When City firm Lovells was faced with reviewing more than a million documents as part of a major case, it decided to outsource the work to India – saving more than £3m in the process. This is a sign of the times – increasingly, client pressure over fees is prompting law firms to consider the potential of offshoring not just routine, commoditised, low-complexity work but also more sophisticated services such as discovery and due diligence. But could lawyers end up outsourcing themselves out of a job?

Outsourcing business processes, such as IT, is increasingly commonplace among law firms, but they remain cautious about going down a similar route with legal work. The big push is coming from US and UK corporates whose in-house legal teams are under pressure to cut costs and so are putting pressure on their external law firms which are, in turn, starting to dip their toes in the water.

For some, the strategy will be to set up their own ‘captive’ offshore centres. Clifford Chance plans to have 20 paralegals in its service centre in India by the end of the year. They will take on unprofitable, low-end work, such as research and analysis, document discovery and collating bound volumes.

Eversheds, on the other hand, has set up an arrangement with a third-party provider, also in India, so it can offer clients two options – either the firm will manage the workflow and relationship between the client and the provider, or it will act merely as the middleman in introducing the two (Case study).

For Lovells partner Neil Mirchandani, 'the interesting question now is: how far will legal outsourcing go up the value chain and do we risk offshoring ourselves out of existence?

‘I think that the top end of the market will be fine because the offshore providers aren’t looking to replicate the work that we do. But any firm that makes a significant amount from relatively routine commoditised work will come under extreme pressure. The question then will be how much vision their clients have in pushing the offshore option, because I suspect that most law firms will not be proposing it for fear of doing themselves out of work.’

Former Clifford Chance partner Mark Harding is Barclays’ general counsel and founding chair of the GC100 group comprising the legal chiefs of the UK’s largest listed companies. ‘Law firms are definitely worried about cannibalising their own businesses and they ought to be. But this trend is not going to stop, so do you want to be King Canute or ahead of the game?’ he says.

He warns it will call into question law firms’ pyramid structure with ‘lots of people at the bottom doing grunt work’.

He adds: 'If that work is outsourced, where is the more straightforward work to train your lawyers going to come from? Where is the leverage going to come from?’

He says there is a tendency among those who run law firms to assume that, ‘if they keep their eyes closed, they will have retired by the time this hits them, though I wouldn’t be so unkind as to say that is general. But law firms are innately conservative and they aren’t innovating in this area’.

Jack Diggle, principal consultant specialising in outsourcing and offshoring at management consultancy PrinceOMC, says offshoring is a ‘very divisive issue’.

‘NatWest made it a selling point that they would never send their call centres abroad. A lot of law firms believe their clients wouldn’t want them to do it. But a lot of high-end equity research is already being done in India and there is no sense of shame in that. There may be a problem with perception, but this is the way the market is going and it will have a significant impact on the way legal services are delivered in this country.’

Cost is the main driver, he says, but another key element is the ability to scale up an operation very quickly, for instance to meet spikes in demand for junior paralegals during large litigation cases.

However, he adds, small and medium-sized firms should also see outsourcing as an opportunity rather than a threat, though it requires a new set of management skills and an entrepreneurial approach. ‘Medium-sized firms, for instance, could call on a huge bank of junior paralegal staff based in India so they could compete with much bigger firms in litigation cases.’

While the market is growing fast – the number of companies offering legal process outsourcing (LPO) services in India alone has grown to well over 150 in the last five years – it is still ‘chalk and cheese’ when compared with IT and business process outsourcing (BPO), according to Mark Ross, a former partner with Hertfordshire solicitors Underwoods.

Ross is now senior vice-president of sales and marketing at US firm LawScribe, which has 120 employees in India and specialises in e-discovery and document review, IP, corporate transaction and legal research and support.

He anticipates that the offshore LPO industry will consolidate over the next two to three years as a result of the organic growth of some companies, attrition and acquisition of others, and the inevitable continuing entry into the market of some of the world’s leading BPO, IT outsourcing and legal technology companies. Infosys, Wipro, and LexisNexis have all recently declared their intent on entering the market.

Ross says the Indian legal press has been full of articles suggesting that the current financial meltdown will propel the fledgling LPO market into the stratosphere, given the likely large-scale litigation that will follow, coupled with pressure on costs. He believes it will be a springboard for the LPO industry, but cautions that major firms may simply cut unprofitable practice areas rather than look overseas.

He warns that those considering outsourcing need to be up on their facts. ‘Make sure you do your homework before getting into bed with anyone. I receive countless emails and telephone calls every month from domestic Indian law firms and small-time entrepreneurs keen to enter the provider market. There have probably been 100 new entrants into the market over the last year, but the vast majority are extremely small enterprises, without a stable financial and physical operating infrastructure.’

