Three New Questions To Ask Before Outsourcing

The growing interest in outsourcing has reached the corporate law department. Actually, law departments have pioneered outsourcing in many companies, having for years routinely referred important corporate legal matters to outside service providers. The outsourcing concept should be comfortable for law departments, but it's not.

Outsourcing today is much more than just deciding which firm gets a piece of the company's legal work. The first difference is one of size and scope. For example: should we shut down our legal department and have all the work done by outside counsel? Are there any practice areas or functions that should be performed exclusively outside? Should we outsource all the work to a single firm? If not, how many firms will we need?

The second difference goes to the decision-making process itself. The "new" outsourcing imposes a business discipline that may be unfamiliar to many law departments. Most corporate and government legal departments used to be able to rely on a fairly predictable workload and revenue stream. Decisions about what legal work to refer to outside counsel, and which firms to engage to do that work, were seldom thoroughly analyzed. In-house capacity and the need for specialized expertise in a specific matter were among the most common reasons for sending legal work outside. Often outsourcing rationales were expressed in terms such as "we've always sent our work to the XYZ firm" or "if it ain't broke, don't fix it."

Things have changed. Corporate and government law departments are now frequently challenged to demonstrate the value, efficiency, and cost-effectiveness of their services- even to justify their very existence. Sometimes outsourcing makes sense, especially when an outside firm can perform "commodity" legal functions cheaper or more efficiently than inside counsel. Sometimes, however, outsourcing can be a disaster, providing lower quality at a significantly higher cost.

The first step in the outsourcing process is not writing a Request for Proposal (RFP). Instead, the general counsel first needs to ask three fundamental questions. The answers willl determine whether outsourcing makes sense and, if so, what specific legal work should be referred out.

Question 1: What is important to our clients? Internal clients define legal quality in terms of whether their needs are met. Cost is only one of a constellation of needs, expectations and values that corporate and government clients ascribe to legal services. In fact, it is usually one of their lower priorities. When asked, clients are more likely to identify factors such as access to quality legal services, responsiveness, and the ability to provide sound legal advice that helps make business or policy decisions. If the principal motivation for outsourcing legal services is to cut costs, don't expect satisfied clients to be enthusiastic. They define quality in other terms.

Law departments need to understand and, whenever possible, quantify the factors that comprise client perceptions of quality. Methods for gathering this data will vary with the size of the organization and the precise nature of the legal functions being considered for outsourcing. However, client input-whether through interviews, questionnaires, or focus groups-is critical from the very start.

Outsourcing succeeds when client values are transformed into outsourcing strategies, supported by quality indicators and performance standards that are clearly defined in the RFP and the engagement letter. For example, if accessibility is one of the client's top priorities, they may not be willing to trade the frequent access to inside counsel for lower legal costs from a less accessible outside firm. The RFP and the subsequent engagement letter should therefore include performance standards and measurements that will ensure reasonable access to counsel for key corporate or agency officers. If clients say that responsiveness is critical, that value will need to be protected in the outsourcing engagement, through provisions such as a system of bonuses and penalties linked to the law firm's performance against required turnaround times.

Question 2: What is the legal work? Outsourcing should be preceded by a top-to-bottom analysis of the nature and quantity of the legal work currently performed for the corporation or agency, both by in-house counsel and outside firms. Some of the specific data points include: What are the specific practice areas (e.g., commercial, intellectual property, environmental) that comprise the law department's mission? What specific tasks or functions (e.g., negotiation, drafting, review, dispute resolution, compliance monitoring) are performed in each area? What specific skills, knowledge, and experience are required to perform these tasks and functions? What is the current mix of internal and external legal functions and services? How many "billable" hours of lawyer and paralegal work are required? What are the support-staff ratios (lawyers to paralegals) in each practice area or function? This information is absolutely essential to a worthwhile RFP. Without it, the RFP becomes little more than an invitation to a guessing game. It will usually generate disappointing fee proposals, set high enough to hedge against a basic uncertainty as to how much work the outsourcing engagement will actually produce for the firm.

The most obvious impact of outsourcing is that some people may lose their jobs. If so, their professional skills and experience, as well as their knowledge of the company's specific legal interests, can transform potentially redundant lawyers and paralegals into attractive candidates for employment by the outsource firm. The migration of legal talent from the law department to the outsource firm may be not only a significant outsourcing goal for the company, but also an important incentive for law firms bidding for the work.

