Potential cost savings associated with legal outsourcing
“How much can I save?” “What is the cost of legal work done offshore?” “Please give me a quote of 100 hours per month for legal work done in India.” “What is your hourly rate?” “How much do you charge for ______?” These are the questions and requests directed at me 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 they should ask, whether to a lawyer or someone who can help outsource a legal project, is not “how much?” Instead, early on, it must be determined whether those who would work on the project have the skills, training, and experience to complete assignments 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 the time frame for completion be met? What about conflicts of interest? These questions should be asked of all US attorneys whose services might be retained. Likewise, they must be requested from any person or entity involved in the subcontracting of legal assignments. 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 qualified US attorneys, generally 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 with 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 tough economic times. Dan DiPietro, head of clients for Citi Private Bank’s Law Firm Group, offered Storm Warnings (American Lawyer, December 2007) noting that “for the first time since 2001, expense growth actually outpaced revenue growth from January to June, which depressed profit margins.” Sounding an ominous note, DiPietro noted that the biggest spending increases were in associate salaries and occupancy and technology costs. His warning proved prescient, as several traditional law firms closed their doors in 2008, including Heller Ehrman, Thelen LLP and Thacher, Proffitt & Wood. Other big law firms are cutting staff and attorneys, including lopsided partners. Corporate clients are reducing the number of outside companies they hire, while putting pressure on them to be more efficient. It is becoming increasingly apparent that difficult decisions lie ahead for many law firms and their clients. Law firms want to retain their rainmakers, secure the best legal talent available, and keep their profits per partner high. Clients want their overall external consulting costs to be reduced. How will these problems be addressed, particularly in a difficult economic climate? Outsourcing is one potential way to meet the challenges. Therefore, the question, how much can I save?
Assuming proper initial inquiries have been made and properly addressed, what are the cost savings reasonably achievable by a subcontracting US law firm and its clients? Answering that question necessarily implies 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 per year at the attorney’s hourly billable rate of $200.00, for a total annual cost to the corporate client (and revenue to the law firm) of $400,000. The law firm’s expenses from the income produced by its associate include the attorney’s base salary ($160,000) and bonus (say $20,000) plus the associate’s share of overhead, occupancy, support staff, benefits, marketing , hiring, technology and other expenses. In its 2006 survey, Altman Weil, the renowned legal consulting firm, estimated the average annual expense per attorney at $161,893. (To be sure, those expenses have increased since 2006, but for conservatism, we’ll use Altman’s 2006 number in our example.) Altman’s breakdown included promotion ($7,136), referral ($4,655), team ($9,299), occupancy ($25,879), staff ($55,147), paralegal ($17,911), and “other” ($41,866). In Altman’s survey, “other” includes malpractice insurance premiums and settlements, payments to ex-partners, recruitment costs and other expenses not shown separately. Adding the associate’s share of expenses ($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 revenue. Let’s call it a $60,000 law firm profit attributable to the associate’s efforts. Stated differently, it costs the law firm $171 per billable hour of associate time to produce $60,000 of profit.
Now suppose the same 2,000 hours were produced offshore at a cost of, say, $75 per hour instead of $171 per hour. (High-end outsourced work, such as legal research or writing, could cost around $75.00 per hour, while other types of work, such as document review, would likely cost less. For the purposes of our analysis, we estimate overall offshore costs to the highest end.) The actual cost to the law firm for 2,000 offshore hours at $75 per hour would be $150,000 instead of $341,892. In addition, the law firm’s client could be billed , say $240,000, for this job instead of $400,000. (Recent bar association ethics advisory opinions allow the law firm to pay a reasonable supervisory fee, provided the client is informed of the relocation and the Code of Professional Conduct, particularly Rule 1.5, is followed.) 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 (which now starts at a $160,000 base) for attorneys at top-tier law schools. Due to lower overhead costs and fewer new associate hires, the firm would be able to compete more effectively for a reduced number of top-tier US attorneys it chooses to hire. Over time, the capital stock and partner distributions would be shared with a smaller number of people. Therefore, a carefully implemented and monitored outsourcing program for select 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, cut 45 equity partners. While denying any kind of crisis, James Holzhauer, the firm’s president, commented on the move: “You need to run a law firm like you run any kind of large company 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. To be sure, while some law firms are reluctant to break the traditional ways, their clients are not. In August 2007, Bloomberg.com observed that “clients are pushing firms like Jones Day and Kirkland & Ellis to send basic legal work to India.” It is significant that this “push” occurred long before the global financial collapse of the last quarter of 2008. Regarding law firms, Holzhauer warned in March 2007: “This (law business) is to some extent a fragile business. “Our greatest asset is our people. If you’re not financially strong enough to retain your best people and attract other strong people from other places, a fragile business can struggle.”
Corporate clients are on a mission to reduce legal costs. Some of those clients would prefer to oversee the outsourced work in-house, while others are apparently content to have their chosen outside US attorney oversee the offshore work. Regardless, legal outsourcing is on the table to consider for cost control. “How much can I save?” is a question asked by those who, just a few years ago, never dreamed of considering the concept of legal assignments being completed abroad.
