Business | Corporate law

Offshoring your lawyer

Outsourcing can cut your legal bills

|NEW YORK

HOW many lawyers does it take to change a light bulb? The answer is 53: eight to argue, four to object, three to research precedents, one to ask a secretary to change the bulb and 37 to bill their time at an exorbitant hourly rate. When every joke about your business mentions featherbedding, you should be worried about outsourcing. At last, lawyers are.

Thomson Reuters, a media and information-services company, bought Pangea3, a legal-process outsourcing firm with most of its lawyers in Mumbai, in November. At about the same time, Thomson Reuters said it was looking to sell BarBri, a company that prepares young American law graduates for the bar examination. Thomson Reuters says the two deals have nothing to do with each other. But Elie Mystal of Above The Law, a muckraking blog, sees a straightforward swap: more cheap Indian lawyers, fewer expensive American ones.

Legal outsourcing is still small. Of the $180 billion that Americans spend on lawyers each year, only about $1 billion goes to outsourcers. But this is growing at perhaps 20-30% a year, for the simple reason that legal costs are out of control. Between 1998 and 2009, big law firms' hourly rates shot up by more than 65%, according to the Corporate Executive Board, a consultancy.

Some legal tasks cannot be done cheaply. If the fate of your company hinges on the verdict, you will want a brilliant lawyer to argue your case. But plenty of legal jobs are routine. American law firms typically get fresh law graduates to do such grunt work and then bill clients for it at steep rates. But the recession has prompted clients to rebel. A recent survey by the American Lawyer found that 47% of large firms had seen clients refuse to have hours billed to beginner lawyers.

American Express, GE, Sony, Yahoo! and Netflix have all started using Pangea3 for basic legal tasks. The firm reviews documents, drafts contracts and does other jobs with repetitive elements. Many clients hire outsourcers such as Pangea3 directly. They often then approach their expensive American law firm and demand that it start working with the outsourcer.

Law firms are responding in different ways. Some hire outsourcers themselves: a quarter of Pangea3's business, for example, comes from law-firm clients. DLA Piper, a big American law firm, plans to set up its own outsourcing operation next year. Taking advantage of the tough legal jobs market, the firm will build a network of thousands of non-staff lawyers, says Peter Pantaleo, the managing partner of the New York office. These lawyers will be American but cheaper, perhaps because they are looking for a work-family balance. They will do for perhaps $100 an hour work that might otherwise cost the client $500, says Mr Pantaleo.

Ray Bayley, the founder of Novus Law, another outsourcing firm, says that his industry is not just about paying lawyers less. It is also about doing the job more efficiently, for example when looking for needles of evidence in a haystack of documents: rather than relying on a single brilliant mind, Novus Law deploys teams of lawyers using technology and a process involving hundreds of small steps. Mr Bayley is not a lawyer—he spent much of his career at PWC, an accountancy and consulting firm, figuring out how to make companies leaner. He brings the same approach to the legal business. His firm's revenues are doubling yearly.

William Henderson of Indiana University praises Novus Law's ability to find patterns in mountains of material. He believes it allows clients to build novel factual theories to win cases. “It's great lawyering,” he says.

Outsourcing will affect American legal firms the most, because they cost the most. The laws that govern lawyering in America are typically written by lawyers-turned-politicians, which perhaps explains why they make so much work for the profession. Many lawsuits require extensive “discovery”, which can mean sifting through nearly every e-mail your opponent has ever sent in search of one that sounds incriminating. That can take a while. As the workload has grown, so too have law firms. The biggest 250 have increased their headcount fivefold in 30 years.

Some lawyers think outsourcing will be a blessing, taking away the drudgery and leaving them free to hone their higher skills. Others are nervous. Machines will never replace the brightest American legal minds, but there is no reason why Indians cannot do some of their work. The sharpest firms will survive. So will mass-market law firms, which will make use of outsourcing. But the profession as a whole could be in for a squeeze.

This article appeared in the Business section of the print edition under the headline "Offshoring your lawyer"

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