White Collar Workers of the World Unite! You Have Nothing to Keep but Your Jobs!

A Bloomberg story reports that large corporate law firms such as Kirkland & Ellis and Jones Day are facing not merely pressure, but explicit client demands, to send junior level work overseas.

This is a more troubling development than might appear obvious at first blush. This sort of behavior confirms Princeton economist Alan Blinder’s views (dismissed in some circles as unduly alarmist) that 30 to 40 million US jobs are vulnerable to offshoring.

We’ve taken issue with the view that things will get quite that bad (although we don’t dispute that Blinder is directionally correct). Companies and analysts fixate on the wage gap between the US and, say, India, when the total cost savings are considerably less (managing work at a remove involves considerable oversight and coordination, as well as greater possibility of screw-ups). And the majority of companies that have outsourced work say they are disappointed with the results. In addition, the further offshoring goes, the more the wage gap will diminish.

But as with second marriages, hope, and the prospect of those juicy savings, trumps experience.

Law firms in particular may be hoist on their own petard. For years, they were able to in essence re-sell the same standard form documents that were tweaked for the needs of a particular client. Edgar, the SEC’s database, leveled that playing field by making the deal documents produced by top firms public. A lawyer I know regularly debates the merits of various firms’ forms based on his Web trolling, much to the horror of other attorneys. His favorite employment agreement? Linda Wachner‘s, the most egregious.

That cushion (and the well founded suspicion among clients that they were paying for the same underlying product multiple times) may have led to inefficient practices and structures at law firms and has certainly led to client pushback on costs (although at least so far, the very top tier, such as Sullivan & Cromwell, Davis Polk, and Cravath, appear unaffected. However, my probably imperfect recollection is that Davis Polk has sent some work abroad, so perhaps astute proactive moves, along with their considerable prestige, has forestalled client demands).

Offshoring is also eroding the quality of the workforce in the US. There are now hardly any entry level IT jobs in the US. They go to Indian or Chinese software engineers. Similarly, the legal and investment banking tasks sent overseas are the yeoman’s work that historically enabled young people to learn the profession. Fortunately, many service firms aren’t of a scale where this sort of outsourcing is viable, but nevertheless, it reduces the number of domestic training positions. It’s a hollowing out of service industries. The fact that is is now happening at the very large firms that do the most sophisticated corporate work begs the question of where their next generation of partners will come from.

Since outsourcing threatens even high-level career paths, the commonly-invoked remedy of re-training displaced workers may not be all that helpful.

From Bloomberg:

Bruce Masterson, chief operating officer of Socrates Media LLC, asked his outside counsel to customize a residential lease for all 50 U.S. states in 2003. The firm’s estimate: about $400,000. He rejected that price tag and hired QuisLex, in Hyderabad, India, which did it for $45,000.

“It was good quality,” said Masterson, whose Chicago-based company publishes legal forms on the Internet. “We’ve been working together ever since.”

Clients are pushing law firms like Jones Day and Kirkland & Ellis to send basic legal tasks to India, where lawyers tag documents and investigate takeover targets for as little as $20 an hour. The firms are reacting to a trend that will move about 50,000 U.S. legal jobs overseas by 2015, according to Boston- based Forrester Research Inc.

“The objective is to have only the most valuable people in London or New York, and the others in India, China or Columbus, Ohio,” said Robert Profusek, co-head of the mergers and acquisitions practice at Jones Day in New York, who sends low-end work to the cheapest locations and plans to open a document center in India. “Lawyers are service providers. We are not gods.”

Companies with in-house legal departments in India include Wilmington, Delaware-based DuPont Co., San Jose, California-based Cisco Systems Inc., and New York-based Morgan Stanley, according to ValueNotes Database Pvt. The Indian legal services industry will more than quadruple to $640 million by 2010 from $146 million in 2006, Maharashtra, India-based ValueNotes said.

General Electric

General Electric Co. sends about $3 million a year in routine legal work to its Indian affiliate, said Janine Dascenzo, the Fairfield, Connecticut-based company’s managing counsel for legal operations.

“India has very talented lawyers,” she said. “But it’s a misconception that you can just send work there and it gets done. You need proper supervision and security.”

Kirkland & Ellis, the seventh-largest U.S. law firm, works with offshore attorneys at the client’s request, said Gregg Kirchhoefer, a senior partner in the firm’s outsourcing and technology transaction practice.

“I’m not an advocate of offshoring legal services, but having worked in this area for so long, I understand the value of the model,” he said. Typically, clients hire a provider and Chicago-based Kirkland helps manage the attorneys, Kirchhoefer said.

Markup Disclosure

U.S. law firms are required under ethics rules to disclose markups on what they pay foreign attorneys who aren’t licensed to practice law in the U.S. Such rules don’t apply to legal work performed by lawyers admitted to practice in U.S. jurisdictions.

Traditionally, law firms pay U.S. contract attorneys $50 to $65 per hour and bill clients up to three times the fee. For work performed by associates at the law firm, firms typically bill clients about $250 to $400 an hour.

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. “But clients are knowledgeable about costs, and they want to negotiate the markup on these charges.”

Trend

Not every law firm has accepted the trend.

“Some firms are spreading fear, uncertainty and doubt,” says David Perla, co-chief executive of Pangea3 LLC, an offshore legal services company based in New York and Mumbai. “They see any competition as bad and they’ll raise any issues as to why you shouldn’t go offshore.”

Of the 10 highest-grossing U.S. law firms, seven declined to comment on outsourcing. Only one, Chicago-based Mayer, Brown, Rowe & Maw, said it doesn’t use the practice.

“I don’t think law firms are ashamed of offshoring,” Perla said. “The firms that are having success with it aren’t talking, because they view it as a competitive advantage.”

