I was privileged to be invited as a guest speaker at the August 6th, 2010  ABA Ethics 20/20 Commission public hearing on legal outsourcing San Francisco.  The ABA also heard or received testimony from two other executives of legal process outsourcers (LPO).  Click here for the speaker schedules and written testimony (PDF).  In this post, I report on the status of the ABA ethics consideration process, my testimony, and my take-away from the hearing.  I then share our view on what direction the ethics rules should take.  The post closes with information on upcoming PLI conferences about legal outsourcing.

The ABA Process.  The San Francisco hearing follows on from the ABA Section of International Law’s Public Forum on Offshore Outsourcing of Legal Services held in New York City on April 17, 2010.  The purpose of that session was “to gather viewpoints for the Section’s Leadership Council, which is considering the formulation of policy recommendations to the larger ABA”.  Integreon also testified at that meeting, as we reported in our blog post, ABA Reviewing Ethics Rules, Examining Legal Outsourcing. At that time, as noted in our post, the ABA had not decided what, if any action it should take regarding the ethics of legal outsourcing.

Since then, the ABA position seemed to shift a bit.   Shortly before the San Francisco public hearing, a Section of International Law newsletter noted that the Section is “helping the larger ABA wrestle with whether existing ethical rules and regulatory structures adequately address the realities and challenges of a globalized 21st Century law practice…   [the] efforts of the Section’s Task Force and the Ethics 20/20 Working Group have now merged [and] [t]he Working Group has developed proposed amendments to the Model Rules to address ethical issues arising from outsourcing.”  So I went into the hearing assuming that the ABA will amend the Model Rules of Professional Conduct.

Integreon Testimony and Report on Hearing.  I opened my testimony with a brief formal statement. The Commission then asked me several excellent questions. One inquiry was the nature of the tripartite interaction among a law firm, a corporate client and an LPO provider. The Commission appeared particularly concerned with a scenario where a corporate client has an existing relationship with an LPO provider and “mandates” that a law firm use its LPO.  I advised the Commission that Integreon views law firms as collaborative partners in the delivery of effective and efficient legal services to their clients. I also commented that in my experience, if based on trust and a true partnership, the relationship among the three parties works well.

Based on what I heard at the hearing, amending the Model Rules does not appear to be a foregone conclusion.  Several options still seem to be on the table, including issuing a best practice guidance, releasing a new Formal Opinion, updating the existing LPO ethics Formal Opinion (08-451), or amending the model rules.

Integreon Views on the Ethics Issues and Bar Regulations.  In our view and experience, lawyers, law firms, and the leading LPOs will welcome additional guidance from bar regulators.  All are interested in the details of legal outsourcing ethics, what constitutes adequate and effective supervision, and frankly, on what, if any mark-ups, might be permissible. (In general, the ethics rules governing lawyer charges seem to be vague if not ambiguous.)

The legal support areas most suitable for legal outsourcing are high volume areas, including large scale document review, contract review and drafting, M&A due diligence support and legal research.  Because of the volume, we think even outsourcing naysayers cannot reasonably require that a licensed lawyer review every single decision made by an outsourced resource.  Anyone taking that position would have a hard time justifying the delegation of these tasks domestically to paralegals, contract lawyers, temporary lawyers, and other professionals.  Drawing a line between these positions and outsourced personnel will be hard if not impossible.   Delegation with appropriate supervision has always been and will continue to be an integral element of the effective delivery of legal services.  The introduction of LPO is, in our view, just another resource to which lawyers can delegate work and which lawyers must supervise.

Upcoming PLI Conferences on Legal Outsourcing.  I encourage readers interested in learning more about legal outsourcing to attend the Practising Law Institute’s Outsourcing 2010: Structuring, Negotiation and Governance (Chicago on September 21 or Los Angeles on October 22).  The faculties are impressive and offer an excellent education about legal outsourcing.  At each, I will present on the Ethics of Outsourcing.  My sessions will include an update on both the ABA’s and the UK Law Society’s ongoing consideration of the ethical issues of outsourcing.

Integreon’s Ron Friedmann’s recent blog post, Estimates for Legal Work and Legal Estimators (January 11, 2010), was cross-posted at Legal OnRamp (LOR), a collaboration system for in-house counsel and invited outside lawyers and third party service providers.  Several LOR members participated in a thought provoking commentary, which we reproduce below.

