Offshore Legal Outsourcing, Plus New Laws, Will Change How Lawyers Must Operate in the New Decade
Posted in Blog on September 19, 2011 by KPO Consultants
By Steve Homan, Consultant, KPO Consultants and Rahul Jain, Vice President, KPO Consultants
Many good points already have been made about what offshore legal outsourcing (or legal process outsourcing/LPO) has achieved in 2010, and what it is likely to contribute in 2011. But this is not just a new year; it's a new decade. This second decade of the 21st century is the one in which the legal world, as we know it, might be turned upside down. Along with related factors, offshore legal outsourcing is likely to continue to be among the leaders of the law revolution.
In the new, client-centric legal world, legal services providers can no longer rely on privileged positions. They can no longer depend on unwavering acceptance of the old model, which Cisco General Counsel Mark Chandler famously described as "the last vestige of the medieval guild system to survive into the 21st century." Lawyers and law firms must deliver value. That's what high-quality, offshore legal outsourcing is all about. This is the number one reason why the LPO (legal process outsourcing) sector is likely to continue to boom throughout the new decade.
The Association of Corporate Counsel (ACC), in effect the trade association for in-house legal departments worldwide, has noted that "[f]or the past two decades, there has been an unrelenting drive by companies and their suppliers to reduce costs while increasing quality and value in their products and services. The only outlier seemed to be the law firms." In response, the ACC has instituted a "Value Challenge... based on the concept that firms can greatly improve the value of what they do, reduce their costs to corporate clients and still maintain strong profitability."
The old days when clients would simply roll over and accept the cost burden of the "pyramid structure" of large law firms, under which clients traditionally have been asked to pay a king's ransom for massive hourly billing by an army of junior associates at the bottom, who do not know what they are doing, and who, as a result, conveniently bill more hours, increasingly are just that: "old." As reported in The Economist: "American law firms typically get fresh law graduates to do such grunt work and then bill clients for it at steep rates. But the recession has prompted clients to rebel. A recent survey by the American Lawyer found that 47% of large firms had seen clients refuse to have hours billed to beginner lawyers."
Many law firms are less than happy with the changing situation. ABA Journal columnist Patrick Lamb points out that "reaction against moving the profession into line with the business world reflects a persistent 'law firms are different' mentality which is, as [Kirkland & Ellis] former managing partner Fred Bartlit has said, “reminiscent of what the owners of the best buggy whip makers were saying when General Motors was first founded."
Indeed, if law firms can't adapt to a client-centric world and start living up to the values and practices of the companies they represent, they will be toast. Which is fine with some of the leading LPO providers, who are happy to eat them for breakfast, if it comes down to that.
But it will not come down to that. Forward-thinking law firms are embracing the change, and reaping rewards from it. Some of those law firms already are receiving more assignments and client revenue, not less. This is coming in part from (a) existing clients who send them “elective” legal work that otherwise would never have been performed, due to cost, but which is affordable when Western lawyers are paid to supervise and edit the work of attorneys offshore, and (b) new clients who hire those firms because of their reputation for developing a "value" alternative to the old model.
For example, partners from three large US/UK law firms (including Latham & Watkins and Morrison & Foerster), and inside counsel at one large bank, recently quit their jobs to form a boutique law firm, “radiant.law,” that bills for value, rather than by the hour, and that embraces offshore legal outsourcing, rather than resists it. One of the radiant.law founders, former Latham & Watkins partner Alex Hamilton, explains: "We had all been working at large law firms or in-house at large companies and felt that there was a lack of movement towards change and development in law firms that we were all looking for, so we decided to set up our own firm with a view to offering services to clients that are better value... using a support network including offshore legal providers."
In the new decade, smart law firms will continue to form new models, adapt to change, embrace legal off-shoring, and learn how to make all of this serve not only the interests of their clients, but their own. And as for the clients, they will expand their use of offshore legal outsourcing providers, whether in conjunction with law firms or directly.
Much has been written about the dramatic upheaval in the US and UK legal worlds. But just as rapidly as the Western legal market is changing, so too is the legal world in India. National law schools are proliferating, skill sets are improving, business-oriented metrics are beginning to prevail, and India's "demographic dividend" is in full effect.
Fifteen years ago, if an average middle-class Indian son told his parents he wanted to become a lawyer, this would have been about as welcome as an announcement that he's leaving town to join a circus. The Indian legal system, in which court cases can take as long as a quarter of a century to be resolved, rivals turtle-like slowness. And the pecking order of prestige and pay in India, much of the legal profession historically has been located somewhere around the rank of policemen, plumbers, and corrupt politicians.
