Law Firm 2.0 – Re-architecting the Law Firm – Outsourcing

Well, I’m back. I took some time off blogging about Law Firm 2.0, as I wanted to “take in” all the layoffs and such – a blog on that is coming soon. But without further delay, here are my thoughts on outsourcing as a critical change coming soon to a law firm near you.

As a venture capitalist, I’ve seen the advantages of outsourcing. One of our largest success stories, Stratify, controlled costs and provided 24/7 support through a well-managed outsourcing strategy. Most professions are outsourcing at least part of their work, why not lawyers?

I can see two potential ways outsourcing can work in the legal setting .

The first way is simply outsourcing outside of metropolitan areas that are expensive to live in. Why make all of your lawyers commute to New York City or the Silicon Valley to work in an office where they never see their clients? In fact, many of these lawyers would prefer to live outside the city centers to avoid the higher costs of living. I would posit that after some type of apprenticeship program at the law firm, well-trained associates could move anywhere in the country and work effectively. I know for a fact that most law firms have some lawyers working from home in locations where offices aren’t located and no one knows the difference. Maybe now it’s time to do that wide scale. Law offices could start to look like consulting offices in that most of their now smaller and cheaper office space is for visiting professionals. Salaries could be adjusted on cost of living analysis. The law firm could increase margins and pass some of the savings onto their clients. As an example of one firm thinking outside the box, Orrick has outsourced its entire back office to West Virginia. Why not some of the lawyers? Wouldn’t many Silicon Valley lawyer prefer to practice from home in San Francisco or Marin? Who says all the good lawyer want to live in expensive places to live? Who says that good lawyers don’t exists in secondary or tertiary markets today?

The second way would be to actually outsource work to other countries. This clearly works better for some practice areas than others, but if it works for processes as complicated as software development, it will work for the legal process. I think patent drafting, licensing / contract drafting, diligence and some other non-client facing tasks can easily be outsourced. I’m sure most lawyers reading this will brush it off saying it’s too hard, but nearly every other industry has figured out outsourcing. One reader of this blog suggested the following:

Although the model did not work well in the airline industry, I think that smart law firms should develop “budget line” practices for routine work.  These could be staffed with Indian attorneys, part-time stay at home attorneys and maybe attorneys in smaller markets with lower costs of living – in all cases, non partnership track attorneys.   They would be supervised by the higher paid, partnership track attorneys with a roughly 10%/90% split of time between the supervising attorney and these lower cost attorneys.  These groups would not handle things like general client counseling,  high stakes litigations or large scale M&A.  The managing attorney would manage the allocation of work between the value line and the main line of the firm.  Given the lower cost of labor and the increased possibility of leverage, assuming a reasonable mark-up, this proposal still might maintain per-partner profits

I actually think he’s got a good point.

Something to consider. As always, fire away…

  • Take a look at what Virtual Law Partners is up to. http://www.virtuallawpartners.com They were also recently written up in WaPo http://www.washingtonpost.com/wp-dyn/content/stor… . I suspect you know some of the people over there, considering it's a lot of former DLA, VLG, WSGR, Cooley types.

    Outsourcing presents a whole host of problems, many of which should be solveable. We used one of the major LPO providers and were completely underwhelmed by the work product. That could be an issue of a nascent industry or it could be endemic, too early to tell. Between the amount of resources we had to expend supervising and revising, it ended up costing us more work than doing it ourselves. Those are the fixable issues, though. Depending on the type of work, there could be un-fixable problems with privilege. Eventually, I suspect LPO will work for things like initial privilege review, routine patent filings, contract library management, etc.

  • Agree with you and I’m well tuned into VLP.  I’ve met with them several times and like what they are up to.  In fact, I have a blog post (coming) that highlights their business model.

  • Any thoughts on the longer term impact of alternatives like crowdsourcing, self-service webmd type plays like nolo and market-connector sites like elance? Oh and AI based expert systems – when can we have those?? 🙂

  • You can have those as soon as people stop suing lawyers for malpractice, probably.  It’s interesting, I definitely think that there will be a move to self-service and the like.  But I think the movement will be slow.  Want to start a company?

    • I see DIY as the only option between an ever-widening gap between doing nothing and hiring expensive legal services. Furthermore, there are some legal documents that are more accessible to non-lawyers than others. Why not make the tools to create and use "vanilla" docs even easier? Model docs are a start, but companies need an operating manual or a "nutshell" for how to use them. Why there aren't more resources out there demystifying common legal startup docs is beyond me. Unfortunately, those most qualified to educate, the transactional attorneys, are the ones with incentives to perpetuate the status quo. The legal community could do a lot of good (and repair some reputational damage) by facilitating more legal education in their communities. The crash course series, specifically the legal ones, are an example of what I think startup lawyers could do a lot more of: http://www.silicon-flatirons.org/events.php?id=wo

  • Thanks lawshucks! Jason was one of a handful of people who thought law firm business models were interesting last year. Now I think a lot more folks are paying attention, wondering where their attorneys are going to be in 6 months.

    VLP, if I may toot our horn, is a case of right people, right timing. When you don't have high billable-personnel/admin ratios or lease expenses to worry about it's easier to get through down times. We have managed to grow from 9 attorneys last spring to 35 currently when most firms seem to be going the other direction.
    </firm pitch>

    Thanks again. We really appreciate people checking us out and paying attention to our model.

  • Rich Baer

    Smart clients are starting to piece part out engagements and use outsourcing (for instance, contract attorneys hired directly) for certain work (document review, large volume due diligence) and only pay the law firm for oversight of the outsourced labor. With technology (Stratify's and other's) the outsourced labor can come from the lowest priced labor markets.

