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Legal Process Outsourcing: Success Reliant on Ethics and Quality

Legal Process Outsourcing:  Success Reliant on Ethics and Quality

A recent ALM Legal Intelligence Survey of 324 legal departments showed 85 percent of general counsels are evaluating, are planning to use or are using legal process outsourcing.  If you are one of them, your success rests on whether you understand the ethical pitfalls of LPO and how to ensure quality so your client obtains optimal benefits.

Several experts on LPO recently weighed in during a LexisNexis martindale® Connected webinar on the pros and cons of outsourcing and the keys to success.

Domestic outsourcing of legal processes has been going on for many years, but as global communication and technology have improved, outsourcing to other countries has grown exponentially.  Additionally, the scope of the processes has increased from objective back-office tasks such as billing and word processing to subjective front-office legal work.

What is driving the increase is a desire by law departments and outside firms to increase efficiency, improve predictability and reduce costs, because they are under severe economic pressure, said David Perla, co-founder of LPO provider Pangea³.  Law firms also see the benefit of freeing up their most expensive resources to do the most complex work.

LPO Can Set Firms Apart

But perhaps the biggest issue is differentiation, Perla said.  Firms are saying, “Look, this is a way for us to say to our clients we’re thinking about the issue, we’re staying ahead of it and we’re different.  We understand that every firm has different departments.  We all have experts in our field.  We want to differentiate ourselves by coming to our clients and talking about efficiency, cost savings and predictability using outsourcing before the client tells us we should use it.”

Economic savings are generated in several ways, said Arnold Natali of McCarter & English in Newark, N.J.  Non-U.S. lawyers charge substantially less than even junior American lawyers at small firms, recruiting educated workers overseas at lower salaries is easier, overhead costs are lower overseas, and using an LPO provider saves the cost of investment in technology, software and infrastructure.

He added that a firm will have more opportunities to handle larger and more complex matters without hiring or training additional permanent staff.

Ethics & Supervision

If all of this sounds a little too ideal, you may be asking, “Does LPO violate any ethics rules?”  The short answer, according to the experts, is “No.”  But as with all things involving ethics, you must operate within the model rules of professional conduct or standards specific to your jurisdiction.

Edward J. Reich, deputy general counsel of SNR Denton U.S. LLP outlined the general ethical rules provided by the American Bar Association in formal opinion 08-451.  While the ABA gave a green light to LPO, it also required U.S. firms to maintain competent representation.  Reich noted that as LPO is used more and more in front-office work, competence becomes an even more important issue.

American firms must conduct reference checks and background investigations, Reich said.  For more complex matters, he advised interviewing the main lawyer involved and dealing directly with employees who will do the work.  “You cannot let these supervision and competency obligations go by the wayside just because you are outsourcing.”

In the end, the outsourcing lawyer must maintain his or her own independent legal judgment, because the lawyer is responsible for the competence of the work.

Additionally, the U.S. lawyer who is outsourcing is obligated to:

  • Supervise providers on a regular basis.  Natali suggested regular review and ongoing communication, including face-to-face.
  • Ensure the provider maintains a culture of confidentiality.  Having a system for best practices security, employee agreements, and technology goes a long way, Reich said.
  • Make sure the provider has no conflicts of interest.  Reich said conflict tests should be conducted at the outset and as the outsourcing relationship proceeds.

Another hot ethical topic is the unauthorized practice of law, or assisting in the unauthorized practice of law by bringing in a lawyer or non-lawyer from overseas.  One way to avoid such an ethics violation, Reich said, is to be certain that the LPO provider is providing support services to the lawyer, NOT doing legal work for the client.  In that respect, it is no different from having a paralegal or legal secretary doing the work, Reich noted.

At what point do you need to disclose your outsourcing to the client or obtain the client’s consent?  Reich said when you reach the point of imparting confidential information or the provider is doing more substantive work, you should notify the client and possibly obtain consent.

Finally, Reich addressed the ethics of passing outsourcing fees on to clients.  Rule 5.1 says fees must be reasonable, so you can pass through provider fees to the client, but you cannot mark up the provider’s bills in order to profit from the client, he said.

Assuring Quality

Meeting the requirements for staying above board on ethical matters translates into best practices for ensuring quality work for clients, the experts agreed.

First, choose appropriate tasks for LPO by evaluating their complexity, the provider’s competence and the client’s expectations, Natali said.  In selecting and LPO provider, a lawyer should obtain all background information, including resumes and references, examine sample work, review quality assurance policies, ensure adequate technology, and even hire a provider for a test project to see whether a long-term arrangement is appropriate.

Perla suggested looking at the provider’s talent pool:  How deep is the pool?  What training is provided?  What is the culture?  How are they recruited, trained and retained?

Further, Natali said outsourcing lawyers should consider the nation’s legal education system, its ethical principles and its ability to police its lawyers. 

“A lawyer should not retain a foreign LPO provider if physical distance, language barriers, differences in time zones, or inadequate communication channels make it impossible for the lawyer to supervise the work reasonably and adequately,” Natali said.

When it all coalesces, the result is a team that targets technology, business process improvement, allocation and careful analysis of the strategic priorities of the law department, Perla said.  “It’s much more than a vendor relationship between a legal department and a provider and law firm.  It’s much more an integrated relationship between people that view themselves as partners.”

LPO in Action

One place where that relationship is blossoming is at healthcare products and services provider Cardinal Health.  Patrick Eckhert, director of Indirect Procurement at Cardinal, is using Pangea³ for contract management, contract review and litigation discovery.  Ultimately, he said he hopes to put more higher-end services to the test.  By phasing in the use of LPO, Eckhert said Cardinal is learning the value of it as it goes along, he said.

The LPO’s reading and extracting data using technology allowed Cardinal to quickly load contracts into a repository and run reports.  By having Pangea³ review low- and medium-risk contracts, Cardinal’s legal team can focus on higher risk contracts, Eckhert said.  Cardinal saves on productivity by having Pangea³ work on contract review load and draw up risk assessments before sending it to a Cardinal attorney for signing off.

“We have the ability to manage risk around all our contracts.  Traditionally that would be focused more on just the top-tier contracts, strategic suppliers.  We’ve been able to put that very same discipline to any contract we touch.”

Eckhert admitted his legal services team had some concerns.  But the lawyers learned from the process, gained confidence in the relationship, and made changes without making a major shift. 

“We have a very aggressive plan to get more spend under management,” Eckhert explained.  “We really want to start driving sourcing discipline. With that, we run into situations where we have business challenges where we have a lot more contracts we’re bringing into the system.  How do we manage that increased volume, how do we scale our program to handle that increase, and ultimately how are we going to handle the cost?

“What we’re able to do now just from a scalability standpoint [is] very quickly on-board more suppliers, put more spend under management without causing a disruption to legal to review all these contracts.