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The rise of global legal sourcing
How vendors and clients are changing legal business models
By David A. Steiger
Legal outsourcing is growing faster than nearly anyone expected even a few years ago. In times of increasing economic uncertainty, the cost savings that this young industry promises grows more appealing to clients, big and small. The rise and mainstreaming of legal outsourcing—and other tools clients use to assert cost control—have ramifications not only for the management and continued viability of law firm business models, but also the job prospects of new law graduates, and even the future legal curriculum in the United States.

What Legal Outsourcing Is Today
Law firms and in-house counsel are increasingly turning to legal sourcing in the normal course, observes David Hickey, an international litigation partner at Winston & Strawn. Hickey points out that Clifford Chance is operating a captured offshore office, the "Knowledge Centre," which has reportedly worked on over 300 client projects in its first year of operation. DuPont has been an industry pioneer in assigning large-scale document reviews to attorneys in the Philippines. Hickey has personally visited 22 legal sourcing providers in India and six more in the Philippines. "There are a number of well-established providers that have embraced the ethical guidelines set out by the ABA and are currently delivering quality work in remarkably secure offices," Hickey observes. In fact, many of the well-established providers offer a "dual shore" model that integrates attorneys in the United States with their counterparts in the Philippines or India on the same projects.

Michael Ford of American Discovery holds that currently there is no one clear market leader in legal sourcing. No one sourcing company is currently capable of being all things to all clients. Similar to the traditional law firm model, vendors may have broad service offerings, but typically focus on specific product sets and expertise. Ford's own company concentrates its efforts on document review and discovery consulting. Industry observations suggest that other vendors have staked out their own territory. Pangea3 is primarily known for contract management and IP research; Mindcrest is building its brand on legal research and analytics.

The industry leaders in legal sourcing will generally emphasize that what they are not doing is attempting to practice law, as Ford simply tells the firm representatives he meets, "We're not trying to take your job; our intent is to enhance it."

A neutral third-party view of legal outsourcing in 2009—in all its various incarnations—suggests that it is primarily focused on labor-intensive work requiring a level of judgment and subjectivity that up until now has been managed with little uniformity across law firms and corporate legal departments. Some higher-end work being outsourced, such as document review, has sometimes been assigned to not only paralegals but also to first-, second-, and third-year associates. A growing chorus argues that there is nothing inherent in the tasks involved in that work that require a licensed attorney to do them. The question becomes whether a young associate's time is best spent plowing through warehouses filled with documents, or actually learning how to research and brief legal issues, argue in court, or negotiate transactions.

For now, legal outsourcing vendors are not going to set up the equivalent of competing law firms overseas. Mark Ross of LawScribe relates that India, for example, has legislation that restricts the setting up of Indian branch offices of U.S. law firms to engage in the practice of U.S. law. The various licensing authorities in the United States deem the foreign attorneys working within offshore legal vendors in India, the Philippines, or elsewhere "non-lawyers" unless admitted in their jurisdiction, regardless of their experience level. Thus, it just isn't permissible to have these "non-lawyers" overseas practicing U.S. law. Ross concludes that the leading legal sourcing vendors exist to "aid and abet U.S. law firms and legal departments in their own practice of law." In that context, U.S.-based lawyers must assume full ownership of the work produced.

David A. Steiger is the author of The Globalized Lawyer: Secrets to Managing Outsourcing, Joint Ventures and Other Cross-Border Transactions, a practical, step-by-step guide on how to prepare for, negotiate, and implement a new cross-border operation. The Globalized Lawyer examines both legal and business considerations involved. Even experienced transactional specialists will find fresh perspectives in the unique references of the views of a variety of disciplines, including Chinese and Indian-based professionals.

Topics covered in the book include:
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  • The crucial importance of careful feasibility analysis and planning;
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  • Strategic concerns surrounding intellectual property;
  • Joint venture strategies;
  • Evaluating offshore destinations and vendor partners;
  • The art of negotiating in a cross-border context;
  • Secrets to implementation and dispute management across cultures;
  • Creating fact-based strategies for managing emotional backlash arguments.

