Thought leader

Virtually all large companies rely on a mix of in-house and external lawyers to meet their legal needs. For a general counsel set on achieving the best value for money for his or her company, getting the right combination of internal and external work is a continuing challenge.

And, not surprisingly, the proportion of internal to external work does not remain constant. Data from the US shows that the proportions have altered. The mix of internal/external resources (based on fully loaded costs) has shifted from roughly a 55/45 split in the 1980s, to a 50/50 split in the first half of the 1990s, to some 60 per cent of the work being done externally since the mid-1990s.

Many larger law departments aim to handle in house as much as possible of their sophisticated, business-critical legal work. Not only are in-house lawyers more cost effective in these roles, they can also offer a service based on greater knowledge of their company’s industry, business operations, strategy and new product opportunities than external counsel. However, in specific circumstances, the additional cost of using a top-quality firm is a more appropriate choice. Typically, this is where cutting-edge legal knowledge is required for unusual or infrequently encountered transactions or where the complexity and scale of resource required is exceptional. At the other end of the spectrum is legal work that is standardised, predictable, and can be performed using skills and experience readily available in the market. This is work that benefits from economies of scale and experience. Such standardised work can readily be outsourced: a high-volume specialist can often perform it at a lower cost and at a quality at least equivalent to an in-house team.

Two factors are currently contributing to further shifts in the pattern of work undertaken internally or externally. One is the changing structure of private practice and the second is technology.

In recent years, as markets have opened up and competition has started to bite, we have seen a remarkable period of change in the structure of the legal sector. Firms that for many years have been full-service generalists, with little to differentiate them from their peers, are becoming more specialised. Increased focus on particular areas of practice, on groups of clients or on cost usually results in law firms that are better aligned to the needs of their clients. This wider choice also provides greater opportunity for the outsourcing of legal services. For example, the emergence of low-cost providers of routine legal services means that previous outsourcing decisions are worth re-examining.

Technology is also having an impact. It is being seen most immediately at the commodity end of the market. The development of broadband, high-capacity networks, digital dictation and imaging technology has opened up the provision of professional services to a global market. It has allowed access to the growing pool of highly educated talent in developing countries where English is the lingua franca. New possibilities have opened up for the outsourcing of paralegal work to specialist suppliers in places such as India and Sri Lanka. They can operate on a global scale and off a cost base that is substantially lower than the developed-world alternative.

At the expert end of the market, the change has, to date, been slower than the publicity might have led us to expect, but there is an inexorable trend. Technologies such as advanced know-how systems, document assembly, on-line transaction management and client-dedicated extranets will speed up the product lifecycle and commoditise work more quickly. It is too early to predict with certainty how this will play out in the market, but we could see a change in the value relationship between the client and their expert law firm. One scenario is that the premium law firms will become solely expert counsel, with much of the associated legal work being undertaken by the client in-house, supported by the new technology.

For legal departments, this means that regular review of the balance between externally and internally-sourced work is critical to secure value for money. Second, the more that law-firm panels can be encouraged to improve the quality of their technology, the more likely that one will see fee rates come down for the non-expert proportion of their work. Third, for commodity work, and particularly paralegal work, it will almost always make sense to go either to a law firm that uses offshore resources – or to go direct to one of the offshore suppliers of paralegal work.

Giles Pugh is a director of the professional-services-consulting firm Hildebrandt International. He can be contacted at gsapugh@hildebrandt.com