Wednesday, April 19, 2006

Inside vs. Outside: When Does it Make Sense for Law Firms to Outsource?

A Roundtable Discussion

April 2006

Is outsourcing something real or just another area of hype? What do you see happening today in the world of law firm outsourcing?

Ron Friedmann (RF): Law firms have long outsourced many functions, from the mail room to travel services. In the past, outsourcing was restricted to what almost everyone would agree are "back office" tasks. Today, however, some firms outsource functions closer to the "front office," that is, what lawyers do, for example, legal research, drafting contracts, or document review by contract lawyers. There is no magic in where to draw the line between front and back office. Ultimately, law firm economics, ethics considerations, and market demand draw the line. Today, the trend is to outsource more. I've talked to lawyers who'd like to explore offshoring document review and to CIOs who want to investigate outsourcing help desks. So in my experience, outsourcing is not hype but serious consideration of this option, however, does not guarantee rapid growth.

Dennis Kennedy (DK): I see a growing amount of outsourcing of all kinds, although sometimes law firms don't call it outsourcing. For example, how many firms have their own janitorial staff? I'm not sure that they would say they've "outsourced the building maintenance functions," but they have. You see a growing use of temporaries, from staff to, as is increasing common, lawyers for document review and other projects. Payroll and financial functions has been a subject for outsourcing for many years. Two of the final frontiers seem to be outsourcing technology and, perhaps most controversial, outsourcing legal services in ways other than simply hiring onsite temporary contract lawyers.

John Tredennick (JT): There is more going on that meets the eye. Business process outsourcing companies like Office Tiger are now targeting the legal market as the next candidate for outsourcing. As I wrote in an earlier article, Office Tiger provides outsourced legal secretaries to a major U.K. firm at a 3 to 1 ratio. That isn't 3 attorneys to one secretary as you might expect. Rather, that's 3 secretaries to one attorney--round the clock secretarial support for about 30,000 Euros a year. Another major company has just entered into a $4 million contract to outsource much of its litigation support work--scanning, coding, subjective review, etc. This work often went to law firm paralegals and US companies. Now it is heading overseas. This company is a longtime thought leader in corporate circles so you can bet that others will follow quickly. It won't take long for them to start outsourcing some of their legal efforts as well.

Stephen M. Nipper (SN): Thomas L. Friedman in The World is Flat, notes that "...you are not going to go to Bangalore to find an internist or a divorce lawyer, but your divorce lawyer may one day use a legal aide in Bangalore for basic research or to write up vanilla legal documents..." ["Chapter 6: The Untouchables"]. As for my opinion, I think the biggest impact on law firms that "outsourcing" hype will cause is increasing the rate at which clients question the fees their attorneys are charging them. While a client may not REALLY send their work overseas, this "outsourcing" discussion may increase their desire to seek lower cost alternatives, including sending work to smaller firms and "farmshoring" (working with law firms in smaller metropolitan areas where billable rates are lower but quality is just as high).

Often, outsourcing experts refer to the need to understand your "core business" before you outsource. What is a law firm's core business? What are some good examples of operations a law firm might outsource?

DK: Startup law firms tend to focus on this issue more than established firms do. They consider and calculate carefully what makes sense for them to do, and not do. Will an outside vendor do it faster and cheaper? I suspect that before many outsourcing decisions have been made in law firms, someone stood up and said, "I don't think that we need to be in the ______ business." More and more, the notion of core business is directed at actually providing legal services to clients. As firms get larger, many parts of a firm start to look like their own businesses. Focusing on the "core business" helps you make better decisions about outsourcing. What operations are not related to serving clients and can be done better and cheaper by someone in that business? Payroll processing was a first step for many firms - it took a lot of effort, staffing and was complicated. Administrative functions are common choices for outsourcing, but, increasingly, law firms are wondering if they need to be in the IT support business. Security, disaster recovery and help desk services all have become candidates for outsourcing in the last few years.