Not so today. With the rise of India as an economic powerhouse, accompanied by the rise of Indian corporate law firms, and with a well-publicized boom in legal process outsourcing, young people in India, and perhaps more importantly their parents (who still call the shots in traditional Indian families), have come to see law as an excellent career choice.
This increase in the prestige in being a lawyer, combined with the sheer size and youth of India's population (1.2 billion people, 65% of them young) has profound implications for the entire legal world. As former government official Pavan K. Varma writes in his excellent book, "Being Indian," although the caste system that began several thousand years ago is now "officially frowned upon," still in India "the mentality of a stratified society is very much in evidence in everyday life," and there is still a ubiquitous "obsession with status." That's why the number of elite, or "national," law schools in India has increased from one to 14, to meet the new demand for upscale legal careers. That's why the Indian educational system now is turning out record numbers of outstanding, English-speaking law graduates.
Now that high-profile U.S. law suits have been defeated with the use of high-end, offshore legal outsourcing, the corporate world is just beginning to realize that the best response to bogus claims is not a costly settlement payout, but instead, a cost-effective defense.
In a comprehensive law review article on offshore legal process outsourcing, Professor Cassandra Burke Robertson of Case Western Reserve University School of Law has highlighted how offshore assistance in the resolution of frivolous lawsuits in particular is revolutionizing the way in which law is practiced in the West. "International legal outsourcing is reshaping the practice of law," says Professor Robertson, in her November 2010 59-page report, "A Collaborative Model of Offshore Legal Outsourcing" (Working Paper 2010-35 This paper can be downloaded without charge from the Social Science Research Network Electronic Paper Collection: http://ssrn.com/abstract=1705505) Professor Robertson uses an actual high-profile litigation in Los Angeles to demonstrate some of the most surprising and profound ways in which LPO services are shifting the legal landscape:
Offshoring the defense in that case did not merely replace domestic legal services with a lower-cost alternative elsewhere; instead, it changed the nature of the defense entirely. It took a case that would likely have been handled outside the court system through a nuisance settlement and brought it within the formal adjudicatory system. As a result, the case was decided on the merits and the decision is publicly available, potentially discouraging further meritless claims
In short, the offshore outsourcing of legal work is leading to an unprecedented new breed of effective tort reform, as defendants facing bogus or inflated claims are choosing to litigate and win. As Professor Robertson points out, this in turn discourages such claims. And the money that otherwise would be spent by defendants on nuisance payouts can be plowed by corporations right back into Western economies.
The implications are enormous. The average large corporation spends $19.4 million per year on outside counsel fees, much of it for litigation, and that is not including the huge amount of money wasted on nuisance payouts to plaintiffs and their lawyers.
In a brilliant review of the hit film, The Social Network, Harvard Law Professor Lawrence Lessig takes the example of the $65 million settlement extorted from Facebook founder Mark Zuckerberg by the Winklevoss twins (a deal the twins now say is not rich enough, so they are trying to void it in the courts) to point out that "the real villain" in the Facebook story is a legal system that taxes innovation and rewards frivolous litigation plaintiffs:
Any legal system that would allow these kids to extort $65 million from the most successful business this century should be ashamed of itself. Did Zuckerberg breach his contract? Maybe, for which the damages are more like $650, not $65 million. Did he steal a trade secret? Absolutely not. Did he steal any other “property”? Absolutely not—the code for Facebook was his, and the “idea” of a social network is not a patent. It wasn’t justice that gave the twins $65 million; it was the fear of a random and inefficient system of law. That system is a tax on innovation and creativity. That tax is the real villain here, not the innovator it burdened.
In the coming decade, corporate and other defendants are increasingly likely to turn the tables on meritless lawsuits and realize tremendous costs savings, through offshore legal outsourcing.
The new development of third-party funding of plaintiffs' litigations, to the tune of hundreds of millions of dollars provided by seemingly unlikely investors such as Citigroup, means that corporations are under even more pressure to reduce their legal costs. Offshore legal outsourcing is an answer, not only to them, but also to the claims investors, who want to maximize their returns on worthwhile cases, rather than see most of their money go to legal fees.
Regarding third-party involvement in litigation funding, The New York Times reports as follows: “Total investments in lawsuits at any given time now exceed $1 billion, several industry participants estimated. Although no figures are available on the number of lawsuits supported by lenders, public records from one state, New York, show that over the last decade, more than 250 law firms borrowed on pending cases, often repeatedly."
For the new investors in litigation, because every dollar in legal fees means a reduction in the return on their investment, they too may come to see offshore legal outsourcing as a crucial value proposition.
