Law firms are faced with extreme price pressure for any form of work that is deemed by clients to be routine or a commodity.  The answer for most firms has been to either get out of the practice area or live with drastically decreased margins.  Outsourcing and off-shoring has become routine operating tactics for manufacturing and IT businesses, but law firms have only dabbled in the concept for a few administrative functions.  But as price competition moves some mainstay practice areas toward commoditization, it may serve law firms to take a hard look at the off-shoring option.

Outsourcing vs. Off-shoring
Outsourcing for most law firms has involved hiring outside firms to provide routine support services.  Probably half of the large law firms in the U.S. outsource their centralized duplicating to companies that specialize in these services.  We see firms outsourcing their mail rooms, centralized records, IT helpdesks, accounts receivable collections, receptionists and all sorts of functions.  Some firms have successfully hired companies to handle their entire financial management, IT and marketing support functions.  Whether outsourcing saves firms money seems to be a function of who is doing the accounting, but the real benefit is that it allows firms to focus on revenue generating activities and let the outsource vendor worry about routine administrative functions — what management theorist Peter Drucker called “sticking to your knitting.”

Technically, outsourcing is any form of service where the work is performed by an outside vendor.  Off-shoring is outsourced work that is performed by a vendor in a different country where costs are lower.  Outsourcing is designed to provide management and cash flow benefits and, perhaps, some small economies of scale.  Off-shoring is all about cost – having work performed in countries where wages are substantially less than in the U.S.  A number of large international firms have successfully moved some of their administrative services off-shore.  Baker & McKenzie, for example, has several hundred typists and translators in the Philippines serving offices around the world in preparing documents.  Orick Harrington moved their administrative functions to Charleston, West Virginia (technically not off-shore but it seems that way to the people in their New York and San Francisco offices).  But while the savings of off-shoring administrative functions are substantial (Baker & McKenzie estimates around a 70% savings for the work performed by their Philippines operation), the financial impact of off-shoring administrative services is peanuts compared to the potential win in off-shoring actual legal work.

The Evolution of Commoditization
All legal services transition through phases in which demand and price sensitivity evolves.  Typically, when a new legal service is created, the demand by purchasers is low.  In fact, the law firms offering the service may even have to convince buyers that such an area of law exists and is an area of practice the buyer needs.  Homeland security is a practice that some law firms are offering, and presumably selling, to clients while other law firms may be scratching their heads and wondering what a homeland securities practice really is.  Sometimes emerging practices take off (biotech and the patenting of genetically engineered products); sometimes they don’t (Y2K).  If demand for the legal service increases, the service enters a growth phase where demand increases faster than the number of lawyers who offer capability in the legal area, premium rates are being charged and general practice firms are scrambling to add the practice area.  Eventually the practice becomes mature as the demand for the legal services balances with the number of lawyers capable of doing the work.  Buyers of the legal service have a greater number of choices among law firms and are able to become more knowledgeable about comparative pricing among those firms.  As a result, the market becomes more efficient, and service becomes more commodified, i.e., buyers detect that there is little significant difference among the law firms performing the service; therefore, the primary means of differentiation to a buyer is price.

Now, for a long time law firms have attempted to forestall the evolution of services from maturity to commodity through things like providing extraordinary service, unique value adds, strong personal relationships and technological handcuffs that make it difficult for buyers to change firms over relatively small cost differences.  While such differentiation works for a period of time, eventually the price differences become sufficiently great and/or the legal service becomes sufficiently routine that it falls off the radar screen of corporate senior management and general counsel and into the preview of the procurement or operating managers.  At this point, the service is all about price with the possibility of client service or personal relationships serving as a tiebreaker.  This is where market competition gets bloody. Law firms offering the service find themselves losing money (at least on an opportunity cost basis) and attempt to move themselves out of the practice.  Firms with lesser resolve create justifications for continuing a commoditized practice such as “We continue to do low level insurance work because it helps our lawyers maintain their trial skills.” or “We do routine patent prosecution as a loss leader to generate patent litigation.”

