Growth of legal outsourcing may herald era of cheaper lawyering
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, LawyerLink.
The deals are not large; Axiom and LawyerLink didn’t even bother issuing news 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.
“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.
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.
Chicago-based LawyerLink started as a temp agency in 2005 but quickly started providing document-review services. One of the costliest parts of litigation is in the evidence-gathering stage, known as discovery, during which lawyers comb through mountains of documents, including e-mails and other electronic communications.
Jennifer Bertoglio, a lawyer who founded LawyerLink, said her company manages discovery less expensively than law firms. It’s not just about paying her lawyers less. LawyerLink uses technology and quality-control processes borrowed from manufacturers to make document review more productive and with fewer errors, she said.
Mark Harris, chief executive of Axiom, said LawyerLink’s attention to quality is what impressed him the most.
“There’s often a stalemate between costs and quality,” Harris said. “A lot of in-house lawyers think you have to give up one to get the other. The only way to break the stalemate is to radically improve the process.”
Harris, himself a Big Law refugee, has focused on breaking down the traditional law firm model. He co-founded Axiom in 2000 with a handful of lawyers in New York who are sent to big companies to work for extended periods or parachute in for specific projects. Ten years later, Axiom has 350 lawyers across nine offices.
Companies such as Goldman Sachs and Accenture have been receptive because Axiom lawyers charge about $200 an hour, about half the average rate of associates at the largest firms outside New York.
Law firms have responded in different ways. Some have created a new class of lawyer known as the “staff attorney.” The starting salary for staff attorneys is about $100,000. They don’t have to work as many hours as associates, who often earn two or three times more, and staff attorneys are not on a partnership track.
At McDermott Will & Emery, staff attorneys handle document review and other discovery-related tasks, said co-Chairman Jeffrey Stone. The firm started with four staff attorneys 16 months ago and now has 50. The Chicago-based firm chooses to handle document review in-house rather than outsource the task because it exercises greater control over the quality of work and experiences less turnover among the attorneys, Stone said.
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% 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. Lawyers in India charge $25 to $35 an hour for routine corporate work such as drafting contracts and complying with regulations, said Ganesh Natarajan, president and CEO of Mindcrest, a Chicago-based rival of Pangea3.
In announcing the deal, Thomson Reuters, which owns West, a legal publisher, said outsourcing would 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.”