in the first place and then you have the responsibility of monitoring DIS to assure that their work product is acceptable. The firm is responsible for the entire work product, and must make sure that all the parts work.

Lawyers are just starting to become familiar with the idea of subcontracting work, and the use of outsourcers presents new challenges.

As Mark Ross noted in a paper entitled The Ethics of Legal Outsourcing, “It is clear that to satisfy the duty of competently representing one’s client, a US lawyer engaging an LPO provider cannot rely on the LPO provider to evaluate its own work product and must himself or herself be able critically and independently to evaluate the work product received.”

Next week, we will talk about some of the challenges of this new requirement.

This post was adapted from the forthcoming third edition of the Legal Project Management Quick Reference Guide, which will be published on May 20.

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