In June, the world’s largest mining company, Rio Tinto, signed a deal with legal process outsourcer CPA Global, to send their lower-end legal work to twelve lawyers in India. Many heralded the deal as a strong message to law firms – already facing pressure to cut legal costs and consider alternative business models – that a changing of the order may be taking place. In an interview with CPA Global’s publication Legal Strategy Review, Rio Tinto’s managing attorney, Leah Cooper, said that its in-house team was dissatisfied with their external advisors’ lack of transparency on legal fees. The company decided to ‘take the initiative’, resulting in the outsourcing deal. Cooper estimates cost savings will amount to a reduction of 3:1 for in-house legal work, and a 7:1 reduction on work sent to external law firms.
ALB's Rashida Yosufzai spoke to CPA Global’s Asia-Pacific senior manager, Eve Johnson, about the deal with Rio, and whether outsourcers are reducing the law firm's market share.
ALB: Can you tell us about the deal with Rio Tinto?
Eve Johnson: The legal model that Rio has developed is a three-way relationship between the in-house legal team, their external counsel and CPA Global. As the outsourced legal services provider, we’ll deliver scalable, cost-efficient resources to handle services such as contract review and drafting, legal research, and document review.
ALB: What does this mean for the legal industry? Are outsourcers taking over law firm roles?
EJ: While the amount and nature of the work that goes to external counsel may change, there will clearly always be a place for law firms. When corporations require specialist expert advice, they will continue to consult with their external legal advisers.
As the needs of a large corporation are diverse and change regularly, building that expertise in-house to cover every eventuality is never likely to be feasible. General counsel will always need to buy in specific expertise from external firms. However, it seems apparent that stricter budget controls are likely to stay – both in the corporates and law firms – so the way the law firm is supported in delivering that advice might change. The traditional end-to-end handling of all aspects of a large transaction or litigation matter is under threat.
In the United States, it is becoming quite common for the lower-end aspects, such as discovery and data-room compilation, to be outsourced to a lower cost vendor. I think we will see more of this, with the law firm still controlling the matter [and] providing the strategic advice, but working with other parties to deliver the work.
ALB: What do you see happening in the industry over the short and long term?
EJ: I think it's interesting to contrast the way law firms and legal departments have reacted to the global financial crisis. With law firms, as revenue growth has slowed we have seen a focus on controlling costs – through redundancies and expense cuts, managing partner expectations for lower drawings and waiting until the economy recovers. So it’s a correction rather than a shift.
Our corporate clients have also experienced a significant shift: they have had their budgets slashed. We are seeing procurement specialists actively involved in legal [process] sourcing. General counsel sees a move from sourcing 'value for money' to having to deliver hard expense-reduction targets. This means they have to do the same amount of work for less, by changing the way their budget is allocated.
Our corporate clients tell us the cost pressures they are under will continue well after the economy recovers. If this is true, then it could take some time for law firms to return to the revenue growth they enjoyed prior to the GFC. Therefore, firms may look to other markets in Asia and elsewhere to supplement this growth. The ‘magic circle’ and US firms are already established there, so competition will be tough.
We have seen some law firms supporting general counsel by suggesting ways to handle the high-volume, low-risk aspects of the legal workload to reduce the cost of this activity. These firms are working with outsourcing vendors to lower costs [associated with] discovery and the establishment of data rooms for large transactions. They still retain the high-end strategic work and, in doing so, are cementing a relationship with their client. At legal panel review time, we might see those firms being allocated a higher percentage of the strategic work – which could mean they achieve more growth.
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