Summary:  In February, Microsoft announced that it would outsource a substantial amount of its legal work to an Indian legal outsourcing company.  This is not new news but the scale of it is and an interesting twist by the Indian company:  They have an outsourcing center  in the US and will staff up another one in the UK (this is called “onshoring”).  This could easily replace several hundred US and UK attorneys and related staff.  Taken with other news such as large flat annual fee deals recently announced, it is more evidence of not just downward price pressure but a precipitous decline in lawyers’ remuneration.  It’s not all bad:  The legal profession is now, finally, restructuring, embracing flat fees, capped fees, “unit” fees.

Well, Jeez, we, along with many other boutique firms, have been doing that for years!  Why wouldn’t Microsoft turn to the smaller firms?  (OK, it’s a rhetorical question.)

The Details.

In mid February, Microsoft announced that it was creating another LPO outsourcing deal with an Indian firm with which it has been doing work for some five years.  The earlier deal—which will continue—related to IP work (including, for example, patent renewals).  In this case, the public statements indicate that the outsourced lawyers will do legal research but there are some reports that they will also draft documents.

Most notable, however, is not that they are doing this, but that their provider already operates one of the centers in the US.  The second one will be created in the UK, potentially in the North.  Lawyers, expect competition.

The LPO outsourcing looks like it is part of a budget cut, dropping the $900 million legal budget by 15% over two years.  If we assume, somewhat arbitrarily, that lawyers and staff average $100,000 per year in salaries, overhead and benefits, then that would represent about 1,350 attorneys and staff.

Microsoft is not the only company to outsource LPO.  Indeed, many large law firms take advantage of a kind of “cost arbitrage” by using lower-cost lawyers in other jurisdictions, typically to maintain margins rather than provide dramatic fee reductions to clients (though some bar associations are trying to change that structure).  Microsoft is among the first and the biggest to announce the plan.

So What?

First of all, this development is neither bad nor good;  it just is, but it will have ramifications.  This kind of onshoring means, very simply, that the legal fees will be less expensive for the large clients because, among other things, the lawyers themselves will be paid less.  This will ripple through the market.  Fast.  With Microsoft making this announcement, we can expect that large clients of the large law firms will increase the pressure on those firms to cut costs—and this time they will succeed because (1) they can point to Microsoft as a case study and (2) they can turn to these kinds of LPO providers.  Ah, the benefits of competition.

Connect the dots with other legal cost-cutting initiatives by, for example, Levi Strauss and Pfizer.  Levi Strauss just announced a deal with its outside counsel, Orrick, for an annual fee (paid in monthly installments) covering a vast range of legal work.  Pfizer has been doing the same for over a year, though with a larger number of firms.

But from our perspective as a boutique law firm with a lot of experience with “alternative fee structures,” here is where it gets interesting:  The LPO firm rates that we have heard are within line with our usual rates and above our alternative fee structure rates.  The costs are higher on a project basis—i.e., fee charged for drafting, say, an agreement v. charging for total hours for such work.  We may be getting the wrong information on the LPO fees, but it is not unreasonable to use them as the basis for comparison.

The difference, of course, is the marketing prominence of such firms—i.e., clients are aware of them.  Second, for the larger clients, using one source for such legal services reduces transaction costs.

So, perhaps one more nail in the coffin of the hourly fee structure?  We can only hope.

James C. Roberts III (jcrext@globalcaplaw.com) is the Managing Partner of Global Capital Law Group and CEO of the strategic consulting firm, Global Capital Strategic Group.  He heads the international, mergers & acquisitions and transactional practices and the industry practices concentrating on digital, media, mobile and cleantech technologies.  He is currently involved in opening the Milan office.  Mr. Roberts speaks English and French and, with any luck, Italian in the distant future.  He received his JD from the University of Chicago Law School, his MA from Stanford University and his BS from the University of California—Berkeley.

The Global Capital firms counsel domestic and international clients on strategic and legal issues inherent in the deployment of intellectual & financial capital—a merger or acquisition, foreign market expansion, a strategic alliance, a digital content license, a mobile deal, foreign and domestic labor and employment policies, starting a new entity or raising capital. Clients range from global Fortune 100 corporations such as Deutsche Bank and News Corporation and its subsidiaries, MySpace.com and Fox Interactive Media, to start-ups.  Industries represented include digital media, Internet, software, medical and biotechnology, nanotechnology, consulting firms, environmental technology, advertising, museums and other cultural institutions and manufacturing.

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