Alison Hook, head of international at the Law Society, says the use of outsourcing/offshoring by UK firms is a ‘rich picture’ involving practices of multiple types and sizes: ‘The reasons can be boiled down to service to clients and cost reductions in particular.’

She says some law firms are offshoring in order to get a round-the-clock service and to deal with documentation and even legal work outside UK office hours, such as Allen & Overy’s operations in New Zealand. Others are outsourcing elements of commoditised work such as PI claims or conveyancing paperwork to India and South Africa.

‘However,’ she says, ‘there are clearly limits which firms will not go beyond – anything which touches on the core legal work is regarded as something that could not be outsourced for reasons of client confidentiality and control.’

The Solicitors Regulation Authority emphasises that protection of clients should remain paramount in every arrangement: ‘We would be particularly anxious to satisfy ourselves that firms comply with the regulatory requirements relating to ownership, confidentiality, supervision and qualification.’

Concerns over data protection, trust in the provider, loss of control and quality assurance all figure heavily on lawyers’ checklists when it comes to considering offshoring.

Diggle says: ‘It is not a question of plug in and play. It requires a significant investment in the first year – in visiting the provider, training their staff and tailoring their work to your style – and that shouldn’t be underestimated.’

Law firms are rightly obsessed with client confidentiality and security, and they demand this of their offshore captures. But the real security concerns might be closer to home. ‘One law firm I spoke to was very concerned about data security,’ Diggle says. ‘I checked and the provider didn’t keep paper on site; staff were body-searched; the USB drivers were disabled; and there was no access to external email addresses. When I went to see the law firm, I walked in without being checked and could have walked out with any of the files piled high on the desks. The providers know that one breach and that is the end of their business.’

Paul Graham is legal director of the National Outsourcing Association, which has about 35 top-50 law firms as members. A partner with UK law firm Dundas & Wilson, he says: ‘This is not a quick fix for anyone’s balance sheet in year one, but there will be long-term savings.’

Kerry Underwood, senior partner at Underwoods, has taken advantage of South Africa’s lower labour costs – about a third of the UK’s – to set up an outsourcing operation there. Underwoods South Africa is working on its first batch of 100 road traffic cases and, if the trial goes well, he hopes to build up staff from four to 50-plus by the end of 2009 and be taking on 2,000 cases a year.

‘Law firms will have to embrace this either as a way of reducing costs to clients or increasing their profits or they will go under. With the Legal Services Act changes on the way, no one should think for a second that big players will do routine, commoditised legal work here.’

Robert Glennie, former chief executive of KLegal International, set up NewGalexy in Mumbai to do legal work, including due diligence, contractual work and legal risk management, revising often very high-value contracts.

His company now has 45 Indian lawyers, a number he hopes to increase to 100 by this time next year. Junior lawyers start on £10,000-£12,000, while salaries for senior lawyers are up to £30,000, allowing them to do work at a 50% cost saving compared with a UK law firm. NewGalexy now has 10 corporate clients from the UK, US and Holland, and has been approached by top-50 UK law firms.

He says LPO should not be seen as a threat. He would be ‘astonished’ if it put anyone out of work in the UK, though lawyers brought in to do specific projects may be vulnerable and in-house teams may not take on additional people. ‘But it has not been a case of slash and burn through work coming to India. The future of "Tesco law" is a far more serious threat to the high street lawyer than this is,’ he maintains.

At Barclays Harding says the bank has successfully piloted some commercial contract outsourcing to a New Zealand law firm. ‘However, we have also gone pretty heavily towards insourcing legal work and building up large legal teams so we can increase the sophistication of our in-house legal capability.’

Fellow GC100 members are discussing outsourcing legal work, he says, ‘though we are not ganging up on law firms in any way.

‘However, in-house lawyers see the world very differently to law firms. As you are effectively a parasite on the rest of the organisation, you have to embrace the processes the rest of the organisation adopts. They don’t think twice about outsourcing and question why lawyers should be any different.

‘What we are beginning to see, particularly with American companies, are more creative fee arrangements, which transfer the pricing risk on to the law firm. This involves taking on work for a fixed price and managing it cost effectively. And one way to do that is by outsourcing, as long as the quality is maintained.

‘However, until we get more momentum behind fixed prices and off the billable hour, I don’t think we will yet see as much pressure to do that as we will in the future.’

In the meantime, Seamus Smyth, treasurer of the London Solicitors Litigation Association, says law firms may find that the risks involved in offshoring are too high, even if the client knows and consents.

