Over the past few decades, that legal industry “social contract” went something like this:

Aspiring lawyers attended law school and got jobs at law firms upon graduation. Each year, associates received raises based on their law school graduating class and moved into a higher billing rate. And every few years or more firms raised their hourly rates for all classes/tiers of lawyers. As a result, profits per partner, the compensation benchmark at big firms, continued to rise – often dramatically – irrespective of client profitability. Those associates hired worked especially hard for 7-10 years, and some of them made partner. Others left along the way to become in-house counsel (my post-firm career path prior to Pangea3), join smaller firms, join businesses or open their own law practices. Throughout all this time, in-house legal departments, which were and still are made up predominantly of lawyers who had practiced at law firms earlier in their careers, hired law firms to handle a substantial percentage of the company’s work, and paid the perennially increasing hourly rates. This continued, with only minor hiccups, for about the last 30+ years.

Then came the great recession of 2008-2009. Corporations came under massive pressure to cut costs, both because of radically lower revenue, and because of cost structures that were, frankly, out of whack. The legal department, along with the other corporate cost centers - such as IT/MIS, HR, Shared Services, Marketing and Finance – came under pressure to cut costs. However, in this latest recession, legal was treated differently. In the past, legal departments had been able to claim that legal was different, that it was impossible to predict legal costs, and therefore impossible to fix those costs and implement traditional cost saving and cost-certainty measures. However, over the past decade (roughly since the last recession), all of the other traditional corporate cost centers had been subject to institutional cost-cutting and right-sizing, as a result of factors such as outsourcing (especially for Shared Services, IT/MIS and HR departments), technology, six sigma, lean and other process improvements and good old layoffs and downsizing. As a result, those departments (1) had the appearance of being relatively leaner (from a budget and spend perspective, if not from a headcount perspective) when viewed against the legal department and (2) were able to adapt quickly to the need to lower costs and become more productive. This time around, the corporations simply insisted that the legal department do its part to align costs to the business, and to simply figure out a way to control and predict costs.

So, for the first time, the legal departments of major corporations simply started refusing to pay higher rates, refused to accept straight hourly billing and insisted that the law firms’ needs for perpetually increasing profits-per-partner was unsustainable, and that the legal departments would no longer foot the bill. In short, the legal departments changed the legal industry social contract.

And the law firms responded – by decimating the associate ranks and in turns changing the social contract with associates and law students. Why? That part is easy. To cut costs, an organization really has three choices: Real Estate, Technology and Headcount. Law firms couldn’t do much about the first two costs, so the only lever that law firms had in order to cut their own costs (in other words, to maintain their own partner profitability) was headcount. Compounding this pressure from the legal departments was a plain reduction in work, as business itself contracted globally. That combination of forces led the firms to not merely break the social contract, but to do it severely and quickly.

So as I read these articles, it actually all does make sense, except for the New York Law Journal article about firms simply insisting that they need to raise rates. I particularly loved these two quotes:

“We can’t sit out two years without changing, so we are going to do so, hoping that client goodwill from last year will cushion us at this year’s hike,” said another.

One firm was more militant. “Firms need to push back on the clients’ unreasonable demands to hold rates at 2008 levels and give a 15 percent discount off those rates,” it said.

In short, the firms are saying that the clients simply cannot change the deal that was cut so many years ago. But the firms themselves already changed that deal with their associates, and everyone knows that the game has changed – all bets are off. So it’s not merely that the partners quoted above are greedy, it’s that they’re disingenuous. They want legal departments to honor the old social contract, but they’ve broken their contract with their associates and prospective associates.

We’ll see how this all plays out, but it’s clear that legal departments are going to allow a return to the old social contract. And since everything flows from the client demands on the law firm, it seems pretty clear that whatever new expectation and social contract emerges between firms and associates will not resemble the old regime. The game has changed – we just don’t know how it’s going to end.

1. “No Longer Their Golden Ticket,” New York Times, Sunday, January 17, 2010.

