Outsourcing Is In

From State Bar of California, The Bottom Line, October 2014

If you deal with even a handful of companies today, you have undoubtedly encountered some version of outsourcing. Law firms should take note.

The principle of outsourcing is fundamental: do what you do best and let others do what they do best, most efficiently, and at least cost to both you and the client.

Outsourcing is not an entirely new principle for law firms. Many firms for years have outsourced mailroom services and records storage, for example. The latest examples range from legal process outsourcers (LPO) that handle the details of a merger transaction under general supervision of law firm partners, to software companies that analyze millions of document pages electronically for lawyers' final review as part of litigation due diligence. The goal in either case is to reduce rates and excess staffing for clients' benefit.

There is no question that using specialized service providers to meet client needs at a reduced cost is the wave of the future for major law firms. Outsourcing today can go in any number of other directions, with positive impacts on firm costs and client value.

Service Outsourcing

Service outsourcing is the most dramatic and high-profile development, in which high-speed Internet technology connects U.S. law firms to the growing pool of highly educated talent in developing countries where the use of English is widespread.

Such offshore legal service providers can reduce the cost of the following:

  • Transcription of voice files from depositions, trials, and hearings
  • Accounting support in the preparation of time sheets and billing materials
  • Paralegal and clerk support for research and file management
  • Data entry for marketing, conflicts, and contact management
  • Litigation support graphics
  • Legal research, including case citation summaries
  • Review and due diligence of business documents
  • Patent review and searches

Because the work is performed by an external outsourced entity, not part of the law firm, but first approved by the client in the engagement agreement and produced under the firm's supervision, it is financially transparent to the client. Clients often get angry with their attorneys for charges they consider overhead and part of the cost of doing business. Given that reality the outsourcing of service needed to advance the cause of the client is sure to grow.

Outsourcing to Contract Lawyers

Many firms, both large and small, use "contract lawyers" to provide legal counsel at a reduced cost.

One crucial question determines the extent of cost savings: When you have a contract attorney work for you, how do you bill your client? This issue has been litigated, and the conclusion is that the contract attorney is not an out-of-pocket cost for billing purposes. Firms are not required to bill the client at the cost to them for the contract attorney's time. They may bill at an "attorney's rate," a standard flat rate or any rate that is established in the engagement agreement and is acceptable to the client. From the firm's perspective, it is important to set a contract billing rate high enough to cover all "overhead" expenses, which would then include all of your own staff, such as secretarial help, paralegals, word processors, and so on.

Contract lawyers can contribute to work and cost efficiencies if used correctly. They can be a transparent resource (again, thanks to technology) that offers a win-win solution for firms and clients.

Outsourcing Commodity Legal Work

Outsourcing doesn't always flow from law firms. Many firms have benefited from the outsourcing flow to them of contracted-for work from increasing numbers of in-house legal staffs. General counsel have realized that standardized and predictable legal work can be performed using skills and experience readily available in the market. Economies of scale and experience present at outside firms benefit corporate America. When this work is outsourced, the high-volume specialist can often perform it at a lower cost and at a quality at least equivalent to an in-house team.

For in-house counsel, regular review of the balance between externally and internally outsourced work is critical to secure value for the money.

Outsourcing and ABA Model Rules

Perhaps the clearest sign that outsourcing has become an accepted part of the legal services model is that the American Bar Association House of Delegates, in the not-too-distant past, quietly approved several changes in comments to the American Bar Association Model Rules to "clarify" the ethical obligations of lawyers when they outsource legal services. These commonsense clarifications are notable:

  • A comment to Rule 1.1 on competency says that a lawyer should ordinarily obtain informed consent from the client before retaining outside services and should "reasonably" believe that the outside services will contribute to the competent and ethical representation of the client.
  • A new comment to Rule 5.3 (Responsibilities Regarding Nonlawyer Assistance) says that a lawyer may hire nonlawyers outside his or her firm but must ensure that the engagement is compatible with legal ethics obligations.
  • A new comment to Rule 5.5 (Unauthorized Practice of Law; Multijurisdictional Practice of Law) clarifies that lawyers cannot engage in outsourcing when doing so would facilitate the unauthorized practice of law.

    The message is clear: in an outsourcing relationship, the client must know about and approve of the contract arrangement, and the contracting lawyer retains final responsibility for the client relationship. The lawyer who engages the outsourced service becomes responsible, in a malpractice sense, for any errors committed even in a seemingly simple case.

    However, this really only applies when lawyers themselves do the outsourcing. What about when the impetus comes from the client? When clients increasingly seek cost-effective nonlawyer services, they are taking charge of the valuation of services by taking control of the legal service process. Thus, when the impetus for outsourcing comes from the client, there will be a major impact on the whole outsourcing scenario and how it is viewed in the legal community from an ethical and liability perspective.

    The Cost/Value Dynamic

    Technology is generally the driver that makes all three forms of outsourcing possible. Increased technology creates greater efficiency but also greater costs of operation. Thus, a new pricing paradigm must be developed.

    To the extent that law firms provide the service their clients need at the price clients are willing to pay, they will grow. Otherwise, they will be challenged to stay in business.

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