A Post About Ethics Rules, Offshoring and Mark-Ups on Contract Attorney Fees
Do state ethics codes deter offshoring of legal services to India, therefore enabling U.S. firms to charge higher prices for services? And should firms be limited in the amount that they can mark up outside lawyer fees? Those are some of the questions that came to my mind after reading this fairly detailed article, Jones Day, Kirkland Send Work to India to Cut Costs (Update2) (Bloomberg, 8/21/07), which describes how large firms and corporate clients are using outsourcing (hat tip to Legal Pad).
The Bloomberg article is an interesting read because it provides some interesting data on how the costs of offshoring work to India compare to law firm costs. Consider the case of Socrates Media, described in the opening paragraphs of the story, which hired QuisLex, an India-based research company that performed the requested work -- customization of a residential lease for all 50 U.S. states -- for $45,000. That's roughly one-tenth of the $400,000 estimate that had been quoted by Socrates Media's outside counsel. Bruce Masterson, CEO of Socrates, found that the work was "good quality" and has been using QuisLex ever since.
So if basic legal research tasks cost so much less in India than within the United States, why aren't law firms sending more work, such as document review or basic research, offshore? Some firms argue that the savings are not as significant because the work still needs proper supervision and security. But there may be another, financial motive as well. As a general matter, virtually every state bar allows lawyers to mark up the cost of legal research and writing services, so long as the overall costs are reasonable. However, firms are not required to disclose the cost differential for legal work performed by U.S. lawyers, whereas disclosure of mark-ups are required for foreign lawyers. Thus, firms can hire U.S. lawyers for contract work at $60 an hour, pay them $30 an hour and bill them out at $200 an hour and keep the $100 an hour as profit without ever telling clients about the price differential. Thus, firms have no incentive to go offshore and hire Indian lawyers for $20 an hour, because then they'd have to tell clients about all that profit -- or bill the work to clients at a lower rate.
Of course, law firms will still face some price pressure from more sophisticated corporate clients:
Armed with the knowledge of how little law firms might pay for offshore work, corporations can use the threat of cutting them out and sending legal tasks overseas on their own to force law firms to reduce fees. Law firms can earn more by using labor they can mark up without disclosure,'' said Stephen Gillers, professor of legal ethics at New York University School of Law in Manhattan. ``But clients are knowledgeable about costs, and they want to negotiate the markup on these charges.''
Still, how much leverage do clients have? Though they can, like Socrates Media, outsource more routine tasks, when it comes to massive litigation, companies are still dependent on outside firms, which have no incentive to outsource to India to cut costs when they can readily mark up the costs of contract lawyers without disclosure.
And if companies don't have substantial leverage to negotiate fees, then how reasonable are the law firm mark-ups? I don't begrudge firms for marking up the cost of contract attorneys if the mark-ups are reasonable. Firms devote overhead to finding, managing and supervising contract lawyers, and of course, they're entitled to make a profit. Having said that, when does a mark-up become unreasonable within the meaning of the Code of Professional Responsibility's requirement that lawyers charge "reasonable fees"? If a firm pays a temp agency $70 an hour for a contract lawyer (with the lawyer receiving $30 after the agency takes its cut) and bills clients $200 an hour for services, is that reasonable? Would a $300-an-hour rate be reasonable? If you find these rates troubling, is it because you believe that the client is getting ripped off -- or because the contract attorney is getting paid so little?
Posted by Carolyn Elefant on August 22, 2007 at 04:00 PM | Permalink
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