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July 20, 2016

Using outsourcing to reduce legal costs (Part 1 of 2)

By Jim Hassett, Mike Egnatchik, and Jonathan Groner

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 do both?”

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…—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 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
  • 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 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.

In addition to outsourcing some elements of the work that lawyers do, law firms are also beginning to outsource many back office functions that don’t directly involve the practice of law (such as their IT help desks and elements of their marketing departments) and that involve the practice of law only indirectly (such as conflicts-checking functions).. Outsourcing of these functions can reduce costs significantly and help make firms competitive.

“What has caused this situation,” said Brad Christmas, a co-founder of nSource, a Chicago-based outsourcing consulting firm, “is the fall-off in demand for legal services – the dramatic change in how legal services are being priced and purchased.”

“All the sins of inefficiency that were covered up in the past, when law firms were riding high, are becoming exposed,” said Christmas. “Unless you are truly a premier law firm, you are fighting with many other firms over a diminishing body of legal work. The result is intense pressure to reduce prices and to keep expenses down.  And not all expenses can be kept down. There has been a constant increase in the cost of top legal talent, and firms certainly don’t want to start paying their partners less, so there are not many easy choices left.  Firms have to run their business more efficiently.”

Enter outsourcing consultants such as nSource, who describe their role as advising law firms about how to cut costs and become more competitive in the same way that consulting firms like Accenture advise corporations on how to become more efficient. In fact, they suggest to law firms many of the same cost-saving techniques that corporate America has used for years. nSource was founded in 2012, when it became clear that the new legal economy was here to stay.  It has since grown rapidly by advising major law firms on how to outsource a wide variety of their functions and on actually hiring people to perform those functions in off-site offices.

Law firms, Christmas said, “are starting slowly and gradually” to outsource many functions.  “These changes particularly affect any lower-skill, routine, rote functions that a law firm may be performing.  As to what is considered ‘routine,’ the bar keeps moving up. When e-discovery first became a major need, law firms responded by hiring lots of staff attorneys. But later, many corporate GCs took control of that function and told law firms they wouldn’t be paying for that many staff attorneys. And advances in e-discovery are gradually reducing the need to have human beings doing much of this work.”

One good example of low level work being outsourced is the information technology help desk function. A recent college graduate – not even a trained computer analyst – can easily be trained to solve the technical computer problems of most law firm attorneys and staff. And they don’t need to work on site; they can work anywhere, as long as they are connected by phone and email to the firm’s worldwide offices. So the law firm will place these people in remote offices where costs of living and wages are lower.

“The business approach for outsourcing low skill tasks is similar to the military,” Christmas summed it up. “You find an intelligent young person. You train him or her, and they do the job very well at a low cost for two or three years. Then they move on, and you hire someone else.”

This series was adapted from the fourth edition of the Legal Project Management Quick Reference Guide which will be published this fall.

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