Legal services outsourcing (“LSO”) is transforming the legal marketplace. The economic recession of 2007-2009 forced corporate counsel to innovate their procurement of services and reevaluate why they were procuring them. The days when corporations relied exclusively on the service of law firms are over, replaced by creative fee structures, heightened price bidding by those firms, and specialized LSO.
LSO refers to the corporate practice of establishing strategic partnerships with third-party legal service providers to work either directly with general counsel or in a tripartite relationship with both the client and its outside counsel. Already robust, the LSO market continues to evolve rapidly, driven by both market necessity and changing perceptions of the practice itself.
In order to understand more thoroughly both these changes and the legal issues they raise, I turned to Leah Cooper, Director, Legal Services Outsourcing for CPA Global, an international provider of outsourced legal services. Ms. Cooper made headlines in 2009 when, as Managing Attorney of international mining group Rio Tinto, she outsourced that company’s document review, drafting, and legal research to CPA Global. Rio Tinto quickly realized benefits – an estimated $14 million in saved legal spending within months. Such a figure requires every corporate Legal Department to consider how it manages its resources and whether LSO is a proper fit for its needs.
According to research done in conjunction with the Financial Times Innovative Lawyers Awards, 43% of corporations and 72% of surveyed law firms were currently outsourcing, planned to in the future or were open to the possibility. Thirty three percent (33%) outsource litigation-related document review. A separate survey conducted by European Lawyer found that 61% rely on LSO for assistance with M&A transactions. Ms. Cooper cites the following as major sectors for the LSO market: technology; telecommunications; healthcare; pharmaceuticals; and especially financial services, where banks are cutting costs as a result of unprecedented amounts of legal work.
The figures quoted above are in large measure the result of changing perceptions of LSO. As corporations have realized quantifiable cost savings, LSO has become a best practice among corporate counsel. Only 3% of corporations and 11% of law firms identify the quality of work as their main barrier to outsourcing legal services, an extraordinary decline from the past. For law firms in particular, outdated perceptions for years remained a serious psychological—and self-serving business—barrier when it came to advising their clients whether to outsource legal services. In recent years, however, law firms have discovered that their clients have taken control of such decisions, and with great attendant cost savings and increases in efficiency.
Many law firms have also come to realize that LSO providers work synergistically with them to the benefit of the client. As Ms. Cooper told me, “the word ‘outsourcing’ is something of a misnomer. We’re not talking about lifting and shifting a department or function. It’s about working collaboratively. ‘Legal Services Integration’ is probably a more accurate description.” The key in this equation is that each spoke in the wheel—each process—be performed by the party with the greatest comparative advantage, as discussed below.
Corporate counsel are no longer merely lawyers within the organizational structure; rather, their role has long since evolved into a business one that allows—and often demands—that they contribute to corporate strategy and growth. Costs and desired efficiencies remain the primary motivators for outsourcing legal services. Yet corporate counsel must now view LSO as a strategic value proposition the benefits of which inure not only to the Legal Department, but to the company as a whole by putting the right people in the right place doing the right thing both (i) internally and (ii) with outside counsel and LSO providers. This is a simple matter of specialization. As Ms. Cooper states, associates at law firms may be able to do the low-level work typically outsourced to LSOs, “but it’s not a core function of their job – often they’re pulled in to help out, but would prefer to be working on something else. Clients recognize the value of giving these sorts of tasks to a professional who specializes in the work and whose sole role is to do the job, and do it well.”
Focusing on players’ respective comparative advantages allows corporations to realize significant strategic and operational benefits. According to Ms. Cooper, “in the area of document review, we have delivered savings of up to 80% for clients versus the cost of review performed by their retained counsel.” My follow-up focused on how corporations could realize the sort of short-term savings that Rio Tinto did.
Most obvious is where [corporations] are sending out work to their external counsel that simply doesn’t have to be done by the law firm. Such work includes document and contract review, litigation support and legal research, where the client is being charged around $300 an hour for a junior associate to handle the work when we can do it for significantly less and often better and more efficiently because we are doing that sort of work day in, day out. [LSO providers] are also able to help [clients] introduce processes to centralize and standardize much of the way in which their legal work is handled, enabling them to do more with less by not having to reinvent the wheel every time they do something that maybe someone around the globe has already done. With greater standardization comes greater cost savings.
She added that specialization is particularly important to achieve scale quickly when it’s needed most.
In a big litigation matter or regulatory review, the work is subject to sudden and dramatic peaks that corporate legal departments and their external counsel may not be able to handle. For a law firm, it’s often all hands on deck, with associates being pulled from one practice to another just because they need more bodies. You might end up with people from the real estate practice working on an environmental case.
Almost every law firm associate has experienced this unnecessary phenomenon. LSO providers can scale up quickly with legal professionals who are subject matters experts, as well as respond to changes in project scope on short notice.
Legal Issues Raised by LSO
LSO raises a variety of legal issues, two of which require the close attention of corporate counsel: (i) attorney-client privilege, and (ii) data security in light of both common law and (especially) statutory requirements as to how client data must be treated and its security ensured, matters complicated by industry-specific laws.
Ensuring attorney-client privilege must remain on any LSO checklist given the nature of the working relationship between the client, outside counsel, and the LSO provider. Even as a third party, the provider’s role is akin to that of any other member of the in-house team to which work might be delegated. On the law firm side, says Ms. Cooper, “the lawyer assigning the work is ultimately responsible. Liability rests with the client.” As I have argued elsewhere, one cannot overstate the importance of memorializing contractually the precise nature of such relationships, as well as the parties’ explicit understanding of where liability lies should the issue arise.
The question of data security also requires close examination given the cross-border nature of many LSO relationships. The list of countries both served by and hosting LSO providers is a long one. Ms. Cooper advises any potential outsourcer to assure itself that “the strictest levels of security” are maintained across LSO operations. LSO providers that take quality seriously should be certified by the International Organization of Standardization (“ISO”), especially for operational quality (ISO 9001) and management control of information security (ISO 27001).
A Strategic “Must”
LSO is here to stay. Case studies showing significant cost savings and increased efficiency have put LSO squarely front and center on corporate counsel’s list of strategic “musts.” Corporate counsel restrained by tight budgets and quality assurance concerns must deploy limited resources so as to maximize comparative advantage. Careful coordination with the proper LSO provider to examine closely the company’s needs and capabilities is a wise first step toward meeting that goal.