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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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Interesting and provocative, Steven. Outsourcing and the use of part-time contract lawyers is definitely here, possibly to stay even if the boom times return. But can this structural shift in the associate model actually ameliorate the distress that model visits on so many young lawyers? Maybe. Or maybe it increases the financial pressures on that same group. Possibly the best outcome is it might broaden the career perspectives of those entering law school - and BigLaw would no longer be the golden ring it is now.

"outsourcing has been an important profit-maximizing technique for a long time"

AND - customers have also been looking down on traitorous companies who are sending good American jobs overseas. They see their friends and family and themselves losing their jobs so that some fat-cat CEO can make an extra couple of million in bonuses.

"The resulting loss of American jobs has been sold as a necessary price paid to remain competitive in the global economy."

What we've been sold is a bill of goods, and don't think for a second that we haven't seen through the lies and deception and GREED.

By far the consumers of products from companies who outsource are working-class, middle class Americans. When they have no more jobs, who the hell do they think are going to buy their products?

I agree that the movement towards outsourcing is here to stay. The career issue for lawyers is to learn how to use these tools in appropriate ways.

Lawyers are not always so good at accepting change but as you aptly point out, if implemented with good quality control, outsourcing can potentially increase career satisfaction for young lawyers who were previously relegated to hours of document review in their first few years of practice.

I wrote a piece about this last year for Massachusetts Lawyers Weekly. If you are interested, here is a link: http://www.seckler.com/downloads/lpotcl.pdf

Thanks for the comment, Dan. Broadening career perspectives of those entering law school is a worthwhile -- and daunting -- challenge. Catching those students even earlier -- while they're deciding whether to attend law school -- would be even better. For reasons that could (and probably will) occupy another post, most law schools reinforce the BigLaw track.

Excellent commentary Steven. Globalization has created greater competition for once-typically closed markets like legal services, and more provider competition leads to a more innovative and efficient marketplace. Seeking out and accessing more affordable labor, materials and services have been historical core principles of business economics, and the fact that the efficient resource is located in another country is no different to accessing a more efficient resource located in another county, state, climate or otherwise. Legal outsourcing, therefore, is familiar economics not so “foreign” after all. The unfamiliarity lies in the fact that law firms that were once accustomed to a closed marketplace are now being forced to operate as truly competitive businesses, and these firms are not accustomed to operating in this manner, nor are many willing to adapt. But to do nothing would be folly as hubristic complacency may be disastrous to these firms, especially as the legal outsourcing industry eventually gains more traction as a resource for not only those mundane legal services that you mention but also for the higher level legal services that truly will be in direct competition with the old guard.

Outsourcing of legal services is not just an Indian resource either. Other markets have proven fruitful, such as Latin America. Our company, Novadios, has been operating a successful legal outsourcing operation out of Argentina for over two years now, marketing itself as a Western Hemisphere alternative to its Asian competitors. The marketplace is therefore growing at a rapid pace both Eastward (Asia) and Southward (Latin America), and within the industry itself, with no real end in sight yet.

Excellent piece.
The LPO industry can indeed propagate quality work in the law firm circuit, while delegating 'menial' work to these LPO's. The young lawyer's or junior attorney's in firms can actually get to do the work of the firm instead of the regular backroom work that they do.

An analysis of your article can be found in my blog:
http://megalpo.blogspot.com/2010/09/no-more-menial-jobs-young-associates.html

Apart from this, the concept that mid-level law firms or even individual attorneys, with assistance from LPO's can rise up and give proper competition to the major law firms is also novel and may well be true in the years to come.

Read the analysis of this part too:
http://megalpo.blogspot.com/2010/09/largest-may-not-necessarily-be-best.html

The legal profession is all set for a make-over and it might well be led by the LPO's.

Regards.

Interesting article. However the notion that outsourcing leads to loss of U.S. jobs is not accurate. In my own experience, I've seen how legal outsourcing actually creates more legal jobs in the West, rather than cutting them. Every time a deal is done, or a litigation is waged, because legal services are suddenly affordable, it means more work for the Western lawyers involved in supervision, editing, negotiating, and/or appearing in court.

For example, a Fortune 100 company specifically requested that the legal research and analysis needed for a series of multi-million-dollar deals in the U.S. be done by Indian attorneys at a legal process outsourcing operation in India. This is a situation where, if not for the off-shore legal outsourcing option, no lawyers would have been hired, because typical Western legal fees would have made it prohibitive. The work would have been done either in-house, or not at all. Because the India team made it possible for the deals to happen, Western law firms ultimately got more business, handling the otherwise non-existent transactions.

A similar phenomenon has happened in litigation, where corporate clients have chosen to defend themselves against meritless lawsuits, using both U.S. and Indian lawyers. The cases have been dismissed instead of settled, because of the successful teamwork among attorneys in the U.S. and India. Without legal outsourcing, there might have been no U.S. lawyers hired for any significant litigation work at all, because frivolous cases often are settled at the outset, just to avoid the usual U.S. litigation costs. The off-shore outsourcing of legal work is leading to a new breed of benign tort reform, as defendants facing bogus or inflated tort claims are choosing to litigate and win. 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 the U.S. economy.

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