Wendy Werner (WW) : I think a lot depends on the size of your firm and where you want to focus your energy. I agree that payroll is usually the first thing to go, and I think rather quickly bookkeeping/accounting in general. Other areas ripe for outsourcing include security, IT, and even some kinds of marketing. Who will determine your logo, the look of your Web site, etc? In part, I think it depends on what your skill sets are as the law firm principal, or as the head of a small firm. I do think you want to understand your business, but I watch a lot of small firm people deal with the frustrations of spending a limited amount of time practicing law because of all of the other things that they are working on. There is a cost/benefit analysis that I recommend that people do as they are thinking about the best use of their time.

RF: The core business of law firms is a combination of solving legal problems and helping clients cope with difficult situations. An old adage says that lawyers are finders (business getters), minders (relationship managers), or grinders (ones who crank out legal work). Today, lawyers who are great at "client hand holding" typically rely on a partner or associate to do the legal work. Could the minder instead outsource this to a lawyer in another organization? The point is that even in what many would consider the core business of law firms lie potential outsourcing opportunities.

JT: There may be less in the core than most suppose. Some firms have already offshored their IT staffs. Orrick outsourced its group to West Virginia (onshoring). I heard recently that the Orrick facility was purchased by a British outsource company which specializes in facilities management, another common outsourcing play. Clearly partners are safe and probably associates as well. But, anything else is up for grabs.

What are your best tips for choosing a third party vendor for outsourcing?

JT: References and history would be key to me. Anyone can put up a shingle as an outsourcer but you don't want to be their first client. Start with a small project and build from there. Management is more important in an outsourcing relationship than when the team is close at hand. Consider having a project manager from your partner on site so you can communicate daily and he/she understands your business. We have a team of 10 developers in Bangalore, for example, but we brought the project manager and a lead architect here to be in our offices. Having a couple members of the team here is more expensive but it has helped make the projects successful.

RF: Know your supplier well, document your requirements carefully, specify the processes and deliverables, ramp up slowly, and verify the deliverables early and on a continuous basis. If a process or function is broken, don't try to outsource it - fix it first.

DK: Reliability, reliability and reliability. Cost, of course, is significant, bit you have probably made a calculation that it is cheaper to outsource than to keep the work in-house from the beginning, so cost savings are a big part of the equation. Finding vendors with real-world experience with law firms and the unique requirements that law firms have with respect to handling client confidential information and complying with ethical rules is a key. In a real sense, an outsourcing vendor will become one of your business partners, so you want to do your due diligence.

WW : I get concerned about the use of terms like "third party," "vendor" and "outsourcing." As a person who provides services to law firms, I like to think of myself as a business partner, a support person, or a consultant. When I hear the term "vending" I think of the machine that provides soda and chips to the office. So when I would want to choose a service, I want that to be someone who has the best needs of the business at heart; and someone who understands some of the unique aspects of a professional services firm. If you were to find yourself explaining what you do to a potential services provider, I think it would make sense to talk to someone else who already understood your line of work.

What can go wrong when you outsource and how can you protect yourself?

DK: What can't go wrong? On the other hand, many things can go wrong if you try to do everything internally. There's a trade-off and you need to use your best business judgment and weigh the risks. Outsourcing, especially in the area of technology, places a premium on crafting good agreements that include explicit performance and support requirements (usually known as service level agreements or SLAs), coverage of what happens when a contract terminates, requirements on how data gets returned, and very specific directions on how client information may be accessed and handled. I often ask law firm IT people whether they feel that they get enough support from firm lawyers in negotiating these agreements and I can tell you that most of them feel that they do not. These are areas where you do not want to sign standard contracts. Due diligence is vital, but the devil often is in the details of the actual agreements.