To order, call the ABA Service Center at 800-285-2221,
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Looking Ahead
In Ford's mind, it's going to take at least three to five years for the industry to fully develop before further integration into corporate and law firm functions are commonplace. This is more a question of perceptions than about the quality of legal sourcing operations today, as the resources they need to do quality work are in place now, and continuing to develop. To illustrate, Ford tells of a recent project his company did in conjunction with a large U.S.-based law firm, generating privilege logs. His company took 60 percent of the work; the law firm took 40 percent. When errors in the work product were discovered, an audit revealed that the law firm's employees had made the mistakes. Ford's firm then corrected the law firm's work.

To the extent that legal sourcing vendors look to move up the value chain, Ross reckons that they will look for scalable tasks that generate predictable revenue. Anupam Razdan, electronic discovery counsel for a multinational consulting firm, imagines a more ambitious future: summaries and even research delivered in real time during depositions.

Razdan suggests the future leaders in the industry will be those who are able to best recruit and retain talent. In India, where students are obligated to take the first offer they receive, the most prestigious firms get to recruit early. Asking Indian vendors when they get to recruit there can reveal insights into their bench strength.

Access to clients, not capital, will become increasingly important, Razdan predicts. Legal sourcing will be certified in the near future, which will help small, high-quality players over larger but lesser quality ones. Choosing vendors may ultimately not be that different from choosing outside counsel.

One thing that may slow offshore legal sourcing expansion in the short term is increasing availability of laid-off U.S.-based legal talent. If these professionals are now willing to work for $25 to $35 per hour, the cost savings case is harder to make, Razdan notes.

Who Is Using Legal Sourcing Vendors?
Large-Cap Clients. Ford suggests that large multinationals have learned from their experience with information technology and back-office outsourcing to "analyze, synthesize and quantifiably measure," similar to processes put in place for those verticals by IBM, EDS, and the automobile manufacturers. Obviously, technological processes involve much less subjectivity than legal services. So, with notable exceptions such as DuPont, most corporations are still engaging legal sourcing vendors cautiously, on a piecemeal basis. Still, Ford estimates that when taking into account all the major sourcing vendors, including services such as legal research, patent searches, and document review, total global revenues are already in the range of $150-$200 million. Ross suggests the top-end figure could be as much as $250 million, based on an estimate that the top 30 or 40 vendors together currently employ approximately 10,000 workers. Large Fortune 500 companies are driving these revenues, particularly pharmaceutical, technology, and manufacturing companies. That's because these companies have the large litigation and legal budgets that lend themselves best to the customized services that vendors currently provide.

Mid- and Small-Cap Clients. Ford perceives a lot of hesitation from mid-market companies in entering the legal sourcing market. He predicts, however, that just as they did with IT and back office processes, they will follow the bigger players eventually. Ross argues that whether to use a vendor is less about how big the client is, and more about the size of the task at hand. A two-partner patent firm might have a big client or a small law firm representing a mid-sized company might find itself defending a large class action.

With most products and services, Razdan notes, the rich utilize them first, and, eventually, they filter down to everyone in society. So too legal sourcing. Once providers learn how to standardize solutions and incorporate more automation into the process, smaller players will more easily incorporate the cost savings that vendors offer.

Changing the Classic Firm Model
Ford correctly notes that legal outsourcing is not forcing law firms to change. Instead it is "enabling firms to change . . . it is complementing what legal departments currently do with improved resources and predictable costs."

Clients are reexamining the legal services supply chain from one end to the other with a new intensity, demanding more value and options from the firms they utilize. Or, as Ross puts it, clients are "picking up the legal profession by the scruff of the neck." Clients have realized that the classic law firm business model developed a host of profit centers over the years. In addition to billing partner and associate time for clearly high-end legal analysis, negotiation, court argument, etc., many firms created profit centers out of high-volume document review, repetitive tasks, organizing file documents, and even copy charges.

