OUTSOURCING: THE BEGINNING OF A NEW AND IMPROVED BIGLAW BUSINESS MODEL?

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 not novel. Throughout corporate America, outsourcing has been an important profit-maximizing technique for a long time. Lawyers have made a lot of 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 world economy.

Such cost-minimization makes sense where protocols can assure a quality finished product. But when lead turns up in the paint on children’s toys from China, well…. 

Now, as the  NY Times recently reported, outsourcing has pushed its nose into the biglaw tent.  (http://www.nytimes.com/2010/08/05/business/global/05legal.html) 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? (See my earlier article, “Send The Elevator Back Down” at http://amlawdaily.typepad.com/amlawdaily/2010/07/harper3071410.html)

Its days may be numbered but, then again, its days may be numbered 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 find the limits and 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 non-critical work. It is equally clear that clients will continue to “pay a lot of money” to lawyers with special experience and expertise — “world-class thought leaders and the best litigators and regulatory lawyers around the world,” as one corporate leader put it in the Times.

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 “world-class thought leaders.” (See my earlier article, “Where Have All The Mentors Gone?” at http://amlawdaily.typepad.com/amlawdaily/2010/07/harpermentors.html)

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 thirve 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.

And here’s a wild card: Small and mid-sized firms with talented senior attorneys may find that these new pools of outsourced talent enable them to compete with the mega firms. Size may no longer be everything. In fact, it may not be anything at all.

If I’m correct, the resulting transformation will slow biglaw’s growth rate and, perhaps, shrink that segment of the profession. But instead of the mind-numbing tasks that are the bane of any young attorney’s biglaw existence, 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 happened — and reality began 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 non-attorneys provide private investment capital, become shareholders, and complete the MBA takeover of the profession. That movement is clearly afoot in Great Britain. (See http://www.abanet.org/legaled/committees/Standards%20Review%20documents/AnthonyDavis.pdf) Once senior partners become accountable to non-attorney 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?

8 thoughts on “OUTSOURCING: THE BEGINNING OF A NEW AND IMPROVED BIGLAW BUSINESS MODEL?

  1. Re: quality of life surveys for lawyers

    If outsourcing means that associates at big firms will get to do more meaningful work because they spend less time doing doc review and other menial tasks thanks to outsourcing, then (as you recognized) we’ll have a cadre of lawyers doing outsourced work. That cadre will hate life because, c’mon, it’s doc review. So on balance, with fewer associates at firms and more young lawyers doing outsourced work, won’t quality of life across the profession either remain the same or decrease?

    • Tim,
      I assume outsourced work would be performed by non-US attorneys outside the US — similar to medicine, computer support call centers, and the like. If the unpleasant work remained in the US, you’re right. The American bar’s rates of career dissatisfaction would not improve. Thanks for commenting.

  2. Hi Steve,

    I enjoyed your article and it confirms my 15 years of experience in the Outsourcing industry. For the over half that time, I represented an IP research and analytics firm on the East Coast and for the last seven years i represent a company where the work is done in India and China. Our experience in the IP industry is that using outsourced resources frees the U.S attorneys to concentrate on strategic issues and not get bogged down doing research. There is simply too much data and someone needs to read it, analyze it and present it in a digested manner. The amount of data will only increase as the emerging markets come on line. We also have a division providing Legal Process work and the same trend may be seen.

    One of the challenges (and job descriptions) for U.S. attorneys will be to train, coordinate and manage teams in other countries. This calls for skills other than just knowledge of the law.

    Regards,
    Marty

  3. Whenever you see a story about LPO, like ATL’s coverage of Harper’s article today, the focus is always upon how it affects the young associates at BigLaw firms. It is well known that much of the work first-year associates do at the big firms consists of tedious document review that could be done by pretty much anyone with a functioning frontal lobe and at least one index finger. It is no wonder that in the glory days many young associates burned out after a mere year or two of long, boring hours clicking through millions of documents instead of lighting the legal world on fire Law & Order style.

    It is upon this foundation that Mr. Harper advocates for LPO as a means by which to ensure that young associates will be given more fulfilling and challenging work from the outset of their BigLaw careers:

    [F]or 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.

    That’s great for the lucky few, but Mr. Harper fails to acknowledge the fact that a lot of these menial tasks have been “outsourced” for years to the unlucky multitude of lawyers who did not win the BigLaw lottery and made their living working as contract attorneys (code for “professional document reviewers”). Document review was traditionally where so-called Third-Tier Toilet law school graduates who didn’t land in the top 50% of their classes would ultimately find employment if they struck out at smaller or midsized firms or couldn’t get a government position.