JT: Putting aside the possibility that the work is done poorly, the biggest risk is losing control of the project. With a team thousands of miles away, it is easy to focus your attention elsewhere. Suddenly the project is out of control and you are running to catch up. Make sure somebody is reporting daily (weekly at least) and that someone from your office is scrutinizing the team's work and progress carefully throughout the process.

RF: Lots can go wrong. But lots can go wrong with performing functions internally or with people you hire as employees. With outsourcing, you typically spend more time specifying requirements and monitoring performance. Others can enumerate the legal and business risks of outsourcing but a key point is to weigh these risks against the alternatives. No option is risk free.

WW: I think the same things can go wrong that do so with any service. Creating specific and clear cut agreements is crucial. It is important to make sure that both parties are speaking the same language and that expectations, time frames and dates are provided. As with many other kinds of hiring, including hiring your own employees, lots of people do not do enough work up front. Sometimes these decisions are made out of frustration and are done so quickly to solve one problem, rather than with an eye toward a potential long term relationship. And it always makes sense to get references.

SN: In my line of work (patent law), I think there are substantial issues with sending a client's confidential information overseas to another country where if it is divulged, legal action to remedy the harm may be all but impossible. I'm not so sure that well drafted legal documents may be of much use to you...it is unlikely that you are going to pursue the expense of foreign legal process unless the benefit outweighs the cost.

Looking to the future, what do you see happening in outsourcing in the next three to five years?

JT: We are clearly in the trial and error phase, which I expect to continue for another year or so. Bold corporations are moving in this direction cautiously but the lure of cutting expenses by 70 percent is a powerful siren. So long as the results meet expectations, expect to see more jumping on this bandwagon. Law firms will be led by the large British firms which are already spread across the globe. Adding Indian offices and centralizing work there will feel natural to them. Americans will follow slowly at best.

DK: First, continued exploration of outsourcing in purely administrative functions, such as HR (benefits administration and the like). Second, more experimentation in temporary staffing. Third, much greater outsourcing of responsibilities currently handled by IT departments (especially security and disaster recovery). In fact, we may have hit the high level for size of IT department staffing in law firms.

RF: The costs of document review in discovery will kill the goose that laid the golden egg. Deploying armies of domestic lawyers to review documents is not sustainable. If document review cannot be "outsourced" to advanced software, then someone will figure out how to offshore this function to lawyers in India.

SN: I agree with Ron. The major benefit to cheap labor is brute force that can be applied to a project. That is why document review and data entry are going to be the most likely candidates for legal outsourcing.

Darryl Mountain (DM): Increased use of document assembly software. This would involve extending the “trap door” model that some corporations use currently. Picture a document as a flat surface with trap doors leading to in-house lawyers hidden below. A person is generating a document in a question-and-answer dialog session powered by document assembly software. If all questions are answered in a “safe” fashion, then the document is generated immediately. However, if the person answers a particular question in a fashion that requires the inclusion of a nonstandard clause, then he or she trips a trap door and the document goes to the law department for review. This system mitigates against the risks of employees using outdated versions of documents, making unauthorized changes, or involving the legal department too late in the deal process. If you were to extend the trap door model, you could have a model where contracts are drafted in-house in the U.S., the Indian lawyer handles exceptions only, and the U.S. lawyer reviews the Indian lawyer’s work.

This example illustrates the tradeoff between people and software and points out how one can easily disrupt the other. If document assembly software contained sufficient guidance that a person with no legal training could draft a document under most circumstances, then the exceptions handled by the Indian lawyer would become increasingly slim.

On the other hand, it is possible for people-based business models to disrupt software-based business models, as well. For example, it seems, anecdotally at least, that the availability of Indian call center labour has led to the scaling back of research into phone-service software that uses voice recognition. Call center workers and automated operators act both as complements and substitutes for each other, much like offshore labor and document assembly software. When one becomes significantly cheaper than the other, customers will switch.