Ron suggested in his blog post that General Counsel should increasingly request legal cost estimates from their outside counsel for both routine and complex legal tasks:

“Consumers routinely seek estimates for many services, for example, buying a new roof, replacing an HVAC system, repairing a car, and even obtaining some medical services. The logic behind this should also drive general counsels to seek estimates for the cost of legal work.”

Legal Process Outsourcing (LPO) can facilitate the uptake of legal cost estimates and at a broader level, alternative fee arrangements (AFAs). The process driven approach to the delivery of legal support services in the LPO model supports AFAs. Integreon and other reputable LPOs take a systematic approach to delivering legal support services that blends process, technology and human resources. These techniques, however, are most effective when the legal function in question has been “unbundled”, or in other words, separated out into discrete, core, constituent tasks. Although it may seem counter intuitive to apply such a pragmatic approach to the provision of legal support, as a solutions provider, the application of a six sigma DMAIC (define, measure, analyze, improve, control) methodology ensures consistency of quality and continuous improvement, across a variety of service lines being provided from multiple delivery centers across the globe.

LPO providers are used to applying workflow analytics and a variety of project management tools to track costs, accuracy and time, while continually monitoring and repeating the process to refine estimates. Both General Counsel and outside counsel can benefit from this structured approach, which results in legal cost clarity and predictability. This in turn facilitates the implementation of legal estimates and AFAs across the board.

With the kind permission of the Legal OnRamp contributors, I reproduce here the original Legal Estimates discussion thread:

First, see Ron Friedmann’s original post (Estimates for Legal Work and Legal Estimators, as posted on his blog Strategic Legal Technology). It generated the following dialogue at LOR:

Comment 1: By Judah Lifschitz of Shapiro, Lifschitz & Schram, P.C.

My practice concentrates on very large complex trial matters – the precise type of case that “can’t be estimated”. The solution to that “it can’t be done” problem is to divide the case into phases and to provide rolling 3 to 6 month estimates focused on discreet time frames. These estimates are very helpful to both client and trial team in the management of a complex matter.

Comment 2: By Patrick Lamb of Valorem Law Group LLC

There is a tendency to equate large and complex cases with large companies who can afford to write a blank check for those trials. Many, many smaller companies find themselves party to large, complex and costly cases where the case threatens to swallow the company. In these circumstances, even the short term budgets suggested by Judah, which work well in some circumstances, do not give the company management [over] the information it needs to make informed decisions critical to the company’s future. More is required.

I think Ron is right on the money when he suggests that “legal estimators” may be required if we are to become as proficient at estimating costs as other industries are. Our experience is that the precision of the estimate is a function of control over key factors–time to trial being one, number of parties being another and e-discovery issues being a third. But the greater the handle a lawyer has over these factors, the more precise the estimate can be. The less control over these critical factors a lawyer has, the more an estimate becomes an estimate plus an insurance policy against a runaway fee.

These estimates can be made and cases can be managed so that the estimates are accurate. Doing so may carry some risk for the client, but the client can then make decisions about whether to make additional investments in the matter, just like any other change order process. Whenever lawyers talk about how they “can’t” estimate fees, I am reminded of things I have heard from a number of GCs about how their companies do A, B and C and have to provide a guaranteed price and make a profit. The idea of bringing the skills of professional estimators to what we do seems to be a likely evolutionary step in the development of pricing prowess.

Comment 3: By Steven Levy, author of Control Costs, Meet Schedules, Manage Risks, and Maintain Sanity

Estimates aren’t the same as AFAs. You should be able to provide an estimate for any type of work, albeit, as you point out, with significant variances. Those variances rather than the “inability to estimate” are perhaps what should drive an AFA decision.

Estimates are a critical part of managing a project. They force people to understand and challenge assumptions, to negotiate “Done,” to set targets that constrain unfocused work.

And as Samuel Johnson said, “Nothing so concentrates the mind as the prospect of being hanged in the morning.” Deadlines, estimates, and constraints matter.