The Off-shoring Option
However, a legitimate third option for some commoditized practices may be off-shoring.  Essentially, that is building the cost of providing a service around the prices the clients are willing to pay.  If a law firm could dramatically reduce its cost of providing a legal service while continuing to offer the service at a quality level that is satisfactory to the client, it is conceivable that commoditized work could go from a loss to a source of profit equal to or greater than higher priced services.

Why is off-shoring less expensive?  Aside from Rand and Rupe to Dollar conversion issues, the simple laws of supply and demand apply.  The United States, arguably the most over-lawyered country in the world, has approximately 950,000 lawyers admitted to practice and its law schools are producing about 36,000 new lawyers every year.  India, by comparison, has over 3 million lawyers and has almost 200,000 new lawyers graduating every year .  All Indian legal education is in English and they learn both the British and U.S. legal systems.  The result is lawyers working for 80 percent less than associates in U.S. law firms.

The fact that other countries have capable lawyers available to perform routine legal work for U.S. and U.K. clients at a substantially lower expense is unquestionable.  The key to the effective use of off-shoring for commoditized legal services is understanding the situations in which it will work.  Not every commoditized legal practice is appropriate for off-shoring.  In fact, for off-shoring to even be considered, five important questions must be raised:

Can the actions in an activity be condensed into a set of written directions ?  In other words, how much prior knowledge does a lawyer require to handle the matter, and how much judgment is required to apply that knowledge?  For example, the actions required to review a document for privilege or create routine bank lending documentation can be laid out in an explicit (although lengthy) set of step-by-step instructions.  Counseling a client on whether to take a bank loan or examining a witness probably can not.

Can the actions be standardized — does the service involve a series of consistent and repeatable processes, or is the application of each process different for each case?  For example, a residential mortgage closing involves the same processes over and over while the negotiation of the purchase price on behalf of a client does not.

Can the actions involved in a service be divided into discrete pieces, performed independently of one another by separate people in separate places and reassembled later?  For example, two lawyers could draft separate clauses of a contract dealing with specific issues that could be assembled into the overall contract later.

Does the lawyer or paralegal performing a service need to be in the same location with other lawyers working on the matter or with the client?  The negotiation of a settlement with an insurance company can occur by e-mail or over the telephone while trying the case can not.

How complex is the activity?  Can the situational and factual information be presented in a one-way presentation, or is it necessary for the recipient of the information to ask questions and interact with the provider of the information beyond the initial instructions?

Is Off-shoring of Commodity Legal Work Realistic?
It depends.  We are seeing some UK law firms pushing patent prosecution work to lawyers in South Africa where the legal education is rigorous but wage costs are comparatively low.  A lot of legal research is being performed in India through online legal services auction sites where law firms and general counsels can send simple work to the lowest bidder.  But the wholesale shipping of commodity legal services to third-world countries isn’t happening – yet.

There are, of course, issues of whether law firms have sufficient volume to justify the rigmarole of setting up an off-shore operation, the ethical considerations of disclosing the relationship and fee structure to clients and the willingness of clients to accept work performed in other countries.  But, can law firms realistically ignore an off-shore option when their driving issues involve:

  • seeing substantial portions of their traditional practices subjected to greater and greater rate discounts by unrelenting clients whose primary concern is the cost of a service;
  • being asked by clients to provide legal services through closed panels and RFP responses that are a prelude to further rounds of rate negotiations; and
  • the apparent ability to handle a larger volume of work by moving a substantial portion of the routine aspects of the practice to fully acceptable lawyers in India who are paid a fraction of what the firms are paying their lowest level associates.

Of course, off-shoring is not a start to finish answer.  To meet ethical requirements, law firms will have to disclose to clients that a portion of their work is being performed outside of the law firm and all such work would have to be supervised by a lawyer licensed in the jurisdiction.   But for the law firm that wants to maintain its traditional practice and is not afraid to consider an innovative and highly entrepreneurial opportunity, off-shoring portions of its practice could be rapidly becoming a “no lose” proposition.