Perhaps the true "frontier" in outsourcing, and it is a controversial topic, is outsourcing actual legal work. We hear about outsourcing document review and other "commodity" legal work to India or even the U.S. Midwest (sometimes called "home sourcing" or "homeshoring"). Tom Friedmann's book, The World is Flat, talks about this and certainly has influenced the thinking of many lawyers on this topic. What are your thoughts on this topic?

RF: I start from the premise that there is a long-standing domestic industry for outsourced legal research. Some large law firms have "insourced" legal work to automated expert systems. And some law departments use professionals in India for patent work or contract drafting. As far as I can see, the frontier has been crossed already, at least by a few firms and clients. The question is whether others will follow the pioneers.

SN: While not living in the Midwest, I do practice in Idaho (Intermountain West). About 50 percent of my work comes from out of state, thereby giving me direct experience with this "homeshoring" topic. On a patent attorney email mailing list I subscribe to, a big city patent attorney recently tried to make the argument that it is malpractice to work for a client you don't meet with face to face...perhaps his rant being evidence that big city firms are feeling the "homeshoring" pressure. Homeshoring is not only being driven by hourly rates, but by customer service (including how clients are treated by their attorneys) as well. Long gone are the days of "all my client needs to know about the law is my phone number." If you don't treat 'em right, someone else will.

DK: There is a compelling logic to this approach and there has been some push from clients as hourly rates for inexperienced lawyers have soared. The recent round of salary increases for starting associates will only cause more interest in this approach. My sense is that, not surprisingly, like all areas of outsourcing, we've seen mixed results at the beginning. As the industry matures and we can determine who does this well, the results are likely to improve substantially. I expect to see more of this happening, especially in "commodity" legal work, especially document review and standard litigation preparation work. I also expect state bar regulators, who seem to have become very aggressive in the last few years, will soon have legal outsourcing on their radars.

JT: Corporations will drive this trend. Many are already sending patent work overseas along with other issues such as those involving international trade and corporate regulation. If we can harness programming talent for some of our most complicated projects, we will increasingly realize that we can offshore others kinds of help including legal analysis. Trial lawyers can rest easy along with top deal makers. But anything relating to regulatory analysis is on the block.

DM:The outsourcing of legal work is known in India as Legal Process Outsourcing ("LPO"). In terms of brainpower and English fluency, there is no reason why Indian lawyers can't do much of the work that U.S. lawyers are currently doing. India's legal system is based on English Common Law, Indian legal training is conducted solely in English, Appellate and Supreme Court proceedings take place exclusively in English, and legal opinions are written exclusively in English. Virtually all Indian lawyers are conversant with the UK legal system.

While the quality of legal education in India varies tremendously, LPOs normally hire students who have attended one of the eight dedicated law universities in India. These universities, the best known of which is the National Law School of India University, draw from a huge talent pool. They offer a 5 year B.A.L.L.B. (Hons.) course that follows the first 12 years of education. Each law university has its own separate entrance examination. The introduction of dedicated law universities is making law more popular as a career choice. Students traditionally have preferred Engineering, Medicine, Indian Administrative Services, and Management over law.

Students attending law universities face high debt loads and increasingly prefer to work for LPOs, which pay about the same as top-tier Indian law firms (US$10,000 per year). LPOs are able to recruit students whose grade point average is in the lower half of the class, who have experience with the use of Internet based legal resources such as Westlaw and Lexis, and who often have completed an LLM in the U.S. or the UK.

LPOs are also beginning to recruit top students from the 106 law colleges in India. The LPOs offer these students better pay than do the law firms that recruit them. While the quality of work offered by some of the better LPOs is as good as that offered by any law firm, the downside is an uncertain career path and a lack of recognition or prestige. That may change as LPOs become integrated into the Indian legal profession.

Legal issues hampering the growth of LPO include Bar Council of India advertising restrictions, data protection laws in the United States and the EU, and security standards and confidentiality.

What do I need to know to get started on any type of outsourcing?