Comment 4: By Hanna Hasl-Kelchner of LegalLiteracy.com

I agree with Steven’s characterization of a case as “project management.” If more folks looked at it that way even the most complex case could be broken down into enough bite size chunks and some costs (+/-) assigned.

Estimating will never be perfect. But presumably you pick counsel in these highly complex cases because of their past experience. So why should anticipating the steps of the project be treated like a case of first impression?

Comment 5: By John Riccione of Aronberg Goldgehn Davis & Garmisa

All of us who have experience and resources upon which to draw can do this! And the better you get at estimating, the more comfortable you will become with using alternative fee arrangements (AFAs).

A properly-constructed AFA is usually a product of four variables:

(i) the company’s primary objectives in the litigation;
(ii) the definition of success;
(iii) the estimate of when the litigation will resolve; and
(iv) an estimate of the total cost of the litigation, calculated on an hourly basis, if the case were to proceed through trial.

Stay tuned for our step by step process on “Setting the AFA – Debunking the Mystery.”

Comment 6: By Steven Levy, author of Control Costs, Meet Schedules, Manage Risks, and Maintain Sanity

John, could you expound on (iv) a bit more, “an estimate of the total cost of the litigation, calculated on an hourly basis….”

I worry that some attorneys will see (fixed-fee) AFAs as purely an equivalence mapping. “This case would cost you X if we billed hourly, so we’ll charge you X but do so in a single statement to cut out a bit of tracking-hours overhead.” It seems to me that an AFA affords the opportunity to approach the case a bit differently from a staffing perspective. “What is the most efficient way we can provide service for this part of the case?” It allows you to separate cost-to-the-firm from billing-cost, looking not just at revenue but at margin on the hours of particular providers. You can also include efficiency — attorney A costs 2x of what attorney B costs but is 3x as efficient. Or maybe it’s better to have a paralegal do a big chunk of work, or use LPO.

I’m not suggesting that having an internal hourly estimate isn’t valuable, but wondering if at the same time it can limit your way of approaching the work. What are your thoughts about this question?

Comment 7: By Patrick Lamb of Valorem Law Group LLC

Steve, somewhere I saw a quote from Samuel Johnson that you used that is so appropriate here. “Nothing so focuses a man’s mind as the prospect of being hung in the morning.”

When your profit depends on your ability to create margin between your cost of achieving an outcome and what the customer is paying you, you quickly find out how much of what you had been doing does not need to be done at all, done the same way or done by the same people who had done it before. Fred Bartlit and his colleagues have built one of the most successful firms in the country on the execution of this principal, to which we all should take heed. They do everything that is necessary to win, but only those things necessary to win.

When it’s the lawyer’s nickel at stake, it amazing how few summary judgment motions actually get filed. Project management is a damned important tool, but the thinking behind the tool is more important.

Comment 8: By Steven Levy, author of Control Costs, Meet Schedules, Manage Risks, and Maintain Sanity

Patrick, you’ve just defined Legal Project Management: “They do everything that is necessary to win, but only those things necessary to win…. [T]he thinking behind the tool is [most] important.” LPM is neither a methodology nor a (traditional) toolset, but rather a thoughtful application of principles and techniques to the management of legal cases.

Comment 9: By John Riccione of Aronberg Goldgehn Davis & Garmisa

There are many different ways to devise an AFA and I do not propose to have a lock on any one method. And I certainly don’t mean to suggest that our AFAs in a fixed-fee plus bonus situation are simply a factor of what it would cost hourly without monthly billing statements. We do, however, draw upon our experience and that of our clients and competitors using an hourly model, when developing our AFA for comparison and verification purposes.

For example, we know that a client has paid, or our competitors have charged, in similar cases $100,000 for taking depositions (or 200 hours at $500/hr). However, we know that doing only the depositions which will take us down the straightest path toward success will take only half the time or be properly taken by someone who costs less. In addition, we know that when we win, we will get $X by way of a bonus. So, we may be able to take the necessary depositions for $40,000 and know that we will get our profits by way of a bonus, and fix this phase at $25,000-$30,000. This is how we have used fees calculated on an hourly basis in formulating our AFAs. It allows us to bid competitively against our hourly-fee competitors and identify those areas in which we must be more efficient to win.