Value-based, flat-fee or fixed-fee billing already is beginning to turn the legal world upside down. Instead of trying to maximize hours and costs, law firms that practice alternative billing, voluntarily or otherwise, are now trying to minimize those same hours and costs. Under that scenario, offshore legal outsourcing is not a dangerous threat to law firms, but instead a great opportunity.
Although billing by the hour is by no means dead, it seems to be an endangered species. The American Lawyer magazine reports that 91% of law firms agreed to flat fee billing for at least some entire matters in 2010.
Susan Hackett, Senior Vice President and General Counsel of the ACC, says, in a joint news advisory: "[V]alue-based billing options are becoming institutionalized, and will likely increase steadily year over year. We were interested to see if in-house counsel would continue to experiment with - or continue to deploy - new fee structures once the markets began to rebound and budgets were not under the same level of stress in 2010. The fact that billing practices did not revert back to the ‘way we used to do it’ demonstrates that in-house counsel are not retreating, but instead continuing the march to drive costs and value away from measuring the value of hours alone.”
For example, Morgan Lewis & Bockius reports that 40 percent of its revenues are billed through alternative fee arrangements. That firm handles Cisco's commercial litigation nationwide for an annual flat fee, and it has been entering into similar agreements with other clients.
Another mega-firm, O’Melveny & Myers, distributed an eventually leaked internal memo saying that by 2012, the firm will "adopt a single rate card" and become "the leader in providing high-end legal services on a fixed-fee basis." The memo noted that “[d]ocument review and production have been outsourced altogether or client-directed to contract attorneys.” Lastly the firm says it will “will seek out opportunities to take on high-value litigation and transactions engagements at fixed fees.”
When law firms are paid a flat or fixed fee for a transactional or litigation matter, regardless of the number of hours required to complete the assignment, all of a sudden there is a tremendous incentive to outsource as much of the work as possible to low-cost, high-quality locations. By the year 2020, offshore legal outsourcing providers may be performing a substantial portion of these services, including not only document review, but also legal research and drafting.
The financial regulations that arose from the lack of transparency and oversight blamed for the recent recession that shook the core of the Western economy, together with the regulations contained in the new U.S. healthcare legislation, have created vast new compliance obligations for U.S. corporations, all of which cry out for cost-effective, offshore legal solutions.
For example, private equity advisers and hedge funds now have to register their firms with the U.S. Securities and Exchange Commission and reveal their books to regulators. Also, institutions accepting deposits will be required to comply with the bank holding regulations issued by the Federal Reserve Bank. Similarly, companies that issue mortgages are subject to new record-keeping requirements to discourage improper loans. The new Consumer Financial Protection Agency will require entities that create consumer debt to disclose more information. Energy and healthcare reforms also will impose new compliance requirements.
Corporate legal departments, already under pressure to reduce spending, are likely to turn to offshore legal process outsourcing throughout this new decade, in order to get the new regulatory compliance work done as efficiently as possible.
As the ABA Ethics Commission astutely recognized, offshore legal outsourcing can be a blessing to overworked and out-gunned solo practitioners and small law firms. LPO providers are acting as "legal trauma units" for such lawyers, expertly handling their deadline emergencies, leveling the playing field for them, magnifying their strength, and allowing them to not only meet difficult deadlines, but even run circles around the client-required, "lean staffing" of large law firms.
In other words, hidden behind the huge, headline-grabbing LPO events, is the following significant development: Solo practitioners and small law firms, who comprise the majority of lawyers in the West, have been turning to offshore legal outsourcing in droves. Smaller legal outsourcing providers in particular have been deluged with requests from such lawyers, while the largest LPO companies focus on large corporations and mega-law firms.
This development dovetails with the conclusions in the American Bar Association's Formal Ethics Opinion 08-451, in which the ABA Ethics Committee found that legal outsourcing is "a salutary trend in a global economy" -- a practice that "can reduce client costs and enable small firms to provide labor intensive services" that they otherwise might not be able to manage.
While some companies reportedly are thrilled to pay $100-200 per hour for "nearshore" or onshore U.S. contract attorneys, and although this trend may thrive for some time in contrast to the $300-500 per hour that BigLaw firms charge for similar work, the nearshore/onshore providers will continue to have serious competitive trouble in the face of the reality that very high-quality, more reliable alternatives are available offshore for $20-40 per hour, or better yet, for inexpensive flat fees.
In an article in The Los Angeles Times ("Growth of Legal Outsourcing May Herald Era of Cheaper Lawyering"), the Times reports that "companies such as Goldman Sachs and Accenture have been receptive" to using outsourced legal services at nearshore provider Axiom Global, Inc. "because Axiom lawyers charge about $200 an hour, about half the average rate of associates at the largest firms outside New York."
