The revelations that Rio Tinto has started utilising off-shore labour for its legal work will have sent a shudder through the top-tier Australian law firms. However, if handled correctly (and admittedly, the chances of that happening are fairly slim), the use of cheaper overseas labour could prove to be a boon for Australian legal partnerships.
To those who haven’t experienced a large law firm environment, the prospect of expensive and ostensibly highly intellectual legal work being undertaken by lawyers or paralegals in India is completely nonsensical. However, the image of a lawyer, sleeves rolled up, sitting amongst a sea of legal text books and pile of contracts is only a partial reflection of reality. In the case of junior lawyers at mega firms, it is barely true at all.
The key to a profitable mega firm is successfully leveraging junior staff. While senior associates (experienced lawyers just below partnership level) are generally considered the most profitable employees, commercially successful firms are able to exploit junior staff (usually those with less than three years experience) in roles such as due diligence, discovery or proof-reading. (Hard-working graduates or junior lawyers are able to bill upwards of $400,000 per year).
For the most junior staff at large firms, the vast majority of their billable time is spent on tasks which are not really legal at all — proof-reading for example is often better undertaken by editors or professional proof-readers, however, partners will have junior solicitors perform such roles (and charge clients more than $200-per-hour for the privilege).
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Similarly, “due diligence” (which involves an acquirer checking a target company to ensure all is in order) is usually completed by very junior lawyers, often with very little idea of the commercial implications of their task. It would be impossible for a partner or senior associate to undertake such duties, but it is very profitable for a large firm to be charging upwards of $200-per-hour while paying an articled clerk around $35-per-hour before overheads.
The majority of the “billable” hours performed by junior lawyers at large firms (the situation is different in small and medium firms) could easily, and in some cases, preferably, be done by those without legal training at all. The main reason that junior lawyers undertake such roles is to earn revenue for the firm — clients paying several hundred dollars per hour are usually blissfully unaware that the task could easily be completed by someone who didn’t spend five years studying law and graduating with first-class honours.
The problem therefore for mega firms is that many of these not-really-legal type roles are able to be performed off-shore (in Rio’s case by-passing the outside firm altogether). And it is these roles which goose the profits of large firms.
There could however, be a silver lining for the big firms. Already, large (and even some small) accounting firms are successfully utilsing off-shore (Indian or in some cases Philippine) labour to perform bookkeeping and other low-level roles. The cost reduction is partially passed through to clients, but also used to maintain margins. While accounting lends itself more easily to offshore outsourcing, there is little reason why the mega firms aren’t able to outsource discovery, due diligence or proof-reading overseas.
While law firms may be able to profit from overseas outsourcing, such a move is not without serious risks. The quality of output, especially from Indian suppliers is mixed. Further, sending jobs offshore, even for menial (non-legal) tasks, may lead to a serious talent shortage in future years. If Australian firms utilise offshore labour, there would be a corresponding drop in the demand for Australian graduates, this will result in a diminished talent pool within Australian firms. It would be, in effect, trading short-term profits for longer term succession planning.
Sadly, for the large Australian firms, if the Rio example is any guide, they may not be left with any choice.
The author worked for five years in the corporate and major projects divisions of a leading Australian law firm.