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LPO’s Have Become Legal Project Outplacement Firms: They Are Outplacing Legal Work from Traditional Law Firms


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                                                                             Jerome Kowalski

                                                                             Kowalski & Associates

                                                                             October, 2011

 

 The guild rules designed to govern the practice of law and create barriers to entry by unlicensed professionals have been completely trammeled.

As the legal spend continues to decline, competition for the ever diminishing budgets for outside counsel continues to fiercely escalate.  Today, we again address the stiff competition coming from offshore legal project outsourcing.  Frankly, United States law firms, the American Bar Association and regulatory agencies governing bar admissions and the unauthorized practice of law seem completely clueless as to what is actually happening in the marketplace.

The LPO industry is a growing behemoth.  Still barely in its infancy, LPO’s will likely reach revenues of $2,500,000.000 next year.  That may seem a pittance compared to he $180,000,000,000 revenues derived by law firms, but revenues for LPO’s continue to grow exponentially, while law firm revenues remain largely flat.

LPO’s initially entered the market by focusing on the processing end of legal work.  As Jeff Carr, general counsel of FMC Technologies, has frequently noted, legal work falls into one of four buckets:  Processing, counseling, advocacy and content.  LPO’s got their noses into the tent by offering to handle the processing component arguing, quite correctly, that US law firms were ill equipped to handle large volume processing efficiently, while LPO’s, staffed by low paid foreign lawyers and aided by state of the art technology, could perform these services at a small fraction of the price of large law firms, allowing these law firms to focus on the other more lucrative buckets, for which these firms were far better suited.

At the outset, LPO’s marketed their services to law firms, offering to serve as their subcontractors. Law firms, in turn, often simply “marked up” the fees charged by LPO’s, on the rubric that the firms were assuming some level of supervision and risk and, well, it was a pretty easy way to make a couple of extra bucks. In short order, sophisticated clients, dealing with sophisticated LPO’s,  entered into direct contracts with LPO’s, having general counsel use the services of LPO’s directly.  Corporations, the ultimate consumers of LPO services, used their economic prowess to extract favorable pricing from LPO’s and often then directed their outside law firms to utilize the services of LPO’s with which the corporate clients had favorable pricing arrangements.  These LPO’s were essentially “designated subcontractors.”

LPO’s are well capitalized and are investor owned. These two factors provide LPO’s with enormous advantages over law firms.  Their technology tends to be light years ahead of that typically  used by traditional law firms.  They are not bound by much of the expensive baggage weighing down traditional law firms, like expensive midtown office space or paying off outmoded technology  cquired years ago.  I have had the privilege of meeting and working with some of the world’s best LPO’s.  I’ve uniformly found the leaders of these LPO’s to be exceptionally bright and astute business leaders.

But, even as the ABA Ethics 20/20 Commission dawdles with merely tinkering Model Rule 1.1 of the Model Rules of Professional Conduct by making some minor revisions and expanding the Rule’s comments to provide the guild’s belated imprimatur to the LPO industry, the facts on the ground have created new realities.  Perhaps only an idealist might believe that the Model Rules are designed to do anything more than create artificial barriers to entry.  Any realist recognizes that free market forces rendered the attempt to be of no moment.

The fact is that LPO’s are working hard to get in to each of Jeff Carr’s four buckets. At a recent Global LPO Conference, much of the discussion by LPO leaders was about inroads they were making in these buckets.  One LPO leader chaired a panel in which he encouraged the industry to re-brand itself, since calling the industry Legal Process Outsourcers created the misimpression
that it was focused only on processing.  I, for one, view the industry as simply providers of legal services.  Period.

Another LPO leader boasted about serving as a processing outsourcer on multi-district related litigation in which the lead counsel and the corporate general counsel concluded that the time was ripe to file some 61 motions for summary judgment in related cases across the country.  Lead counsel estimated the cost of preparing these motions to be in the area of $1,500,000.   The LPO offered to prepare these motions for approximately $350,000.  The motions were in fact ultimately prepared in India and revised and edited by lead counsel; the client saved nearly $1,000,000.  Welcome to the advocacy bucket.

These alternate providers of legal services have for long been preparing routine corporate, real estate and financing documents.  Welcome to the content bucket.

And these providers of legal services have been providing basic and sometimes even advanced legal research to support both general counsel and outside counsel in their counseling functions.

The fact is that the only areas in which these providers of legal services are precluded from active participation are in connection with actual court appearances and signing legal opinions. The workaround here is rather obvious and likely inevitable.  All that an LPO needs to do is to establish a U.S. law firm, populated by duly admitted American lawyers, which will own the equity of the law firm (obviously to circumvent the bar against non-lawyer ownership of law firms), and have these captive law firms contract with the LPO to have the latter handle all of the firm’s “processing” requirements – inclusive of every one of the four items in the bucket, save for court appearances and the signing of legal opinions. Control over the nominal U.S. law firm would be maintained by the LPO, which will have the captive law firm sign a promissory note for the funds it has advanced to capitalize the firm. (After all it has sometimes been said, not completely in jest, that the largest owner of law firms is Citibank, the premiere lender to law firms, which has some 650 law firm clients and 38,000 lawyer clients).