  • John

    Jason–I think the market may already be where you are suggesting, but it is the clients choosing to re-allocate work and law firms refusing to do certain work or pricing themselves out of the market. Few companies that I know of still have only one law firm relationship, and no company with an in-house counsel that I know of uses only one firm. The fee disparities have become too large, and conflicts too prevalent, to allow use of a one size fits all strategy for firms. Over the past few years many large firms have moved up-market and only want high margin work, although now they may have some more flexibility given the down market it is hard for them to turn certain practices (i.e., IP transactions, labor, etc.).

    Here in Seattle, Microsoft and Amazon started to use smaller firm and solo lawyers for IP transactions work (in many cases seemingly leading to the breakup of IP transactions groups at larger firms particularly when combined with rate pressures), and the trend has carried over to mid-sized and smaller companies. There is a robust community of good quality lawyers at smaller firms or solos. Cisco is using firms all over the country, particularly for patent prosecution and similar work. My company uses law firms quite literally all over the country–Seattle, Silicon Valley, LA, NY, Maine and almost everywhere in between. We find the right lawyer, with the right skills, at the right rate to meet the need.

    Outsourcing legal work is harder for small and mid-sized companies to manage, because it is too episodic. Maybe law firms can pull it off, but right now most seem to back into it via contract attorneys for litigation document review and similar projects. Not offshoring but potentially a precusor.

    • John

      I hit post without the last sentences…so I'll reply to myself. It seems possible to me that Law Firm 2.0 may be like an evolution of the current world. An increasingly bifurcated world with big, big, highly profitable firms focused on large, expensive litigation and transactions, and small firms or solos focused on specialty areas or cost-sensitive work. Certainly there seems to be room for firms like VLP to leverage a virtual infrastructure and maybe that is what replaces mid-sized firms. There is no reason why Law Firm 2.0 has to be a large firm. It seems more suited to smaller firms/solos that leverage technology to build a strong reputation and carve-out a niche space, similar to what many Web 2.0 content providers have done. But your bet the company litigation or M&A transaction are not going to go to small firms, unless they are niche firms with great reputations.

      Having large firms build a huge network of offshore resources like the"budget line" for commodity work suggested above seems to be unworkable since it is inconsistent with the premium services law firms are offering–particularly as they get rid of or de-emphasize non-premium services. It is quite difficult to maintain a premium brand and a commodity brand in the same firm at the same time. Conflict rules also seem to lend themselves to smaller firms/solos. For day-to-day work, a conflict check that takes a few minutes not a week is kind of important.

      • Also agree.  I don’t think it has to be a large firm, rather I’m hypothesizing that if large law firms are to survive, they are going to have to move to Law Firm 2.0.

  • Completely agree.  My earlier posts on Law Firm 2.0 talked about how clients have outsourced on their own.  The fracturing of the law firm / client relationship started happening a few years ago and is only accelerating due to current economic realities.  I find it very interesting how many large companies have moved to smaller firms.  In the past this would have never happened.

  • John

    It seems just as likely there will be fewer large law firms. I'm not sure most large law firms can rework their business models and, more importantly, their thinking.

  • Outsourcing is already "here" in Israel.
    US expatriate lawyers, educated and trained in the US, provide first line legal services to US clients. In some cases, the lawyers maintain a relationship with their former US law firms. (Disclosure: I am a corporate and technology lawyer based in Jerusalem and work with US startups and investors.)

  • I think the best opportunity for starting a firm of this type would be to concentrate on outsourcing corporate legal departments. Right now, to my knowledge, there is no legal services outsourcing company that effectively combines systematic knowledge management, document creation/management automation, and process improvement. This combination would allow the company to have predictable costs, which would also mean it could dispense with the billable hour and charge fixed fees that will be attractive for CFOs' budgets. The company could hire attorneys that have excellent experience but want work/life balance, and pay them in the low six figures to work from home (or pay even less by using Central/South American attorneys, who operate in U.S. time zones, and may have sufficient expertise and English proficiency). Guarantee them a 9-5 schedule in return for the reduced salary.

    On the customer side, you have a great sales pitch. Right now, Fortune 1000 companies have way too many in-house attorneys who provide work product of inconsistent quality, are referred to internally as the "sales prevention department" (or "where deals go to die") due to their lack of focus on sales and procurement needs, are often ignorant and dismissive of cutting edge corporate methods such as process improvement and knowledge management, and strenuously resist strategic sourcing methods to reduce outside counsel fees. In my experience, each in-house attorney costs at least $250K per year (when you factor in benefits, support staff and overhead). This means that even after paying labor and returning a significant per lawyer profit, the company could still offer pricing at a significant savings over maintaining a large in-house department.

    So the competitive advantage would be higher quality work, at a much lower price, with higher budget certainty. The company could also take over many outside counsel billables charged using the unpredictable hourly rate. It would be hard to argue that a large in-house legal department could do better work, as a cost center, than a for-profit company such as this one, which is completely focused on providing better service while driving down cost through radical productivity improvements (which most law firms/legal outsourcing/legal staffing companies do not do). General counsels and legal departments will strenuously resist this, so the goal would be to sell to the CFOs, finance professionals, and procurement managers who are dying to get their hands on legal services, one of the last few areas in corporate America today that has avoided strategic sourcing.

  • Eric Cohen

    Check out Rimon Law Group at http://www.rimonlaw.com – they take advantage of both outsourcing and the virtual law firm model.

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