Potential Cost Savings Associated With Legal Outsourcing
“How much can I save?” “What is the cost of legal work done abroad?” “Please give me a quote for 100 hours a month for legal work done in India.” “What is your hourly rate?” “How much do you charge for ______?” These are the questions and requests that I was directed at the beginning of the conversation when someone contacts me about sending certain legal tasks abroad for me to complete.
I regularly advise potential clients that the first question to ask, whether it is from an attorney or someone who can assist in outsourcing a legal project, is not “how much?” Instead, at the outset, it must be determined whether those who would work on the project have the skills, training, and experience to complete the task (s) with quality. This necessarily implies a clear delineation of the proposed company and the expectations of the subcontractor. Also, what are the confidentiality guarantees? Can you meet the completion deadline? What about conflicts of interest? These questions should be asked of all US attorneys whose services may be retained. Likewise, any person or entity involved in the outsourcing of legal assignments should be consulted. It should be noted that offshore attorneys are not licensed in the US and do not provide “legal services” or advice. Foreign attorneys, working abroad, complete assignments under the supervision and review of generally qualified US attorneys in the same manner as paralegals, summer paralegals, or junior associates in the US. In fact, the Code of Professional Conduct requires such supervision.
However, the cost savings that can be achieved by outsourcing seems to be the hot topic of the day. Large law firms, in particular, are looking for ways to cut costs to stay profitable or even survive challenging economic times. Dan DiPietro, Citi Private Bank’s chief client of the Law Firm Group, offered Storm Warnings (American Lawyer, December 2007) observing “for the first time since 2001, expense growth actually outpaced revenue from January to June, depressing profit margins. “On an ominous note, DiPietro noted that the largest increases in expenses were in associate salaries and occupancy and technology costs. His warning proved prescient, as several old-school law firms closed their doors in 2008, including Heller Ehrman, Thelen LLP, and Thacher, Proffitt & Wood. Other large law firms are reducing staff and attorneys, including partners reducing share capital. Corporate clients are reducing the number of outside firms they hire, while pushing them to be more efficient. It is becoming increasingly clear that difficult decisions are looming for many law firms and their clients. Law firms want to retain their rainmakers, secure the best available legal talent, and keep their earnings per partner high. Clients want their overall external consulting costs to be reduced. How will these problems be addressed, especially in a difficult economic climate? Outsourcing is one way to potentially meet challenges. So the question, how much can I save?
Assuming the proper initial inquiries have been conducted and adequately addressed, what are the cost savings that can reasonably be achieved with an American outsourcing law firm and its clients? Answering that question necessarily involves a comparative analysis of income and expenses. Suppose a large US law firm wants to consider outsourcing work that might otherwise be performed by a US associate working exclusively for one of the law firm’s corporate clients. The junior associate bills 2,000 hours annually at the attorney’s hourly billable rate of $ 200.00, for a total annual cost to the corporate client (and income to the law firm) of $ 400,000. Law firm expenses out of your associate’s income include the attorney’s base salary ($ 160,000) and bonus (say $ 20,000) plus the associate’s share of occupancy overhead, support staff, benefits , marketing, hiring, technology and others. expenses. In its 2006 survey, Altman Weil, the renowned legal consulting firm, estimated the average annual spending of a law firm per attorney at $ 161,893. (To be sure, those expenses have increased since 2006, but for the sake of conservatism, we’ll use Altman’s 2006 issue in our example.) Altman’s breakdown included promotion ($ 7,136), referral ($ 4,655), team ($ 9,299), occupancy ($ 25,879), personal ($ 55,147), paralegal ($ 17,911), and “others” ($ 41,866). In Altman’s survey, “other” includes malpractice insurance premiums and settlements, former partner payments, hiring costs and other expenses not shown separately. Adding the associate’s expense share ($ 161,893) to the associate’s total earnings ($ 180,000), it is clear that it costs the law firm a total of $ 341,893 to produce $ 400,000 in associate income. Let’s call it a law firm profit of $ 60,000 attributable to the associate’s efforts. In other words, it costs the law firm $ 171 per billable hour of associate time to produce $ 60,000 in profit.
Now suppose that the same 2,000 hours were produced offshore at a cost of, say, $ 75 an hour instead of $ 171 an hour. (High-level outsourced work, such as legal research or writing, can cost in the range of $ 75.00 per hour, while other types of work, such as document review, would likely be less. For the purposes of our analysis , we estimate overseas overhead costs for the high end.) The actual cost to the law firm for 2,000 hours offshore at $ 75 per hour would be $ 150,000 instead of $ 341,892. Also, the law firm client could be billed, say $ 240,000, for this work instead of $ 400,000. (Recent ethical advisory opinions from the bar association allow for a reasonable supervision fee by the law firm, provided the client is informed of the offshoring and the Code of Professional Conduct is followed, in particular Rule 1.5). The client would happily achieve a 40% savings, while the law firm’s profits would likely increase as well. Additionally, the law firm would require fewer associates in the ever-increasing salary structure (now starting at a base of $ 160,000) for top-tier law school attorneys. Due to lower overhead costs and fewer new associate hires, the firm could compete more effectively for a small number of top-tier US attorneys it chooses to hire. Over time, share capital and partner distributions would be shared with fewer people. Therefore, a carefully selected, implemented and monitored outsourcing program for legal assignments can potentially result in increased client satisfaction and retention, as well as increased law firm profitability.
In 2007, Mayer Brown, a Chicago-based law firm of 1,500 lawyers, purged 45 equity partners. While denying any kind of crisis, James Holzhauer, president of the firm, commented on the move: “You need to run a law firm like you run any kind of big business and make sure you have the right staff going forward.” Outsourcing, viewed by some law firms as the enemy of law firm profits, may in fact be the opposite. Certainly, even if some law firms are reluctant to change traditional ways, their clients are not. In August 2007, Bloomberg.com observed that “clients are pressuring firms like Jones Day and Kirkland & Ellis to send basic legal tasks to India.” Significantly, this “push” came long before the global financial meltdown in the last quarter of 2008. Regarding law firms, Holzhauer warned in March 2007: “This (law business) is to some extent a business. fragile. Our greatest asset is our people. If you are not financially strong to be able to retain your best people and attract other strong people from elsewhere, a fragile company can have problems. “
Corporate clients are on a mission to reduce legal costs. Some of those clients would prefer to supervise outsourced work internally, while others are apparently happy with their outside legal counsel chosen to supervise work abroad. Regardless, legal outsourcing is on the table to consider cost control. “How much can I save?” It is a question asked by those who, a few years ago, never imagined contemplating the concept of legal assignments that are completed abroad.