    So, I can’t help but feel like Mr. Harper is saying “let them eat cake” when he suggests that the disappearance of document review jobs will result in better and more meaningful work for struggling young attorneys. No document review? Well, let them work on complex commercial transactions!

    Again, I am not arguing that outsourcing is evil in itself, I am just angry that thousands and thousands of bright, young attorneys are still unemployed with little hope of finding a job of any kind, let alone a wonderful and fulfilling one, yet every year, the schools keep pumping out more and more graduates, and the legal community keeps finding new ways to exploit them. It’s just peachy that BigLaw firms can lower their overhead by outsourcing menial tasks and that BigLaw associates will get to work on more interesting and complex legal tasks, but what about the rest of us?

    When I’ve written on this topic before, I have received comments from some LPO purveyors who argue that it doesn’t result in any U.S. legal jobs being eliminated, but in fact, creates new ones (emphasis mine):

    I think the post above about qualifications of Indian “lawyers” is false. Being a person with interest in this debate, I checked about the law schools in India. Well, even there they have the 4 year undergrad and 3 year law school system. Additionally, the more elite law schools (government) have a 5 years course (bachelor degree) that starts immediately after high-school.

    In fact, I looked into the website for SDD Global (Russell’s Indian LPO office). It lists the qualifications of the attorneys working there. Have a look at http://www.sddglobal.com/meet_our_employee.htm. And according to the company’s profile they do only high-end legal outsourcing work (www.sddglobal.com) and not just document processing work.

    The thing Russell [Smith] and other LPO entrepreneurs want to drive in is that there NO job lost because of out-sourcing. In fact Russell’s blog quoted above addresses this issue. It’s just that very few people are willing to understand what it means. His other blog entries (easy to find)explain this too. http://lawwithoutborders.typepad.com/

    Even if it were true that no jobs are lost due to LPO, of which I am not yet convinced, there is the minor issue of fewer legal jobs being created. Russell Smith argues that as the prices go down for legal fees, more litigation will result as settlement will no longer be the most cost-effective solution. I’m still not convinced. The focus is still on how LPO will improve business for BigLaw, with a sop thrown to midlaw, which will ostensibly be able to use LPO to compete with the big firms. I am still struggling to understand how, at the end of the day, LPO is going to benefit the other 50% of the legal community.

    • If you’re looking for a BigLaw villain, you’ve got the wrong guy. For the last four years, I’ve taught an undergraduate course at Northwestern aimed at better informing students who are tracking themselves to law school. The idea is to catch them before they take on student debt equal to a mortgage (albeit without the house) — and before reality irrevocably collides with their idealized expectations. The profession suffers from staggering rates of attorney dissatisfaction, in large part because too many students chose law school as a default solution — the last bastion of the liberal arts major who couldn’t decide what to do next. It’s happened for generations, but those who follow this blog know my view that current trends have exacerbated the problems. I’m no fan of the current BigLaw business model. But as I tell my students, “forewarned is forearmed.”

      • Point taken.

        It’s too bad that more of your colleagues at undergraduate institutions don’t follow your lead.

        There is a growing movement of “law school scambloggers” like myself out there, and our aim is to do what your course does–inform prospective law students about the true peril of matriculating in law school merely for lack of other compelling career options–or any career options, for that matter.

        The problem with our underground blogs is that, by and large, only the legal blogosphere is aware of our existence. We are preaching to the choir, because the students we really want to reach are getting all their information about law school from the law schools themselves.

        In my opinion, your class sounds like a real public service. Every liberal arts major that you rescued from the hell of crippling student loan debt is one less person who will end up starting a scamblog three years hence.

        My goal was not to cast you as a villain–merely to point out the skewed perspective that the more mainstream legal media outlets seem to have about LPO and its detrimental effects.

      • No offense taken. (I’m not as cute as Marie Antoinette anyway.) Thanks for taking the time to comment. It sounds like our interests are aligned. The main reason I wrote my recently released novel, The Partnership, was to give students reading material for my class — which has become one of the most popular on campus. Perhaps it will reach other campuses as well. Reality therapy can be disconcerting, but it’s valuable.

  4. I don’t have a problem with outsourcing but I don’t think this is all that new.

    I graduated from law school in the late 1970’s and worked at 2 large regional law firms as an associate and a partner. Over the years, we faced some hard economic times and, not surprisingly, our clients pushed us to bring down costs. One result was that it led the firms to use more paralegals. It worked well if the supervising attorneys were adept at deciding what work could be delegated, knew how to train the paralegals to get desired results, and could effectively monitor and supervise the work. Some attorneys were very successful but others were unable or unwilling to delegate, and in those cases it only increased the firm’s time investment and costs because everything was done twice.

    Attorneys can learn how to outsource but it’s a learned skill and something they and their firms will have to work at if they want to be successful.

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