Rio Tinto Outsourcing Legal Work - What Does It Mean?

Last week the traditional media and blogosphere were abuzz with the news of rigged elections in Iran, and the resultant uprising.  In the legal marketplace, we had a similar level of buzz over the announcement that global mining giant Rio Tinto has agreed to outsource a substantial portion of its legal work to an Indian legal services company, leading to an expected 20% savings on the outsourced legal costs. Why such a furor?  Simply because the work being outsourced isn't the widely proclaimed mundane work of staff accountants, secretaries, mail room clerks and marketers, this is real legal work, the work of highly trained lawyers, that is being taken from top global law firms and moved to a heretofore unknown company with salaried lawyers!  "What is the world coming to?!" is undoubtedly the cry in BigLaw law firm boardrooms everywhere.  What, indeed.

Let's consider the traditional legal work pyramid.  As traditionally described, the top of the pyramid consists of strategic legal work, work that literally decides the fate of the client's organization, the so-called "bet the company" work.  When clients have this level of need, price is not the highest consideration or, at times, not a consideration at all.

This is followed by work that is important to the client but not mission critical.  There is both more of this sort of work and more providers who can perform the work.

And then there is commodity work.  This is often described as repetitive, routine, mundane work that doesn't require a high level of skill, but competency and efficiency are important.  The classic depiction is that insurance defense falls into this category.

Not surprisingly, few lawyers are able to objectively assess where their work product falls on the pyramid.  If we were to ask lawyers to categorize their work and then present the results graphically, the result would not be an upside down pyramid -- it would be more like a bowling ball resting on the head of a pin!  The commodity work is always performed by "other lawyers in other firms."

Many law firms, particularly the largest and most prestigious, think of themselves as "best of breed" in all categories, which suggests that for all legal work their clients can expect to pay premium prices. The fallacy in that assumption is that there are many components of a deal or of a major litigation that are routine and mundane and that don't necessarily require the services of a top partner at a leading firm who attended the most prestigious schools. Since the law firms themselves have failed to make any substantial differentiation in the legal services they deliver, the clients are forced to make these choices. The Rio Tinto outsourcing deal reflects one client determining that routine contract review and drafting and basic legal research are tasks that are more commodity than premium, and therefore a lower-cost provider can and should perform these tasks. Undoubtedly Rio Tinto will continue to retain top law firms for the strategic aspects of its deals and litigation, but this division between premium and commodity work will soon be commonplace.

While many view the Rio Tinto announcement as fairly novel in the legal profession, it's an unexceptional and routine business approach in other businesses. We expect to see more clients take this approach and we also expect top law firms to move slowly in response, but those that do embrace this as an opportunity to make some fundamental changes in the delivery of legal services will have a significant and sustainable competitive advantage. The new measure of law firm differentiation is not limited to pedigree and brand, but efficiency and business sense will now become important factors.

Up to now, top law firms have reacted by offering price discounts, or by offering alternate fee arrangements, or by seeking new engagements to make up for "lost revenue" when clients move commodity work elsewhere. The savvier firms will need to learn how to embrace this sort of outsourcing model in their own businesses. The irony of the situation is that law firms are themselves merely outsource providers of legal services to corporations whose main objective is to make and sell products. Once law firm leaders fully realize this, they will look to their own operations and apply business process re-engineering principles to reduce inefficiencies in the delivery of legal services, which can increase quality while decreasing delivery time, eliminate redundant or unnecessary steps, and allow for the use of prior work product rather than viewing each project as unique. As most other industries have learned, improving efficiencies in this manner can actually boost profits even while prices are flat or declining.

There are many pundits who talk about the need for change but don't explain the hows and whys or provide specific and concrete examples. Since the underlying basis for the change afoot is financial, in a future post we'll present a very simplistic financial model of a law firm operating under today's billable hour model and contrast this with one that embraces operational efficiency and alternate fee arrangements. Without question a law firm can not just maintain but improve profitability in this climate. Whether you believe this or not remains to be seen. What is clear is that clients like Rio Tinto have grown impatient waiting for law firms to act first. So don't wait too long. Because in your client's lobby right this moment is a group of entrepreneurs who have thought through in great detail your client's needs, and right now they have his undivided attention.