In a ground-breaking move, Rio Tinto is announcing today that it is outsourcing its legal work to India — triggering what is predicted to be an irreversible trend in the legal sector. The international mining group has concluded a deal with CPA Global, a leading outsourcing provider of legal services, and expects savings on its legal costs of up to 20 per cent.

It works like this: Rio Tinto is building a team of CPA lawyers in India who will operate, effectively, as an extension to its in-house legal department. That will free Rio Tinto lawyers to focus on more complex tasks. More ambitiously, on all assignments involving external law firms, Rio Tinto will ask these firms to pass tasks that can be done by lower cost lawyers to CPA people in India and elsewhere.

The approach has already been shown to work. A team of 50 CPA lawyers was assembled in under 48 hours to work with a US law firm on a document review for the Federal Trade Commission. This yielded savings of $1 million (£600,000).

Many of England’s leading law firms have already outsourced back-office jobs, such as accounting and word processing, to India. The difference with Rio Tinto is that it is retaining CPA to undertake substantive legal work, such as contract review, drafting, legal research and document review. What is also different is that the drive to outsource has come not from firms, but from the client; and not for the occasional piece of work — but as a fundamentally new way of working.

Law firms will hesitate to give work to CPA lawyers rather than their own, highly profitable, juniors but they may have little option because of the robust stance being taken by Rio Tinto. If a firm refuses to collaborate with CPA, it can expect its position as an adviser to be re-considered. Tellingly, Rio Tinto says that Linklaters, one of its leading advisers, has responded encouragingly to the new approach.

Why is the arrangement with CPA so significant? Primarily because it is evidence of a profound change in the legal world. In-house lawyers are under great pressure to reduce their head count and to spend less on external law firms, but, at the same time, their workload is increasing.

Clients, in short, need their advisers to provide more-for-less. One way to meet this challenge is for external lawyers to charge less. Most firms are indeed cutting their hourly rates and offering fixed fee arrangements; while many clients are driving down fees through e-auctioning and other devices. For now, it is a buyer’s market.

But the Rio Tinto deal suggests that imaginative pricing may not fully fix the more-for-less dilemma. Lawyers will need to go further and source their work differently, often by using less costly labour to do routine legal work.

Nor is this is not just about outsourcing. Other techniques are emerging: off-shoring, sub-contracting, home-sourcing, relocating and leasing of lawyers. There is also the option of computerisation, using tools such as automatic document drafting and workflow technology. An optimum blend of these options can even be envisaged — this is lowest cost multi-sourcing, when the least costly of techniques are used in combination.

People often assume that outsourcing and the options are applicable only to high-volume, low-value legal work. The Rio Tinto deal confirms this is wrong. There is no legal job whose complexity and value elevates it entirely beyond market forces. The reality is that significant parts of even the biggest transactions and disputes are repetitive and routine; and in-house lawyers will be delighted that these can be packaged out to less costly providers.

Although some law firms have responded positively, the Rio Tinto approach does present a fundamental assault on their business model — hourly billing in a pyramid-shaped organisation. At the top is the partner who passes routine work to junior lawyers whose efforts generate more fee income than they are paid; and the more junior lawyers per partner (the wider the base of the pyramid), the more profitable the firm. But if some work can be undertaken at lower cost by other means (for example, by outsourcing), then profitability drops, and the firm is left with the high costs of luxurious buildings populated by expensive lawyers who are no longer required. The base of the pyramid must shrink. Some new-look law firms will soon spring up, streamlined, free of high fixed costs, and designed to work easily with outsourcing providers.

Other firms will hope that outsourcing is a temporary phenomenon that will lose appeal as the economy recovers. But the recession will highlight for all time that traditional law firms are inefficient, that new ways of sourcing legal work are possible, and that legal costs can be cut dramatically. When these truths are widely recognised, not least in boardrooms, there will be no backtracking to the old tariff.

The author wrote The End of Lawyers? and is Visiting Professor at the Oxford Internet Institute.

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