Legal outsourcing is coming of age. Tougher economic conditions are bringing mounting pressure to reduce the price of legal services and one clear way of cutting costs is by allocating the work to cheaper suppliers. This is of particular interest to in-house lawyers who are working hard to reduce their expenditure on external law firms while streamlining their own departments.

While this kind of cost reduction can be achieved in various ways (by setting up offices in cheaper locations or making more use of home workers), it is the specific technique of outsourcing that has the legal market most excited. At its heart, this involves sub-contracting work to locations where the costs of production - especially labour costs - are lower.

Both back office work and the front line provision of legal services can be outsourced and law firms are already outsourcing many kinds of back-office work such as word processing, graphics and design, accounting and IT. India and The Philippines are the most popular current locations for this kind of work. When this works well, the advantages compared to doing it in house in the US or the UK are clear - a less costly service that takes up less management time and is more resilient and convenient It also frees the law firm to do what it does best – legal rather than back office work.

The outsourcing of legal service itself is more challenging. But while many lawyers are intuitively uncomfortable with the idea that some of their work might be parcelled out to third party providers, the reality is that much of the work that lawyers do today is relatively routine and does not need to be kept exclusively to traditional law firms.

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By outsourcing the more routine elements of legal projects, it is possible to reduce overall costs to clients substantially, both in modest and large scale transactions or disputes. Aside from the savings, a further attraction is that outsourcing helps both clients and law firms sidestep the growing difficulty of recruiting and retaining good people to do routine legal work.

It is becoming clear that outsourcing legal work is not an all or nothing phenomenon. To outsource effectively, a firm must analyse and separate out all the processes that lawyers perform on a transaction or case. The firm can then work out which processes lend themselves to outsourcing and which do not. Many clients are now looking for law firms to offer a smart combination of outsourced and bespoke services under a single wrapper.

Most legal process outsourcing, as it has come to be known, currently involves routine work undertaken in English, using Anglo-American common law legal concepts. Examples include discovery in complex litigation, research in patent applications and the review and comparison of a large number of similar contracts as part of due diligence exercises.

India - which benefits from having a large number of well-qualified English speaking lawyers who have grown up in a common law environment - is the world's largest supplier of outsourced legal services. Junior Indian lawyers are relatively inexpensive to employ - indeed some say the total employment costs of an Indian lawyer working in India are one sixth of their equivalents in London. Many Indian law firms have spotted this opportunity and set up their own outsourcing operations, which operate in parallel with their core legal businesses.

A different kind of outsourcing is also playing out in jurisdictions such as New Zealand, Australia, South Africa and Canada. Law firms in these countries contain many partners who were trained at major firms in London or New York. In principle, they can deliver work to a high standard, but on the back of a lower cost base. For the time being, outsourcing to these jurisdictions tends to be on a relatively ad-hoc basis, but it is likely that this market too will develop in a more structured way.

While the business case for outsourcing legal services is becoming increasingly compelling, there are risks and downsides that lawyers and their clients must address. One immediate concern is quality. With the inevitable loss of control over work being outsourced, all interested parties should be comfortable that there are procedures and practices in place that ensure quality standards can still be met.

But what if the service that is delivered is incorrect and this gives rise to loss? There are interesting questions here about the allocation and extent of liability of all players involved. And there are insurance issues too: major law firms carry professional indemnity cover, which may not extend to outsourcing service suppliers.

There are also regulatory challenges. Lawyers are subject to a wide range of professional duties – for example, rules governing confidentiality and the handling of conflicts of interest. Outsourcing suppliers are not, by profession, constrained in the same way so these restrictions and safeguards may need to be introduced in contracts. This absence of regulatory constraint may be the reason that some US clients insist that certain types of work - for example, investigatory work - be done entirely in house and on the premises of law firms.

Broader issues of responsibility arise as well. Outsourcing can lead to job losses in the home jurisdiction and, if suppliers are located in countries with weak employment protections, to quite different risks to workers – of exploitation, for instance. The reduction of the cost of legal service may sometimes come at an unacceptable cost in human terms.

These hurdles to legal outsourcing are serious but none is insurmountable. Working together, motivated law firms and cost-conscious clients who are eager for change should be able to finesse some workable solutions. Whether the cost savings realised bolster the profitability of the law firms or reduce the legal expenses for clients, or perhaps a mixture of both, will depend on what emerges as standard practice in the market.

Looking forward, it is unlikely that the ongoing efforts to reduce the costs of legal service will stop at outsourcing. IT will no doubt play a growing role. Just as outsourcing enables routine work to be done more cheaply, so too can technologies such as automatic document production and workflow systems. Whereas outsourcing costs are likely to rise as a consequence of inflation in the more popular outsourcing locations in the coming years, in contrast, technology costs will tend to fall over time. Accordingly, those who are considering outsourcing should always investigate whether there is a technological alternative that may be less costly and allow lawyers and clients to avoid some of the tricky legal and regulatory obstacles.

Stephen Denyer is International Development Partner at Allen & Overy

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