In a similar vein, The Economist reports as follows: "DLA Piper, a big American law firm, plans to set up its own outsourcing operation next year. Taking advantage of the tough legal jobs market, the firm will build a network of thousands of non-staff lawyers, says Peter Pantaleo, the managing partner of the New York office. These lawyers will be American but cheaper, perhaps because they are looking for a work-family balance. They will do for perhaps $100 an hour work that might otherwise cost the client $500, says Mr Pantaleo."
Regarding the bitter and continuing complaint that legal jobs are lost in the U.S. because they are outsourced, law professor Cassandra Burke Robertson concludes it is not a problem. She cites facts to support her point that offshore legal outsourcing "creates more jobs than it eliminates... [and] the cost savings achieved from offshoring lower-level work may create more high-end jobs onshore."
Even the offshoring of high-value work creates job opportunities in the West. Deals previously undone, and litigations previously settled (or never filed), due to previously excessive legal costs, become suddenly affordable. Affordability means more work for the Western lawyers involved in supervision, editing, negotiating, and/or appearing in court.
Some experts talk, perhaps wishfully at times, about the supposedly upcoming "consolidation" of the LPO industry. In fact, there has been much more proliferation than consolidation. With the one exception of the acquisition of LawScribe by UnitedLex, it seems that so far there has not been a single example of one LPO buying or merging with another. Of course, several legal process outsourcing providers have disappeared entirely (some leaving their old websites intact for posterity, like electronic tombstones), but for every company that has gone under, another three or so have cropped up. The industry has gone from 15 companies in 2005, to over 200 today, and that trend will only increase, as offshore legal outsourcing becomes more popular. This can be a very good thing, not just a bad thing, to the extent that boutique and other niche LPOs emerge to satisfy client needs that go beyond the currently dominant trend of high-volume document coding.
Global companies outsourcing their legal processes across the world seem to prefer doing business with smaller companies, the results of a new survey suggests. The survey conducted across 6,547 clients globally shows that smaller vendors, including legal outsourcing, LPO and legal KPO companies are satisfying more clients and to a greater degree compared to their larger counterparts.
So what makes these smaller players stand taller in the global market? "Smaller outsourcing providers... have been pushing their specialist knowledge and deep client understanding as their unique selling point for some time now, claiming that specialists provide a better service. While all outsourcers talk up their ability to specialise, this survey suggests that... smaller players are best positioned to deliver on that promise,'' said Eamonn Kennedy, who led the research for Datamonitor.
Actually, the "small is beautiful" trend has been accelerating, especially in the Western legal markets, where boutique or niche law firms are very much in fashion. Corporate and other clients are looking for less overhead, fewer conflicts of interest, more responsiveness, greater expertise, and last but not least, lower fees.
Ironically, however, in India the word, "strength," with reference to a service provider, usually means the number of employees, with a greater number signifying greater "strength." In the West, by contrast, a large number of employees is often perceived as weakness, not strength. "Strong" providers are those who provide more value for the money. As law industry expert Jordan Furlong said: "The overall marketplace for legal services is fracturing.... It's unbundling, and specialists are emerging. Legal work will go to the provider best designed for that particular work...."
Accordingly, at a time when Western clients are focusing on value and expertise, not size, it might be a mistake for LPO providers to try to mimic the same Western "BigLaw" model that is falling out of favor. The specialist capabilities of offshore legal outsourcing providers, beyond large-scale document coding, seem almost endless.
The document coding sector, however, including e-discovery, due diligence, and other high-volume document review services, may be a huge, gaping exception to the above generalization. Given the price competition in the document review field, with effective hourly rates sinking to what appears to be an average of less than $10 per hour, greater size and the concomitant economies of scale might not only be preferable -- they could become the only game in town.
A low barrier to entry has led to well over 100 document review companies in India, the Philippines, South Africa and elsewhere, resulting in the fierce price competition. In India, for example, there are hundreds of thousands of lawyers and non-lawyers, who, after two weeks of training, are able to do this kind of work for as little as a couple of hundred dollars a month or less. This is many times what the average Indian is paid. India's "demographic dividend," coming from the fact that the country has, and will continue to have, one of the largest and youngest populations on earth, means that (a) back office work in India will continue to explode, and (b) the price competition among document review providers will continue to reduce profit margins.
Having said all that, the wave of the future for the most part is proliferation, not consolidation, especially since the vast majority of legal services involve drafting and research, not document review. A growing number of expert service offerings, and companies to provide them, will mark the new decade.