Of about 100 third-party legal services providers in India, clients give top marks to Pangea3 and New York-based Integreon Managed Solutions Inc., according to The Black Book of Outsourcing, a survey published in July by Clearwater, Florida- based Brown-Wilson Group Inc.

About 80 percent of Pangea3’s clients are corporations and 20 percent are law firms, Perla said.

`In-House’

“Some firms are coming to us because in-house clients suggested it or pressured them,” Perla said. “Others want to come to the client first and offer a solution.”

Integreon, which provides legal services in India, the Philippines and Fargo, North Dakota, has long-term contracts with about 45 companies and 15 law firms, said CEO Liam Brown.

Law firms contribute 45 percent to offshore revenue, while corporate law departments contribute 36 percent, ValueNotes said.

Integreon recruits lawyers from second-tier law schools in India and managers from the litigation practices of firms such as New York-based Skadden, Arps, Slate, Meagher & Flom, Brown said. After training in India, managers relocate to New York or Los Angeles.

In India, legal education is based on common law, conducted in English, and requires two or three years of classes. The country produces about 80,000 law school graduates a year, according to ValueNotes, compared with about 44,000 in the U.S.

Offshore companies charge $10 to $25 an hour on low-end work and $25 to $90 an hour on advanced jobs. Junior Indian lawyers might earn as much as $8,160 a year, according to ValueNotes, compared with the $160,000 average salary for associates in major U.S. cities.

Janice D’souza, 26, a lawyer in Pangea3’s litigation and research department in Mumbai, says she makes three times as much as she would at an Indian law firm.

“At an Indian law firm, generally your potential is not recognized at an early stage,” D’souza said. “Here it’s talent- based. In the near future, I think I will be a department manager.”

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5 comments

  1. Anonymous

    Please, “begs the question” does NOT mean “suggests the further question.” It means AVOIDs the question, or more fully that someone is making an assumption they shouldn’t. If you’re gonna boast about graduate degrees in your user profile get these things right.

  2. Yves Smith

    If you go to the New York Times website, which is considered to be the arbiter of modern journalistic usage, and type in “begs the question” in the search field, you will see that every use (at least on the first page, I didn’t bother going further) is the same as mine.

    The Times has an army of copy editors, so it this really bothers you, I suggest you take it up with them first.

    And as to the expression’s origins, I suggest you have a look at this:

    http://en.wikipedia.org/wiki/Begging_the_question

    It appears, that as for many words and expressions (“sophisticated” once meant shallow and showy), usage has migrated, but it did not originally mean what you indicated either.

    Get the facts before you start shooting.

  3. Anonymous

    Back to the topic at hand. Outsourcing probably started when large accounting firms began giving advice to corporate customers. The approach is financial but the effects are multifaceted.

    A company that outsources heavily interrupts it’s knowledge base. Eventually, no one knows how to get from point A to Z. Paralysis sets in. Originally, the concept of outsourcing was a reasonable method of managing company peaks and valleys. Around an 80% core were 20% contractors. Contractors provided an extra pair of hands or supplied special skills not frequently needed. Somewhere along the line, managers forgot how to manage the core group or were never trained, possibly a result of job hopping when the social contract between companies and their employees eroded.

    Companies became enamored with the idea of wholesale movement of departments and management upon the advice of the accounting consultants. What you are left with are very highly paid CEOs that don’t really know what is going on (Ken Lay), folks that know how to put numbers into Microsoft Project and the accounting consultants. In the mean time, the wealth of one nation trickles down into another nation, a sort of reverse colonialism. Too bad the folks in the Middle East don’t realize what they are missing out on.

    The solution? Greed is Good. Everyone wants a piece of the pie without adding value. Eventually wholesale outsourcing will become too expensive and the lack of management of the process will become all too apparent.

  4. Chris

    Anecdotal evidence is fun and easy too.

    And Blinder’s ‘evidence’ that 40 million jobs are “vulnerable to off-shoring” is one of the top ten most asinine statistics I’ve ever heard out of a respectable economist. I find this kind of alarmism extremely silly. The United States has one of the best educated, most productive, and flexible labor pools in the world. Just because a handful of firms have been able to realize location economies by sending work to India doesn’t make it a trend.

    I just want some reasonable, statistically viable evidence. THEN we can discuss how it’ll effect the American economy.

  5. Yves Smith

    Chris,

    The “best educated” workforce statement is not true, and “among the best educated” is debatable. Chinese students start learning foreign languages in elementary school. Similarly, they are taught math concepts a good two years before US students are, even in elite schools.

    Our students have been getting middling to lousy international rankings in math and science skills for years

    Similarly, most European countries have a vocational track for students that don’t intend to go to college. US high schools basically warehouse them. And (yes it’s anecdotal) but in Australia, almost without exception everyone I met in that was not college educated (taxi drivers, clerks, secretaries, data entry types) was without exception better read, better at critical thinking, and more articulate than their US counterparts

    Similarly (and this was as of a few years ago) Japanese car manufacturers were complaining they were having to locate auto plants in Canada because the quality of the US workforce was too low. Japanese bank managers who have run sizable operations in the US have told me privately that while the education of people at the top (basically, elite to good colleges) in on a par with Japan, the average is far lower.

    If you click through to the WSJ article that referenced Blinder, there is a table which breaks out the estimates of the most vulnerable workers by industry. The online version for some reason does not have a table that was in the print version, which showed how he came up with his estimate. He does have an analytical basis for his views, whether you agree with it or not. I’ll admit I haven’t drilled through to the underlying work, but he did not pull his numbers out of the air.

    And I did say I thought his forecast was too dire, because outsourcing and offshoring are more difficult and have lower all-in payoffs than most people realize.

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