In recent years, sophisticated clients have started chipping away at some of these "cash cows." They started by instituting guidelines for how much firms could charge for copies and prohibiting billing paralegal or attorney time for simple tasks deemed as "administrative."

Today however, clients facing annual legal budget cuts of 10 percent or more are looking not just at bills themselves, but the philosophy behind them. It's no secret that young associates—particularly those in their first year of practice—typically add very little value relative to the amounts that firms charge for their services. The classic argument for assigning tasks to them is that on-the-job training was necessary to groom them to eventually take their place as partners in the firm. If law firms were to be business partners for the long term, the theory went, clients should be willing to pay to train the next generation of lawyers.

The New Normal
As clients increasingly question the profit center model, they also have begun to challenge the training assumption. Why should the client bear the expense of training new lawyers? The traditional firm model uses labor arbitrage to profit from associate time year-on-year. Why should training not be deemed overhead for the firms? Why should clients pay associate rates for lawyers who are not yet adding value commensurate with the fees charged? Why not insist on having routine work assigned to more senior associates who can complete tasks with minimum overlays of expensive partner time? In other words, clients are demanding that firms eliminate this profit center as a condition of retaining business. This isn't likely to change when the economy rebounds, either. As with other cost-cutting adopted in recent years, law firms should recognize that the shifting of the training paradigm will likely become the "new normal."

Various legal sourcing advocates argue that every other profession and industry has embraced technology, deregulation, and globalization. Accountants have been outsourcing tax return preparation for 15 years. Clients who have long been subject to these forces are growing increasingly intolerant of legal providers trying to exempt themselves from their logical application. Ross finds it somewhat ironic when law firms are cool to legal outsourcing, when sourcing various tasks to nonattorneys has gone on routinely for decades. Razdan also points out that it's hard to argue that others cannot do work 10,000 miles away when attorneys within a firm increasingly work remotely themselves, whether 20 or 200 or 2,000 miles from their office.

In this context, the democratization (if not outright commoditization) of nonattorney services fits very neatly, and may explode in coming years. The challenge to law firms, as Ford sees it, is to devise a workable business model that cuts overhead for costs the clients don't see as having corresponding value. Law firms are, for perhaps the first time, going to be expected to do more with less, just as a client's own customers are demanding.

Document review appears to be a key battleground in the near term. Ross points to a recent KPMG study that calculated that document review accounts for 58 to 90 percent of litigation costs in the United States. Applying a baseline of $4.9 billion as the cost of litigation support at the top 200 law firms in the United States in 2006, and assuming 60 percent of the figure represents document review, the math produces a potential annual market of almost $3 billion, which suggests huge potential growth in legal sourcing going forward. When a client can choose to have a first-cut document review done by associates billed out at nearly $300 per hour, or at $60 per hour via a legal sourcing firm with no loss of quality, what client won't insist on realizing the cost savings?

Redefining the Practice of the Law
Looking 5 to 10 years down the road, Ross foresees a day when first pass document review is no longer viewed as the practice of law, and subject to the same rigorous ethical rules as legal advice and assistance. This will come not only because of technological advances, but also the likelihood that courts will determine that costs will be too high unless restrictions on what can be done by nonattorneys are relaxed. Once these activities are no longer profit centers for law firms, bar associations won't be inclined to fight such a change, Ross reasons.

In fact, this reasoning could reasonably lead to a continued scaling back in the number of mega-firms. Ross posits the intriguing possibility that ultimately the global legal market could contain as few as four super-mega firms (similar to the Big 4 consulting firms) with a drastic reduction in staffing at the remaining large law firms.

