Outsourcing the Law

Ivan Schneider, Writer, specializing in financial technology | 8/17/2010 | 15 comments

Ivan Schneider
You may recall a question like this from an Econ 101 exam: "If the supply of a good increases, what happens to its price and demand, ceteris paribus?"

You fill in the oval marked: "The price goes down, the demand goes up."

Great! That's two points for you.

But now let's take a look at an example of this economic phenomenon out in the wide world. The New York Times describes how legal outsourcing firm Pangea3 has sliced the cost of legal services for its corporate clients. Because of the sizeable cost differential for trained Indian lawyers versus junior-level US-based lawyers, Pangea3 and other legal outsourcing firms are willing to provide more legal services at lower prices.

The cost-cutting angle is exactly what attracts companies like General Electric Co. (NYSE: GE) to the idea. G.E. is a global, diversified enterprise with operations around the world, and there's no reason to expect the fact that it's based in Connecticut to dictate where and how it spends its global legal budget. Going offshore for legal services allows the company to cut its legal costs significantly, which in turn benefits shareholders.

By now, the question of whether or not we should be outsourcing is an old and tired debate that has been more or less decided by events. We've all benefited from lower prices on manufactured goods, from cars to furniture to refrigerators. We've done even better with IT goods, because we get the increasing productivity gains on top of the lower prices.

But are we better off as an economy, or as a society, with lower prices for legal services? Think of the increase in demand that will inevitably ensue. If you think we live in a litigious, over-lawyered society now, just wait until your average business owner, citizen, neighbor, PTA member, homeowners' association, condo board, labor union, and civic group find out that you can sue the bastards at Wal-Mart prices.

What may happen: Lawsuits that ordinarily would never see a courtroom because of the prohibitive cost will end up on the docket. There won't be enough judges or courtrooms to go around, and over time the domestic staffing problem will get worse because declining economic prospects in the field will dry up the pipeline for legal talent. Worthwhile cases will be crowded out by spam lawsuits, denying swift justice for all.

The economy will suffer, as will civil society. The cost of doing business will go up due to the need for defensive lawyering, whether for slip-and-fall cases, patent defense, intellectual property protection, or the need to respond to incessant discovery requests. Inefficient or unfair aspects of the legal code will be amplified by runaway litigation, as will the economic consequences. Respect for the law will go down as civil disorder goes up, as will the incentives for corruption. It's simple economics, folks.

Nevertheless, this Pandora's box of legal outsourcing might reveal at least one benefit. In the same way that outsourced manufacturing has put high-quality, finished goods within the reach of consumers in developing nations, and outsourced IT has given companies in developing nations the ability to build world-class enterprises, offshore outsourcing of legal services may end up training an entire generation of offshore legal experts who will create in their own countries our nation's most successful export -- the rule of law.

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fbpmt   Outsourcing the Law   8/23/2010 5:51:49 PM
Re: A Scary Thought

I also see the other side of the fence.

In this post, are we missing the positive economic impact on a drastic change in the legal system. would more jobs, but different types of jobs, be created here?

Back to the manufacturing industry's outsourcing, Americans were inspired to find an alternative means of employment, and one result was the explosion of the IT industry!!

So maybe from an economic standpoint, there would be something good to come from such an endeavor -- it just has not been invented? yet? 

User Ranking: Blogger
nimanthad   Outsourcing the Law   8/23/2010 4:04:04 AM
Re: the impact won't be great
Hmmm good, but I'm wondering how far this will be successful? Certainly there are security issues and if no clear evidence is shown on how to overcome it successfully, I doubt the success ratio :(
Fredric Paul   Outsourcing the Law   8/19/2010 9:20:22 PM
Re: the impact won't be great
@Cyrus  Thanks for talking me down from the ledge on the prospect of cheaper lawyers leading to more lawyering. I certianly hope your analysis outweighs Ivan's supply/demand equation.
Cyrus   Outsourcing the Law   8/19/2010 5:37:49 PM
the impact won't be great
As I posted in another thread, while I spent the first decade of my career as a tech and financial journalist, I've been in PR for about 10 and a lot of my work in this area involves lawyers and law firms.

The outsourcing issue has loomed large on that landscape for years, largely because of the rapid increase in legal fees that the big firms commanded until the economic crash. Much has been made of outsourcing to cheaper economies like India. But in reality, all those folks can do is document preparation, even if they're licensed attorneys in India. Once you get into issues that actually require someone to be physically present in a court, you need someone licensed to practice law in that state's court. You don't necessarily have to take the bar exam for the other state, as many states have reciprocal agreements allowing a licensed lawyer from one to apply and relatively easily be licensed in another.

Stateside, you've had companies like Axiom Legal reinvent the billable hour concept and offer companies a different value model. Axiom is basically a "virtual" (although I hate that word) law firm where attorneys are actually independent contractors working under a single banner.

To the broader issue of whether cheaper services will bring more litigation, I'm not sure about that. Technically speaking, if you've got the inclination, time and money for filing fees, you don't need an attorney to sue anybody. In every state I know of, you can easily sue someone without an attorney, despite the fact that New York and several other states in the country require an attorney for routine transations like a home purchase.

Much of the increase in litigation is actually due to third parties taking up an issue on another's behalf, I'd wager. Nothing will really stop that.
Fredric Paul   Outsourcing the Law   8/18/2010 5:30:30 PM
Re: A Scary Thought
@Matt & Zentropist  Remember that while you may need an actual lawyer admitted to the bar in the state in question to sign the documents or present the case, much of the work is usually done by others who may or may not be full-fledged lawyers.

Similarly with architects. A "real" architect has to sign and stamp the drawings, but they are often put together by folks with a wide range of backgrounds.

You just need the person with the accredation (sp?) to be the front man and take responsibility (liability).
Fredric Paul   Outsourcing the Law   8/18/2010 5:25:33 PM
Re: A Scary Thought
@Ivan  No, that's not really helping.
Fredric Paul   Outsourcing the Law   8/18/2010 5:23:32 PM
Re: As supply increases ..
I love that story. It's so true it hurts.
Matthew McKenzie   Outsourcing the Law   8/18/2010 5:19:37 PM
Re: A Scary Thought
Just looked up the answer to my own question: most of the world has legal systems based on civil (code) law, most of the exceptions are former British colonies.
Matthew McKenzie   Outsourcing the Law   8/18/2010 5:14:24 PM
Re: A Scary Thought
Interesting points. Another question I have: How much of the world adheres to case law? I assume that most places once within the British Empire would be, does that make sense? As for countries that use code law, are the differences significant enough to pose barrier for attorneys educated in that system?
Zentropist   Outsourcing the Law   8/18/2010 3:21:48 PM
Re: A Scary Thought
@ Matt: Bear in mind that some 90 percent of American lawyers practice transactional law -- they never step foot in a courtroom. And while lawyers that are practicing law need to have successfully passed the bar exams and be licensed in the states where they are practicing, a lot of the paralegal and associate level due diligence and other research work can readily be outsourced.

I wonder now if  we'll start to see a greater hue and cry from legislators about outsourcing since many of them have law degrees and even this white collar profession is now feeling the heat of having hungry people living in countries where the cost of living is far below ours eager to go and eat their lunch. 

Litigation, in my opinion, can still get expensive and does require an attorney that can make court appearances, but this will make it harder for some firms to justify billing $300 or more per hour for someone to make photocopies or review case law in order to prepare a brief.

Hey, it's a flat world and justice is supposed to be blind, so why can't justice also speak accented English and live outside of U.S. time zones?


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