Outsourcing will also affect those whose jobs in the law department remain. Projections of the staffing reductions to be achieved through outsourcing are seldom 100 percent exact. Systematic workload and staffing analysis, however, will keep the law department from cutting too deeply or not deeply enough. Overestimates are more frequent and ultimately, more costly. If too may positions are eliminated, the hoped-for savings can evaporate in the face of increased overtime costs, declining morale and productivity, and the need to hire new temporary or part-time personnel needed to meet workload surges.

Finding out about the legal work will often produce surprises. It might reveal, for example, that 10 to 15 percent of the typical lawyer's day is spent performing purely administrative or even clerical functions. This may uncover a hidden savings opportunity that is more promising than outsourcing. Instead, the law department could reassign the lawyer's administrative and clerical tasks to paralegal and administrative personnel, who can perform them at lower cost and, usually, more efficiently.

The work analysis will also frequently reveal another surprise: that more lawyers are working in a particular practice area than job descriptions or organizational charts would suggest. Failure to identify and quantify this phenomenon can have subtle, but far-reaching impacts when the law department outsources some of its work. Suppose, for example, that 80 percent of a lawyer's legal work is in an area that is going to be outsourced, but 20 percent of her work would not be outsourced. If, as is probable, the lawyer's position is eliminated, the law department will still have the remaining 20 percent that will still have to be performed in-house. This can result in a staffing shortage with respect to practice areas and functions that are not outsourced, as well as the need for a major reorganization of the work duties of the staff who remain in the law department.

Question 3: What is, and will be, the cost? The desire for lower legal costs is what drives most of the interest in outsourcing. In many cases, though, in-house counsel are already providing legal services at a lower cost than a law firm would. Before writing even one line of an RFP, the law department and its corporate clients need to know two things: What is the current fully loaded cost per lawyer for in-house legal services? How much would a law firm charge to perform the same work?

Comparing these two cost estimates is perhaps the most important step in the outsourcing decision. In many cases, this comparison will show that the law department is already providing legal services more economically than a law firm would. This may convince the law department and its clients to forego outsourcing altogether, at least for the time being. Even if the law department's cost per lawyer-hour is 20 percent higher than the projected outside cost, this cost gap can often be closed through relatively quick, inexpensive process improvement techniques.

A second option is to proceed with outsourcing, but to look for significant improvements in quality indicators such as access, responsiveness, or substantive professional quality. For example, even though it might cost more, a company may want to outsource a particular practice area to obtain highly sophisticated legal expertise that in-house counsel cannot provide as quickly or efficiently. It is usually more economical to pay an expert $360 per hour for a "bet-the-company" answer that takes the expert one hour to deliver, than to absorb a fully loaded operating cost of $120 per hour for the five hours it might take a less-knowledgeable in-house counsel to research the same question.

Sometimes, a cost comparison may result in even more legal work being brought in-house. Suppose that a law department currently provided litigation services at a fully loaded cost of $90 per hour, compared with a median hourly rate of $140 per hour from litigation firms in the same general area. Instead of outsourcing litigation, the company should consider hiring more in-house litigators and bringing more of the work in-house. This could produce an annual net savings of up to $87,500 for each additional litigator hired.

Cost comparisons for an entire law department are useful, but the greatest value is realized when cost comparisons are calculated for each of the major practice areas. Sometimes, instead of outsourcing substantially all of the law department's practice, the corporation or agency can achieve even greater savings and efficiency by outsourcing the areas that are more expensive to perform in-house, and bringing back into the law department the work that can be done more cost effectively inside.

General counsel and their clients need to understand all the costs. What is the fully-loaded cost of in-house legal services now, and what will the costs be with outside counsel? In short, after considering all the factors affecting value and cost, does outsourcing make good financial sense? Corporations and agencies that navigate the outsourcing process successfully will articulate and pursue strategies that seek to increase the overall value of legal services by adjusting the inside-outside mix of professional providers. The bottom line is value: obtaining high quality legal services at low cost. Both components are essential to successful outsourcing.

*article courtesy of Norman K. Clark of Altman Weil, Inc.