Today's Chicago Tribune features an article on how legal process outsourcing (LPO) is helping to reshape the legal world, as "alternatives to the traditional law firm are becoming increasingly attractive to buyers of sophisticated legal services in the post-financial-meltdown era." In the article, Indiana University Law Professor William Henderson, a specialist in legal workforce markets, is quoted as follows, regarding the offshore legal outsourcing trend in particular: "This is the beginning of a wave that's only going to get bigger in the years to come."
As evidence of how legal outsourcing of different kinds is shifting the legal landscape, the Tribune cites two important and recent mergers in the legal industry:
Two recent mergers in the legal industry speak volumes about the forces reshaping the business of law at its highest levels. What's also notable is that neither deal involved large law firms.
Thomson Reuters, a media and information-services company, acquired Pangea3, a legal-process outsourcing firm with most of its lawyers in India, in November. A month earlier, Axiom Global Inc., which provides lawyers-for-hire to big corporations, bought another legal staffing company, Chicago-based LawyerLink LLC.
The deals are not large; Axiom and LawyerLink didn't even bother issuing press releases. Yet the transactions reflect how alternatives to the traditional law firm are becoming increasingly attractive to buyers of sophisticated legal services in the post-financial-meltdown era.
The heads of corporate legal departments like the competition because it drives down their costs as their bosses continue to pressure them to cut spending. And the biggest expense is money spent on outside legal counsel. The nation's 100 largest law firms had combined revenue of $64.8 billion in 2009, according to American Lawyer magazine.
As 2010 comes to a close, experts predict little to no growth in total revenue from a year ago for the largest law firms, also known as Big Law. Despite the lack of growth, lawyers breathed a sigh of relief. Few industries suffered more from the financial meltdown than Big Law, as firms significantly downsized in 2009.
Work force restructuring continued in 2010 despite an improving economy, though not as many lawyers appear to have been laid off this year compared with 2009, when firms of all sizes shed more than 4,600.
New regulations in health care and financial services will keep legions of lawyers busy next year. But busy will not necessarily mean greater law firm revenues because of unrelenting pressure from clients to do more with less.
"Sophisticated general counsels are trying to stretch their legal budgets," said William Henderson, a law professor at Indiana University, who specializes in legal labor markets. "That's what is leading to the shakeout."
LawyerLink, Pangea3 and other alternatives to law firms have been around for several years, but their business models have gained momentum since the recession because they have found ways to cut costs out of basic legal tasks.
Interestingly, the Tribune reports that "companies such as Goldman Sachs and Accenture have been receptive" to using outsourced legal services at Axiom "because Axiom lawyers charge about $200 an hour, about half the average rate of associates at the largest firms outside New York." By contrast, "lawyers in India charge $25 to $35 an hour for routine corporate work such as drafting contracts and complying with regulations." The article addresses the misperception that legal outsourcing to India and elsewhere inevitably means a compromise in the quality of the work, noting that the Thomson Reuters acquisition of India-based legal process outsourcing company Pangea3 "appears to at least validate the business model":
There is still the widely held belief among law firm partners and general counsels that outsourcers don't offer the same quality of work as law firms, Henderson said. The perception, right or wrong, has prevented outsourcing from becoming embraced in the legal industry. Only about 1 percent of the money spent on lawyers in the United States goes to outsourcers, according to various estimates.
But Thomson Reuters' acquisition of Pangea3, based in New York and Mumbai, appears to at least validate the business model....
In announcing the deal, Thomson Reuters, which owns West, a legal publisher, said outsourcing will be key to helping law firms and their clients be more "responsive and cost-effective."
Henderson agrees: "This is the beginning of a wave that's only going to get bigger in the years to come."