August 20, 2010 12:30 PM
Outsourcing: The New and Improved Business Model Big Law Needs?
Posted by Ed Shanahan
By Steven Harper
If you're a new law school graduate looking for work, or an equity partner seeking to profit this year (and maybe next) from the leverage that high-priced associates add to your firm's bottom line, outsourcing sounds like a bad idea. But for those concerned about the long-run psychological well-being of the profession, the implications are more ambiguous.
It's hardly a new idea. Throughout corporate America, outsourcing has been an important profit-maximizing technique for a long time. Lawyers have made good money assisting clients in the development and implementation of such strategies. The resulting loss of American jobs has been sold as a necessary price paid to remain competitive in the global economy.
Such cost-minimization makes sense where an insistence on protocols assures a quality finished product. But who hasn't experienced the frustration of trying to get straight answers from a so-called customer service representative following a script on the other side of the world?
As The New York Times recently reported, outsourcing has pushed its nose into the law firm tent. If the trend continues, what is the fate of the dominant large law firm business model that relies on associate/partner leverage as the source of equity partner wealth?
Its days may be numbered but that might be the case with or without outsourcing.
As the Times article notes, outsourcing is particularly advantageous for mundane legal tasks--due diligence on corporate deals and document review for major litigation matters. What client can resist paying "one-third to one-tenth" of a big firm's hourly rates for such work?
The challenge will be to identify the limits in this and put systems in place to assure quality output. Due diligence seems unimportant until a major potential liability gets overlooked. Document review is dull, but large lawsuits have turned on an internal memo buried in a gigantic collection; a discerning eye made all the difference.
Still, it seems likely that clients will gravitate toward firms that can offer lower rates for outsourced attorneys performing necessary but noncritical work. It is equally clear that clients will continue to pay lawyers with special experience and expertise handsomely--"world-class thought leaders and the best litigators and regulatory lawyers around the world," as one corporate leader was quoted in the Times article.
With these trends, new law school graduates will face shrinking labor markets, especially at entry-level positions in big firms. But for the fortunate few who get jobs, their work could get better as outsourced labor performs some of the menial tasks that now account for most young associates' billable hours.
Meanwhile, senior attorneys will have new incentives to mentor proteges so they become their firms' next generation of leaders.
What will all of this mean for equity partner profits? The big-firm leaders who do the right things--strict quality control of outsourced work coupled with a serious investment in the development of inside talent--will thrive as their firms deleverage. Unfortunately, others intent on maximizing short-term dollars by prolonging the lives of their leveraged business enterprises will do okay, too — at least for a while. But such a myopic focus runs enormous long-term risks for the affected institutions.
There is a wild card in all this: Small and mid-size firms with talented senior attorneys may find that these new pools of outsourced talent enable them to compete with the megafirms. Size may no longer be everything. In fact, it may not be anything at all.
If I'm correct, the resulting transformation will slow the growth rate at large firms and perhaps shrink that segment of the profession. But instead of the mind-numbing tasks that are the bane of so many young lawyers' lives, associates will find themselves doing work that more closely resembles what they thought being a lawyer meant when they first decided to attend law school. If that were to happen--and reality begins to resemble expectations--lawyers as a group could become more satisfied with their jobs. The unthinkable might even happen: a slow reversal in the tide of recent surveys that consistently rank attorneys near the bottom of all occupations in career fulfillment.
Such a scenario would be an ironic turn of events. The extraordinary wealth that clients now confer on those running today's highly leveraged big firms could be providing the impetus to upend the profession and force the emergence of a new business model in which leverage no longer mattered.
Of course, everything could careen wildly in a different direction--toward further corporatization of law firms as nonattorneys provide private investment capital, become shareholders, and complete the MBA takeover of the profession. That movement is clearly afoot in Great Britain. Once senior partners become accountable to nonattorney boards of directors, the individual autonomy that once defined being a lawyer will have disappeared.
But it doesn't cost any more to be optimistic, does it?
Steven J. Harper is an adjunct professor at Northwestern University. He recently retired as a partner at Kirkland & Ellis, after 30 years in private practice. His blog about the legal profession, The Belly of the Beast, can be found at www.thebellyofthebeast.wordpress.com. A version of the column above was first published on The Belly of the Beast.
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