Outsourced Legal Work = Outsized Law Firm Profits

A story* in the on-line version of the ABA Journal shed light on a little discussed practice in the law business these days, that of outsourcing legal work to temp or contract employees. The story concerned a client who filed a malpractice suit against a law firm over the quality of the work performed by the contract attorneys that the firm used.

Just like many other business, law firms are looking to save on overhead where they can by outsourcing work and turning to contractors or temp services for virtually everything that can be done by a clerk, legal secretary, paralegal, or lawyer.

I know many insurance defense firms that do not have legal secretaries, but instead use one of the “virtual” secretarial services.   One mid-major law firm in Indianapolis which does a lot insurance work has outsourced their photocopying and document storage and retrieval department.  Although the department is still located in the firm’s offices, the employees are all employees of a vendor.

Of course, a client should not really care that much if a law firm can save money on its overhead by outsourcing or using temps or contract workers instead of firm employees to do secretarial or clerical work.  That is because such work is considered as firm “overhead” and not billable.  So, if a firm can save a buck or two on this type of work, why not?

Client concern does come into play when a firm chooses to outsource paralegal or attorney work that can be billed to the client.  The ABA article noted that contract attorneys are paid as little as $25 an hour.  And it is common for for many large firms to bill contract or temp attorneys at up to 10 times over what they actually cost the firm.

How can law firms ethically do this?

Well, first off, ABA Formal Opinions about the use of temp or contract lawyers are pretty generous from an attorney’s perspective. They allow the attorney to “hide the ball” from the client and not disclose that a temp or contract attorney is even working on a client matter unless that attorney is working without “close supervision” of an attorney associated with the firm.  See ABA Formal Op. 88-356 (1988).

Moreover, since “close supervision” is not defined in the Opinion, this means as a practical matter that it is not likely that attorneys will ever see the need to disclose the use of temp or contract attorneys to the client.  This would be especially so because of how ABA Formal Op. 00-420 (2000) allows attorneys to bill temp attorneys.

ABA Formal Op. 00-420 allows attorneys the option of choosing if they want to bill the services of temp or contract attorneys as either “fees” or “expenses.” The difference here is that if the contract or temp attorneys (or paralegals) are billed as “expenses,” then just like any other out of pocket expense, the lawyer cannot markup up the expense except for any direct costs associated with the expense without advance client consent.  See ABA Formal Op. 93-179 (1993).  If billed as “fees,” the firm could bill the temp or contract attorney as the rate it does for its other attorneys in the firm.

This generous treatment by the ABA Opinions allows law firms to reap a windfall profit as the difference between the two billing methods is often substantial. Consider that in the insurance defense world, a good temp litigation contractor who gets $60 could be billed as an associate at $120 an hour. That gives the law firm what is known in the retail world as a “keystone markup” or 100% markup which translates into a 50% profit margin on the use of contract attorneys! The profit margin on temp or contract paralegals can be even higher.

And telling attorneys that they (and not the client) have the option of deciding whether to bill contract or temp employees as “fees” or “expenses” is like telling them that they can choose to drive a Lexus or a Chevrolet and whichever one they choose, the client will pay for it.  Guess what they will choose to do every time.

Because of the generous way the ethical rules treat lawyers on the issue of how they can use and bill contract or temp employees, clients need to be proactive on this issue.  They should have litigation and billing guidelines that require law firms to identify and get agreement on the use of any temp or contract attorney (or paralegal) working on company files at any level whether with or without close supervision.  That type of guideline in and by itself just makes good business sense notwithstanding the billing issues involved.

Just as important, litigation and billing guidelines also should specify that any temp or contract employee be billed as an “expense” rather than billed as “fees.”  Even if billing guidelines did not address this issue when a matter first was assigned to the attorney, the issue is still ripe for discussion with an attorney at any point during the course of the representation.

Finally, on the outsourcing issue, I would be remiss if I did not call attention to the disingenuousness of some attorneys who see no problem in outsourcing legal work with “actual” confidential client information, but object to insurers outsourcing legal bill reviews because of “possible” release of confidential client information.   More on other examples of disingenuousness on this issue in a future blog piece.


One thought on “Outsourced Legal Work = Outsized Law Firm Profits

  1. Pingback: Give Your Company a Present for the New Year – Update Your Litigation and Billing Guidelines « legalbillreviewerblog

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