The Work

October 26, 2010 5:03 PM

Outsourced: LPOs Challenging Big Firms for Work

Posted by Tom Huddleston Jr.

In the fourth installment of The Legal Intelligencer's weekly series on the state of law firms, Gina Passarella delves into the challenge being mounted against large law firms by smaller and more specialized legal process outsourcers (LPOs), the boutique firms, and legal services providers that can often offer specialized services at lower prices.

The article examines how nontraditional competitors to the "monolithic provider of legal services--the law firm" such as LPOs and even clients' own in-house departments are gaining converts in the wake of the recession. 

"The overall marketplace for legal services is fracturing," Edge International consultant Jordan Furlong tells The Legal Intelligencer. "It's unbundling and specialists are emerging. Legal work will go to the provider best designed for that particular work in terms of personnel systems and mindset."

Furlong tells Passarella that this trend is here to stay, and that law departments are scrambling for ways to get legal work done for less money without losing out on quality. "I think this is permanent, which is rare," Furlong says. "Trends come and go all the time. This one, I think, is here to stay. I think it's driven more by clients than by lawyers, but mainly just by the marketplace."

The article goes on to state that even during the recession, the industry was slow to "pull the trigger." But, LPOs were more economically attractive, causing the start of a shift that Furlong believes will only continue.

Some counsel aren't convinced that LPOs can pick up all of the nuances that their firms catch, and many firm leaders don't yet view the alternative models as true rivals. Passarella quotes K&L Gates chairman Peter Kalis as saying that LPOs "are a gnat in an elephant's ear when it comes to K&L Gates." Kalis goes on to add that he does not feel threatened by company's that cannot offer the attorney-client privilege guarantees that firms can offer. 

Kalis also sees an "ebb and flow" between client work that goes to his firm and that stays in-house, saying that viewing the clients themselves as competition is "simpleminded." The challenge to reinvent a firm's offerings to suit the client is part of the business and, Kalis says, other law firms are still his main competition.

Nonetheless, consultants such as Furlong note the growth for LPOs like Pangea3. The New York– and Mumbai-based outsourcing company's co-CEO David Perla tells Passarella that 80 percent of his business comes from law departments.

Mostly, Perla says, the company makes money on document review for litigation and government investigations, as well as corporate services such as contract drafting, review, and revision. Perla says that his company saw its strongest period of growth in 2009, when it expanded by 60 percent. In the current fiscal year, he predicts the company will increase its business by 250 percent. 

It's another sign that LPOs may indeed provide big firms with real competition.

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Does legal process outsourcing threaten the existence of U.S. law firms? No, unless you want to define American law firms as inherently dinosaur-like, and incapable of changing to avoid extinction. No, the threat is not to law firms themselves, but to an outmoded model of law practice that clients increasingly will not tolerate. We are witnessing the start of a positive, paradigm shift in the way legal services will be delivered in the West.

Several law firms are embracing the change, and reaping rewards from it. Those firms are receiving more assignments and more client revenue, not less. This is coming in part from (a) existing clients who send the firms “elective” legal work that otherwise would never be performed, due to cost, but which is not a problem when the U.S. lawyers are paid to supervise and edit the work of attorneys in India, and (b) new clients who come to these law firms only because of their reputation for developing an alternative to the old model.

So there is no need to start making funeral arrangements for the U.S. legal industry. Forward-thinking law firms will adapt, embrace off-shore legal outsourcing, and learn how to make it serve not only the interests of their clients, but their own.

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