Notwithstanding the foregoing, we are always open to improving our processes for devising AFAs and debunking the mystery associated with them for prospective clients.

Comment 10: By Steven Levy, author of Control Costs, Meet Schedules, Manage Risks, and Maintain Sanity

Thanks, John. That makes a lot of sense. I appreciate the follow-up.

End of thread

To view or join in on this discussion thread, first login to Legal OnRamp and then click here. If you are not a member of Legal OnRamp and would like to join, you can submit your request on LOR’s website or feel free to send us a message at marketing@integreon.com with your contact information and we will be glad to relay your request for membership to LOR.

While on Legal OnRamp, be sure to also visit Integreon’s LPO Central (login for Legal OnRamp required) as a resource for news, insight and best practices covering the spectrum of legal discovery, contract review and middle office outsourcing for both law firms and corporate legal departments.

Last week saw the release of the latest ValueNotes report, Legal Process Outsourcing: Crisis Creates New Opportunities for LPOs (November 2009), regarding the state of the LPO industry and representing the analyst firm’s third detailed research publication on this now fast maturing market. Following the predictions and postulations recorded in their prior reports, Offshoring Legal Services to India (2005) and Offshoring Legal Services to India, an Update (2007), what can we glean of Value (pardon the pun), from their most recent biennial LPO coverage? Here is my assessment of the report’s findings.

Impact of the Financial Crisis

The 2009 report’s release, and no doubt the time period during which the research was undertaken, coincides with a period of financial turmoil in both the wider global economic community, and of course the legal profession. When the 2007 report was released, Bear Stearns and Lehman Brothers were apparently in robust financial health, and the term “subprime” was hardly commonplace in day to day business speak. Profits per equity partner were at an all time high, new associate starting salaries at the AmLaw 50 were knocking on the $200,000 door and the concept of deferred start dates was simply unthinkable. How times change.

Without proffering novel information, the initial section of the report succinctly condenses the major changes affecting the global legal marketplace as a direct result of the great recession. Major corporations across a wide variety of industries have seen profit margins decline dramatically which in turn has impacted negatively on the world’s leading law firms. Certain practice areas have been harder hit than others:

“The number of global M&A deals in the first quarter of 2009 witnessed 5,914 transactions valued at $978.9bn, a decline of 41% and 48% respectively for the same period in 2008.” (ValueNotes Legal Process Outsourcing, November 2009).

I recall reading an op-ed piece over a year ago now in TheLawyer.com. In Law firms need to take advantage of tough conditions, Tony Williams, a former Clifford Chance managing partner, highlighted the example of a firm with a 25 percent profit margin with a fee income that fell just 20 percent, entirely plausible in the recent financial climate. This firm would witness its profit fall by 80 percent in the short term as costs simply could not be adjusted quickly enough to offset the revenue reduction. Add into the mix horrendous rises in indemnity insurance premiums and the tightening of credit witnessed over the last 18 months and one didn’t need to be Nostradamus to predict bleak times ahead. ValueNotes comprehensively details along a time continuum, the layoffs of partners, associates and support staff at the largest U.S. and U.K. law firms. In order to survive now, and hopefully thrive in the future, the report comments that law firms are,

“actively re-looking at their business models and developing strategies to remain profitable. Firms are offering alternative billing models, making technological improvements and entering partnerships with local and offshore service providers.”

Slowdown in LPO Revenue and Manpower Growth

In 2007 ValueNotes predicted revenue generated from the LPO industry in India alone to reach $640m by 2010. These estimates have been revised downwards substantially. Revenue is estimated at $320m for 2008, $370m for 2009, and expected to reach $440m by the end of 2010. The report rightly reminds us that these figures and others quoted in the report pertain solely to the Indian LPO industry. Clearly, although India is the dominant offshore destination, others such as The Philippines and South Africa cannot be discounted, and perhaps more importantly, these figures do not reflect the substantial legal outsourcing engagements to onshore destinations both in the U.S. and U.K.