Moreover, Ross sees the deleveraging of profit centers as changing the traditional pyramid-shaped law firm model to a diamond shape. Under this model, there would be a smaller number of inexperienced associates at the bottom, a larger number of experienced senior associates and nonequity partners in the middle, and a small number of equity partners at the top. Simply put: Why not just emulate mid-tier firms that for years have avoided training expense by primarily hiring experienced associate laterals?

This new paradigm does beg the question: Who will hire the bulk of initial graduates? Razdan speculates that possibly a farm system of smaller firms and agencies will rise up to develop promising talent. One can assume these firms will pay significantly less than the starting salaries at large law firms.

Young Lawyers and Legal Education
As clients pressure firms to reassign tasks that arguably can be done by nonattorneys, while simultaneously demanding that more sophisticated work be done by senior associates, the demand for recent graduates without practical experience will be severely curtailed. Squeezed to provide more value at lower cost, law firms will cut wherever possible—including associate training costs. These factors will likely translate into lower starting salaries to help defray the costs—while many graduates face monumental educational debt.

Graduates without the practical skills needed to provide clients value on the first day of practice will be at a severe disadvantage. This fact requires a long-overdue rethinking of how law students are educated and trained.

For too long, the U.S. legal curriculum has emphasized the theoretical over the practical. It is not surprising that law school graduates often must be taken during their first week to see where the courthouse is. There are a number of remedies for this. They range from infusing first-year classes with practical research and writing assignments instead of strict reliance on Socratic lecture and final exams, to adding a required fourth year of school that would focus exclusively on clinical skills. Legal educators need to understand the urgent need for change, and accreditation decisions should in large part rest on the extent to which institutions are addressing this issue in a meaningful way.

Welcome to the Business of Law
For many years, some members of the bar have fought a pitched battle to preserve the practice of law as a profession rather than a business like any other. Often, this was done with the best of intentions: after all, lawyers are assigned a public trust when licensed. Officers of the court should be expected to see the greater good. Sometimes, though, the motives were less pure: a thinly guised attempt to protect cherished revenue streams.

Either way, at this point the battle is largely a rear-guard action. Legal practice is changing, not because lawyers want it to but because clients are changing it for them—increasingly insisting that attorneys utilize the discipline driven by the same market forces to which every other business is subject.

Clients are imposing more sophisticated and varied cost controls on legal expenditures. The increasing need for both predictability and cost containment makes the business case for legal outsourcing as part of the solution more compelling to clients all the time. If legal sourcing vendors offer quality work product, we can expect that, as in IT and back office outsourcing, they will gradually but steadily move up the value chain.

The expertise of the senior partner, whether through local knowledge of judges and juries or ability to offer high-end strategic advice, will likely never be outsourced. Still, lawyers must understand that, as never before, their work will require the same relentless drive to accomplish more with less that their clients have been dealing with for years. The days of unquestioned year-on-year fee hikes, independent of increased value-adds, are coming to an end. Adjust your business model accordingly because trying to hold on to certain profit centers in the short term may cost you clients in the long term.

For young lawyers, recognition of the competition that they face from overseas is critical. Clients will become increasingly less tolerant of having to pay premium rates to train them how to do basic tasks. Lifelong additions to their skill sets to provide something uniquely valuable to the client will be a must if salary levels are to be maintained in this environment. The responsibility for seeing to it that such opportunities are made available falls to legal educators. Practical training beyond basic writing and research and elective courses in trial and appellate advocacy must be instituted now.

Additional Resources
For more reading on a similar topic, you can retrieve the following article on the Business Law Today website at www.abanet.org/buslaw/blt. All issues since 1998 may be accessed under the "Past Issues" heading at the bottom of the web page.
Outsourcing Legal Services Overseas
Choosing the Solution That's Best for You
By Ken Wollins
Business Law Today
November/December 2007
Volume 17, Number 2
Steiger is a licensed attorney and visiting faculty member at DePaul University's School for New Learning. His e-mail is davidasteiger@gmail.com.

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