DK: You definitely want to take a hard look at the numbers and calculate the costs and benefits of outsourcing work as compared to using an employee. Remember, too, that outsourcing certain tasks can free up your best employees to do higher level work. Talk to your peers in other firms to see what works and doesn't work, but, and this is important, talk to people outside the legal profession to see what they are doing. There are a lot of good resources. Finally, think in terms of your firm's profitably - does outsourcing help you reduce costs or improve revenues? If so, you may take home more money, better serve your clients and sleep a little easier with some well-chosen outsourcing - not a bad combination.

WW: I think it's important to look at the time costs of keeping everything in house and also to look at the skill sets of the employees in the organization. Not only can outsourcing free people to do higher level work - in some instances it might help you get higher level work. People are generally both happier in their work and more productive when they are using their best skills. So knowing what the abilities are that you have in-house is important before you determine what you may want to off-load; and what the opportunity costs are of not sending some things outside.

DM: To obtain more information about what types of outsourcing are possible, contact an LPO provider. These include OfficeTiger , Integreon, Pangea3, Offshore Legal Services, Lumen Legal, QuisLex, Manthan Services, and Mindcrest.

JT: I think you start by looking at your internal processes. Think about each aspect of your work process and ask yourself the question: "Can we do this work more efficiently and effectively." If the answer is yes, think about "how." Could we automate repetitive processes? If so, you might look to an outside development firm to do this work. Could we use a service rather than buy and manage it ourselves? Litigation support software is quickly moving to a hosting model. Firms are increasingly realizing that it is expensive to maintain and run the enterprise programs themselves. Could the work be done better by an outside group (either because it would be cheaper or it would free you up to focus on what you really want to do)? Once again, this could lead you to consider outsourcing. Think electricity. At one time everyone had their own generator. Today we outsource that service to the local power company. Once you start down the outsource road, you may be surprised at where it leads.

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Ron Friedmann is the president of Prism Legal Consulting , which helps law firms with the strategic use of technology and legal market software companies with marketing and strategy. He is a lawyer by training and has held senior management positions at two large law firms and two legal software companies.

Dennis Kennedy is a well-known legal technology expert, technology lawyer and blogger. His blog and his web page are highly-regarded resources on technology law and legal technology topics. He is member of the ABA Law Practice Management Section’s Council and Webzine Board.

Darryl Mountain is a lawyer and president of Ontago Inc., a company that markets DealBuilder and GhostFill document assembly software. Mr. Mountain owes much of his knowledge of LPO to Shashank Krishna, a graduating student at the National Law School of India University.

Stephen M. Nipper is an intellectual property attorney in Boise, Idaho with the law firm of Dykas, Shaver & Nipper, the oldest and largest intellectual property law firm in Idaho. His blog The Invent Blog can be found here.

John Tredennick is the founder and CEO of CaseShare Systems, which has been providing secure document repositories for complex legal matters since 1998 for some of the largest corporations, insurers and law firms in the world.

Wendy L. Werner is the owner and principal of Werner Associates , a career coaching and law practice management firm.

For more information: http://legalblogwatch.typepad.com/legal_blog_watch/2006/04/look_out

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Hey, Juniors: Look Out for Outsourcing?

Ron Friedmann posts at Prism Legal about outsourcing, linking to a recent  round table discussion on outsourcing  at Law Practice Today.  I've also discussed the topic briefly here at  MyShingle.  Does your firm outsource?  And if you are a starting associate, do you fear that outsourcing may eventually jeopardize your raison d'etre at a firm.  There's been lots of commentary in the blogosphere on outsourcing, some from the solo community, which has discussed, for example, whether patent outsourcing might displace solo IP lawyers.  But to me, it seems that outsourcing poses the greatest risk for junior associates engaged in document review and more ministerial tasks.  So how about it -- are you juniors afraid of the outsourcing trend?

Posted by Carolyn Elefant