My friend and professional colleague, Bruce MacEwen, writing as Adam Smith, Esq., recently noted that the LPO’s are “smart, stocked with top talent, well-funded, strategically astute, and not the least bit afraid to break some china.”   My only disagreement with Bruce is that these folks won’t be content to simply break some china.  I believe they are planning on walking away with the china closet.

At the end of the day, traditional law firms will need to consider developing their own LPO, aligning with an existing LPO or, perhaps finding some different lines of work.

One final cautionary important postscript:  LPO’s typically carry about $5,000,000 in E&O insurance. In a world where we already have one claim pending against a prominent law firm  redicated on errors allegedly committed by its LPO subcontractor in connection with a matter that may involve some $380,000,000, Quite clearly, LPO’s need to materially beef up their coverage, law firms and general counsel need to examine any LPO’s coverage and law traditional law firms should use their own expanded insurance coverage as an important marketing tool as they will increasingly compete toe to toe with these alternate providers of legal services.

In all events, as Paul Lippe of Legalonramp.com so cogently observed, non-traditional law firms may well eat the lunches of many traditional law firms and these traditional law firms must now take notice and action.

©
Jerome Kowalski, October, 2011.  All Rights Reserved.

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Are 100 Page Responses by Law Firms to Client RFP’s Really Efficient or Necessary? Some Radical and Revolutionary Changes are Upon Us


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Hundred Page RFP Submissions which Clients have Been Demanding of Law Firms Got you Down? Change is-a-coming.

 

                                                                                       Jerome Kowalski

                                                                                      Kowalski & Associates

                                                                                      September, 2010

Many of our client law firms have expressed enormous, indeed almost unspeakable,  frustration and dissatisfaction with the RFP process that so many corporate clients and potential corporate clients now require, particularly in connection with engagements that will require Alternative Fee Arrangements, in which such responses seem to have become a staple. The RFP typically requires completion of a 60+ page questionnaire, which frequently require scores of hours and professional time to complete.  Added to this frustration is the fact disappointment experienced by firms who have gone to such lengths to and not get to the brass ring.  Many firms have simply thrown their hands up in the air and basically abandoned most or all efforts to respond to such detailed RFP’s.

The good news is that there may be significant change coming down the pike with regard to the RFP process.  Jeff Carr, the well respected trend setting General Counsel of FMC Technologies, who has not only been the most vocal advocate for AFA’s and Value Billing, has taken note of the fact that compelling law firms to complete such cumbersome questionnaires too often results in lawyers not only pulling their hair out, but, as I mentioned, simply abandoning these cumbersome processes.  One consequence is that corporate clients are getting short changed since otherwise eminently well qualified law firms have simply responded to the whole RFP process with a simple no mas.

Inside Counsel recently reported how Mr. Carr has recognized the problem, but, in addition, as part of FMC’s convergence program, reduced its previous 56 page RFP questionnaire down to a one page yes or no questionnaire, publicly posted for all to see at www.legalonramp.com , a document outlining FMC’s general terms and conditions for engagement of outside counsel and FMC’s pay for performance system. FMC also “published its historic litigation data and invited the participating firms to rank themselves by type of litigation or litigation competency, provide their historic data and metrics, and provide their default ACES budget for the major types of litigation FMC has.”

Mr. Carr then culled through 52 responding law firms and invited 32 to provide  the ultimate “elevator pitch” by providing a Tweet on Twitter, which of course is limited to 140 characters. FMC dubbed this as a “Tweet and Greet.”   For those of you who scoff at Twitter as kid’s play and merely a social tool, the recent article in the Guardian will certainly be an eye opener in connection with its real utility for lawyers and clients.  Twitter is but one of the tools that more and more in house lawyers are using to identify competent outside counsel, in the same way that they use blogs. In fact, if you or your marketing personnel have created your blog with all of the appropriate tools of this new Internet era, your blog posting should be fed automatically to Twitter.  This one is, as are all of ours. Doubters or skeptics can check us out on www.twitter.com  @jerrykowalski.

Of the 32 firms that responded to Mr. Carr’s “Tweet and Greet” invitation, 16 were invited by Mr. Carr to meet with him and, in his words, “wow not woo.” In the end, FMC selected six law firms and “decided to form a joint venture among them, wherein new cases are handled by a team the law firms form. Sometimes the team consists of one firm, several or even all of them.”

“The JV is administered by one of the outside counsel on retainer with a performance-based hold back,” Carr explains. “All cases have a default target budget [based on an FMC-designed pay-for-performance plan] lower than our historic data. The overall savings will be shared between FMC and all the firms, with the distribution reflecting how well they worked with the other firms.”

All of FMC’s various pending cases were then re-assigned to the new law firm joint venture, as are new matters coming in the front door.

Mr. Carr then went on to note, “traditional RFPs have a reputation for being complicated, mostly useless and quite painful, but it doesn’t have to be that way, So, out with the 56-page RFP, little of which is used in the ultimate decision-making, and in with the three-page non-RFP.”

Jeff Carr is, as is well known, an articulate and outspoken advocate for change in the relationship between client and counsel. He is the ultimate trend setter for corporate counsel. Watch for other companies to follow suit.

But, when you get home tonight, spend some time with your kids and have them explain to you what Twitter is all about and how to make best use of it.

© Jerome Kowalski, September, 2010.  All Rights Reserved.

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