Instead of complaining about the supposed loss of jobs, forward-thinking Western lawyers are realizing that offshore legal outsourcing provides them with an opportunity, and maybe even a necessity, of moving up the value chain. Whether they are litigators or transactional lawyers, they have the opportunity to focus on becoming quarterbacks or team coaches, or as Jordan Furlong puts it, "solutions managers." That's what clients want from them the most. As for young associates, they will be trained to negotiate deals, appear in court, supervise offshore providers, and provide legal advice. None of those tasks can be done best (or in some cases, at all) by foreign lawyers. All of those roles provide an opportunity for growth, not decline, at least on the part of modern law firms that are willing to embrace the future, rather than resist it.
Law.com journalist Gina Passarella, in an article in The Legal Intelligencer ("Are Law Firms Morphing Into Managers of Legal Providers?") recently reported on this: "Smart firms will say they still want to manage the process and sit at the client's right hand," [Jordan] Furlong said, adding however, that they need to realize there are some things the firm is good at and other things a legal process outsourcer may better handle. The real battleground for law firms in the near future will be over who will serve as the quarterback, or the solutions manager, Furlong said.
According to the article, several large law firms have been taking up the challenge. For example, Lovells, now Hogan Lovells, has sent over 9,000 matters to smaller firms to save its clients up to 20% on fees, while still maintaining oversight and supervision. "In turn, Lovells was able to increase its rates for the high-end work it was doing, given the fact that the clients were still saving money. That also made up for sending out some of the work...." The article concludes as follows:
In a now-famous New York Times article, business journalist David Segal reported on the surprising fact that many venture capital funds deliberately look for entrepreneurs who have a mental disorder. The investors are looking for potential business leaders who are "just manic enough" or "crazy enough." In the LPO field, about 6 years ago, Indian providers like Mindcrest, Lexadigm, Quislex, Pangea3 and others were "just crazy enough" to provide document review and other services that most Western companies and law firms would never imagine sending overseas. Now, the sending of document work to India is routine. Today, arguably "crazy" legal outsourcing entrepreneurs and other LPO leaders are setting their sights on the highest-value, highest-profit-margin mother lode, which is legal research and legal drafting. It is in those areas that offshore legal outsourcing is likely to make its greatest mark.
A particularly interesting firm, which has ambitions you may deem admirable or frightening or a combination thereof, is CPA Global of Jersey, the Channel Islands, which bills itself as the world's leader in legal process outsourcing, and which raised a mere $700-million in a private placement in the UK this past spring. For that nice sum, the investors got what? 49%. Not even control. This is a war chest on a scale the AmLaw 10 and the Magic Circle, put together, would be very hard-pressed to match. And they'd probably have to cede control.
The ambitions, and business strategy, of CPA Global and their ilk are no secret: Bypassing law firms altogether and marketing their offerings directly to clients. If another word for outsourcing is disintermediation, welcome to the ultimate disintermediation: They would like to take the law firm out of the equation altogether.
And this [offering of not only document review but also higher value work, all at "Bangalore" rates] is precisely where the independent outsourcing firms can have an impact. Once clients begin to get accustomed to the notion of being able to unbundle, or unchunk, legal engagements - be they disputed matters or transactional ones - there's potentially little end to it.
In a more comprehensive article, Jordan Furlong points out that off-shore providers are "moving up the value chain," far beyond "first-year associates’ grunt work," to the point where they are "rewriting the rules of the game":
LPOs, it has to be emphasized, are not just doing first-year associates’ grunt work, not anymore. They are moving up the value chain steadily and with surprising speed, taking on the work of second-, third- and fourth-year lawyers -- not just by using lower-cost labor, but by doing the work more systematically and efficiently. As I said a while back, these companies will not be content with basic work forever; they see no reason why they can’t eventually do the toughest legal jobs.
Billion-dollar legal services providers, unfettered by traditional lawyer restrictions, can go global instantly and almost effortlessly. They’ll have more than enough money to acquire the top talent from the best firms worldwide, to invest in new systems and innovations that will reduce costs even more, and most importantly, to change clients’ expectations about what a law firm can deliver. They will be law firms, in effect, and even if lawyers in a given jurisdiction somehow succeed in keeping them out, the landscape will have changed: clients will demand their lawyers compete on the same playing field."
Professor Robertson makes a similar point in her law review article, cited above. She shows how offshore legal outsourcing is not only confined to quasi-legal work such as filling out forms, coding documents, and transcribing depositions, but also includes complex work such as legal research, drafting contracts, drafting briefs, and preparing patent applications. Robertson points out that, “while this higher-level legal work represents only fifteen percent of the LPO market right now, it is quickly growing; as LPO firms become more established, they tend to take on increasingly more sophisticated work.”