In addition to slower than originally expected revenue growth, the overall manpower employed by the LPO industry (again, only in reference to India) has also witnessed sluggish growth. With the wonderful benefit of hindsight, forecasts a few years ago of 32,000 employees working within the LPO industry by the end of 2010 now appear wildly optimistic. The revised prediction for 2010 stands at 15,400. The LPO and KPO industries have not been immune to the global economic downturn. However, as the global economy continues along the path to recovery, while concurrently LPO becomes both an increasingly desirable strategic option for major corporations and law firms, the report anticipates that the there will be an upswing from the currently plateaued manpower levels towards a more consistent period of stable growth.

The report then proceeds to list each and every vendor (many of whose names my colleagues and I do not recognize) alongside estimates of their current manpower levels. Clearly these figures have been supplied by the vendors themselves and prospective customers would be wise to seek independent corroboration. However, immediately apparent on perusing the list is the wide variance in manpower levels, ranging from several LPOs with ten or fewer employees, to the larger, scale players with headcounts in the several hundred.

Changing vendor landscape

The report comments that for the first time in the lifecycle of the industry a number of service providers have withdrawn from the market and closed shop. The formative years of the industry, from 2005-2007, witnessed aggressive expansion, with numerous start-ups appearing on the scene. ValueNotes comments that in excess of 20% of the total number of service providers have now ceased operating altogether or at a minimum closed down their LPO operations. I was interviewed for this report and, as I state in it:

“The coming 12-24 months could prove to be tough for many of the smaller LPO providers, several of whom may simply give up the chase and withdraw from the market altogether. Others will look for an opportunity to achieve the scale increasingly viewed as a prerequisite by potential clients, by either merging with a competitor, or selling to a larger, more stable provider. This activity, together with consistent growth by the leading, large-scale providers of legal and knowledge process outsourcing services will continue to push the industry as a whole further down the path towards consolidation.”

The report correctly identifies scalability and multiple service capability as a prerequisite for attracting business from major corporations and the U.S. and U.K.’s leading law firms. A rapidly globalizing legal profession has reached a tipping point where legal outsourcing is now recognized as a viable and efficient option for the delivery of certain types of legal services. As major law firm and corporate procurement of legal outsourcing services becomes increasingly the norm, LPOs without the scalability to match both the increased demand and sophistication of the buying community will suffer. Purchasers will be inclined to opt for providers who can offer scalability through a global, multi-shore delivery platform. While there may remain certain niche areas of demand that the boutique, one geographical delivery center providers can satisfy, for larger scale projects or enterprise wide engagements, multiple locations, backed by access to a scalable workforce will become a prerequisite.

In order to achieve both the requisite scale and end to end capability identified as desirable by those procuring LPO services, the report identifies an upswing in M&A and strategic partnership activity within the LPO industry. Integreon’s recent acquisitions of ONSITE3 and Datum Legal are highlighted as activity enabling the provision of an end to end enterprise solution all under one roof.

ValueNotes comments that over the course of the last 3 years several of the largest U.K. law firms have announced outsourcing initiatives. On review of the dates of these public pronouncements, it is readily apparent that the pace of these declarations is picking up. 2009 will be viewed as the tipping point year, when major law firms were let loose from the shackles of reticence and began to acknowledge that their public embracing of outsourcing was clearly viewed by clients as indicative of being forward thinking, innovative law firms of the future. The report references Integreon’s recent deals with Simmons & Simmons and Osborne Clarke, as well as Pinsent Masons’ South African initiative with Exigent and CPA Global’s Rio Tinto engagement.

Key Takeaways

In an economic climate where numerous industries have taken a backward step, the slower than originally expected growth within the LPO industry should not be viewed as disheartening. In the early days of the industry, backed by a vigorous entrepreneurial spirit, the vendor landscape mushroomed dramatically. The last 12 months have witnessed the first signs of contraction. It has taken Integreon over a decade to achieve the scale, infrastructure, and end to end operational capabilities which affords us the position of now being the largest provider of Legal KPO services to major corporations and global law firms. As ValueNotes correctly comments, it will be those LPO companies that are able to acquire scale and provide operations from a multi-shore global base, as well as satisfy the desire of clients by providing a full suite of legal support services, which survive and subsequently thrive. Over the coming 12-24 months many of the smaller players will struggle to remain in the game, as client requirements become ever more sophisticated, and the move from piecemeal, short term projects, towards longer term, multiple FTE contracts, picks up pace.