Smyth, a partner with London solicitors Carter Lemon Camerons, says that outsourcing back-office or ‘mechanical’ work may be sensible because, ultimately, the English solicitor is still taking responsibility for the overall service provided.

But he says it is difficult to see how work involving professional judgement and experience, such as assessing evidence, can be responsibly outsourced to a foreign lawyer without English qualifications or up-to-date English experience. ‘My experience is that attempts to save costs this way have not been successful and have often cost the client more.’

Despite all this action, while offshoring legal work is increasingly on the agenda for many law firms, the firms themselves remain cautious. Chris Bull, chief operating officer of Bristol-based Osborne Clarke, says that firm does not yet feel confident it knows what benefits it would deliver.

However, Bull points to the deal Lovells brokered, known as the ‘Mexican wave’, where the firm took on work for a client doing the higher-end work at City rates but subcontracted the volume work to smaller regional firms. ‘It was deemed a successful model for clients who don’t want to unbundle work. It is not a big step from there to subcontracting some of the work overseas.’

And perhaps most importantly, clients are starting to ask about offshoring intentions, says Norman Green, chief operating officer for Herbert Smith. ‘We are one of the more cautious firms, so we won’t be out there in the lead. We would need to see more track record from the offshore offerings and demonstrable benefits, because there is a lot of sales hype around this. So it is definitely on the agenda, but we are not yet anywhere close to pushing the button.’

Outsourcing top tips for ethical compliance

Mark Ross of legal services provider LawScribe outlines the steps firms should take before outsourcing legal work:

  • Investigate the background of the lawyers, non-lawyers and service provider, and conduct reference checks;
  • Interview the principal lawyers involved in your matters and assess their educational background;
  • Ascertain the LPO’s hiring practices to evaluate the quality and character of the employees likely to have access to client information;
  • Investigate the security of the provider’s premises and computer network;
  • Conduct a site visit;
  • Assess the country to which services are being outsourced for its legal training, judicial system, legal landscape, disciplinary system and core ethical principles;
  • Disclose the outsourcing relationship to the client and obtain informed consent.

Taj Mahal Case study: Eversheds

Eversheds is keen to dispel any ‘myths’ that its venture into legal process outsourcing (LPO) in India and South Africa is in any way ‘profiteering’. In one arrangement, the firm has linked up with Indian LPO Mindcrest, using law graduates to carry out work such as contract process review and compliance audits at about 30% of the cost of a UK law firm.

Eversheds operates two control models. In the first, Eversheds will manage the relationship and workflow between the client and Mindcrest, for which it will charge a fee. In the second, it will introduce clients to Mindcrest, at no charge, in the hope that it will lead to more profitable work from the clients in the future.

Eversheds partner Jonathan Guest stresses there is no question of ‘profiteering’. He says: ‘There has been a suggestion that we are somehow doing this behind the scenes to make more margin, but we are very open about it. We are saying to clients that, if you want to go direct, we have set up the terms and rates – take the benefit and plug in directly.

‘Nor are we stripping jobs out of the UK, because this type of work isn’t being done by lawyers here.’

The firm spent about five months choosing the LPO in India.

‘We are now testing the arrangements with our first live client, a US corporate. We had planned to start these ventures gently but, since they have been in the press, a number of clients have approached us so we have more in the pipeline than we expected.’

The firm’s other offshore venture is through its South African office Routledge Modise, which recently joined Eversheds International. Guest says: ‘It became apparent that some of the work that we were doing for major US corporate player Tyco, such as contracts and employment processing, could be done in South Africa at half the equivalent European rates.’

Quality is maintained through an oversight and supervision protocol. Guest also stresses that offshoring legal function is best managed over a period of time, rather than in a ‘big bang’.Guest suspects a growth in LPO is inevitable as lawyers get more expensive in Europe. ‘Global organisations with generic areas of legal need that don’t have to be handled bespoke in any particular country are naturally going to consider where they can do it most cost-effectively.’

In-house lawyers, the Gazette needs you

To follow this week's feature on outsourcing and offshoring legal work, the Gazette needs your input to a survey on what businesses are doing in terms of outsourcing legal work.

In conjunction with legal services offshoring company NewGalexy Partners, we are conducting a survey exploring the incidence of legal offshoring, and whether it might be taking work away from private practice law firms. This is a subject much discussed in legal circles, but which – to date – has lacked hard evidence to back up the anecdotal.

If you are in an in-house legal position, please take part in the survey, which is hosted by the C & I Group website. The questionnaire is short – only 12 questions – and should take no more than three minutes. Even if you're NOT looking at more outsourcing/offshoring, we need to hear about that too.

Go to: www.cigroup.org.uk/questionnaire/questionnaire.asp.

Grania Langdon-Down is a freelance journalist.