2.“As Economy Stays Down, Firms Say They Will Raise Rates,” New York Lawyer, January 15, 2010. _{[NYLJ Subscription Link]}

3. “Brief for India’s outsourcing lawyers: keep it cheap,” Times of London, January 15, 2010.

4. Inside India’s Legal Outsourcing Machine, The American Lawyer, January 19, 2010 and AmLaw Daily, January 15, 2010.

5. Outsourcing: It’s Cheap and Easy to Do, Above the Law, January 15, 2010.

6. THE AM LAW 100: Revenue, Profits Up at K&L Gates, AmLaw Daily, January 21, 2010.

As the new decade approaches, we look forward to continuing to share news and developments in the legal services industry on our blog, and we wish you continued good health, happiness, and prosperity in the New Year!

2009 has been a year of momentous change for the legal industry, faced by the impacts and challenges of the global economic crisis, prompting closings, layoffs and other cost-cutting measures. Given this – and the pressure on corporations and law firms to manage legal spend – Pangea3 has successfully partnered with many Fortune 500 Corporations and Am Law 100 firms in the U.S., Europe, and Asian regions in 2009. Our clients benefited from our innovative, high-quality, tailored, outsourced legal services delivery model, and reported significant cost savings and improved operational efficiencies.

As we gear up for 2010, we are proud to acknowledge accomplishments in 2009 that solidify our position as the global leader in legal outsourcing. The expansion of our Board of Directors to include Brad Hildebrandt and Ambassador Wisner is clearly a positive development for Pangea3, and we are pleased with the numerous industry awards that validate our strong position, including the Top 50 Best Managed Global Outsourcing Providers and Top 5 Legal Outsourcing Providers for 2009 by the Black Book of Outsourcing, and LPO of the Year by the India Business Law Journal. [Read more about our 2009 Awards.] Also, in 2009, several of our success stories were featured in leading journals and newspapers including the National Law Journal, India Business Law Journal, Times Ascent and Economic Times.

And, not forgetting what is most important, we are happy to continue our tradition of giving to our community on behalf of all Pangeans and our clients by providing support to Project Crayons, an NGO in Mumbai, that supports child rehabilitation and youth oriented nationwide services. Stay tuned to learn more about our ongoing CSR commitments.

Once again, wishing you and your loved ones a Happy and Healthy 2010!

As quoted in the November issue of the 2009 IBLJ LPO Awards report, “… Pangea3 is the only LPO provider to win an award in each of this year’s awards categories, often with a marked statistical lead over its rivals. In all five service areas considered by the judges, the company was among the most prominent and highly rated providers.”

The IBLJ results were largely based upon confidential feedback from senior in-house counsel at leading corporations and law firm partners along five key performance criteria: quality, consistency and reliability of service, innovation, ability to tailor services, and value for money. Several of Pangea3’s Fortune 500 clients recognized its high quality and cost-effective legal outsourcing services.

Read More…

The New Legal Innovators

LPOs are poised to reshape the global market for legal services, argues Sanjay Kamlani, Co-CEO, Pangea3.

Legal process outsourcing (LPO) has come a long way since 2001 when General Electric (GE) made the concept a reality by utilizing in-house counsel in Delhi to handle procurement agreements for its affiliates around the world. In 2003, Lawrence Harnett, the senior counsel for the Americas at GE Plastics, announced that the credentials of Indian lawyers were “impeccable", stating that his clients were “really happy with the work". By 2004, GE reported annual savings of more than US$2 million from its outsourcing programme. At the same time, several other captive centres of excellence had generated an additional US$3 to US$5 million in revenue or cost savings for their corporate parents.

Currently, a group of about 10 top-tier LPO providers, dozens of smaller service providers and captive outsourcing units of many multinational corporations deliver a wide variety of legal services including contract drafting, legal research and related motion drafting, electronic discovery, regulatory compliance and patent prosecution and related analytics. Independent market research by the National Association of Software and Service Companies (NASSCOM), ValueNotes, and various LPO consultants indicate that there are now 5,000-10,000 lawyers working in India-based LPOs, generating annual revenues of US$250-US$500 million. Considering the recent growth of the sector, India’s LPO market can be expected to grow to at least US$1 billion by 2010.

Decision-making lawyers in the US and Europe, particularly the in-house counsel at multinational corporations, have come to appreciate the LPO providers that have successfully brought together impeccable legal credentials with process expertise, including Six Sigma tools and methodologies, lean cell manufacturing and other concepts that have made efficiency a key component of their value proposition. These in-house counsel have visited LPO facilities across India and have seen for themselves that process-expert lawyers are housed in state-of-the art secured facilities that are integrated with international markets through advanced technology.

Many have also found that LPO providers overcompensate for any apprehensions associated with geographic remoteness by offering outstanding customer service. Additionally, clients of LPO services have been pleased with the billing rates of LPOs, especially fixed-price models that eliminate budget risk and give them assurances regarding ultimate costs.
At the same time, clients are aware of the potential pitfalls of outsourcing. Key risks include the possibility of selecting an under-qualified LPO provider, overselling by industry players and the possible inability of the client to conduct a full in-depth due diligence of prospective providers.

The most significant risk facing the LPO industry is the failure of some LPO providers to meet client expectations. Unfortunately this has the potential to taint the entire sector. With a number of LPO providers overselling their capabilities, the likelihood is that delivery failure will occur. It may even occur at a highly visible level. In an effort to minimize this risk and prevent clients from having to engage in their own extensive due diligence of potential LPO providers, industry leaders have rightly focused on establishing a credible certification organization that will set appropriate standards and potentially offer guidance on segments of the industry that meet those standards. With such systems in place by 2010, in-house counsel and law firm partners will be in a better position to assess the competencies of industry players.

As we look towards 2010, the LPO sector is likely to influence standards within the larger legal services industry, including those of Indian law firms. In-house counsel are likely to demand greater efficiency from their legal service providers and push for a move towards fixed-pricing models and baseline standards for service provision.

Six Sigma and lean cell manufacturing tools and methodologies have become the norm for the LPO industry. These tools allow clients to track and verify the quality and consistency of any kind of recurring work product, be it documents being reviewed in the context of a litigation, or documents being drafted in the course of normal day-to-day business. Increasingly, law firms that have traditionally focused on billable hours are being asked to adopt these practices.

Just as performance, defined by volume and consistent quality, is increasingly measured using such tools, billing mechanisms are similarly being defined by the volume of pages, documents and gigabytes, or in terms of full-time dedicated teams, rather than by hours. Service providers and clients will increasingly focus on the relative risks and returns associated with these different pricing mechanisms. Providers who have been trying to hold onto billable hour pricing mechanisms will be pushed towards fixed pricing.

As we approach the end of the first 10 years since offshore centres of excellence for legal services were created and ultimately came to be known as LPO providers, it is clear that the trends that have emerged from this industry will impact - If not lead - innovation in the global legal services industry in the decade to come.

By Sanjay Kamlani, Co-CEO, Pangea3

© India Business law Journal, November, 2009

Ambassador Wisner, a veteran U.S. diplomat and a former U.S. envoy to India, is highly recognized as one of the nation’s most respected diplomats, and brings a wealth of expertise in U.S.-Indian relations, international affairs and public policy.

Mr. Hildebrandt is a world-renowned authority on law firm management and an advisor to law firms and legal departments on firm strategy, mergers and acquisitions, governance, restructuring, practice management, partner compensation and international practice issues.

Pangea3’s new board members solidify our position not only as the leading provider in the legal outsourcing industry but as one of the first legal outsourcing providers to revolutionize and transform legal departments into critical business units with an innovative suite of streamlined outsourced legal solutions that minimize clients’ business risks and maximize efficiencies.

Meet the Board.

Read the Press Release.