Outsourcing is big business! Today, just about every firm today outsources something. Big firms, little firms, manufacturers, accountants, lawyers and technology firms. All big corporations perform certain common functions: payroll, accounting, PC support, and so on. When you’re ready to outsource you identify the functions that can best benefit from outsourcing, test that your list makes sense, review the most likely vendors and then sign an agreement. That’s the standard process. But not for legal outsourcing. The legal profession has gone off on a different and dangerous path. Can they get back on track?

The culture of the large American legal firm developed more than a century ago, and a lot of that development came from a peculiarity of the legal industry. Over the last century, the largest American (and European) businesses have moved from private ownership to being almost exclusively publicly traded corporations. However, for legal firms, the path to public ownership was barred. Law firms can sell shares to lawyers within the firm, but not to the public. Legal firms overwhelmingly became partnerships, organizations controlled by the founders and major rainmakers. Clients of the firm are for all practical purposes “owned” and managed by individual partners. This culture of partner client relationships creates silos inside of  large legal firms.

In an earlier age, when life was simpler, this culture was effective. Each silo is bound by some company rules, but it maintains significant autonomy. That was all well and good, until the early 80s. Document review, an important but relatively minor activity during a lawsuit where documents requested by the court are collected, read and classified into various collections. Before the arrival of the computer age, this was a relatively simple process, involving a few thousand documents. Suddenly, the nature of computers caused an exponential increase in document volume… especially after the corporate world discovered e-mail! Today a document review in large corporations can involve 5,000,000 pages or more.

The management of a corporate lawsuit used to require few junior lawyers or paralegals, and a more senior lawyer to answer questions. But as review sizes grew, law firms lacked the junior lawyers… and space.. for a large review. A review was no longer a boring and repetitive task to heap onto junior lawyers. Now it was a major project that required the procurement of temporary lawyers, space, and equipment. By the late 90s, corporate clients were noticing that reviews were a rapidly growing legal expense. Some financial firms, specifically Investment Banks, having undergone major internal cost reduction programs themselves, asked their legal firms, “Why aren’t you outsourcing?”

Massive tobacco industry lawsuits drove document reviews to new heights. Teams of hundreds of lawyers would spend years shuffling and re-shuffling documents in the doc review for a single case. Law firms were forced to investigate outsourcing…. First onshore and then offshore. This was a step in the right direction. But then the silos we discussed exerted their influence. Instead of a creating a single high quality, very efficient “document review machine”, law firms developed an outsourcing process that followed their legal culture. Individual lawyers negotiated outsourcing agreements on a case by case basis. By bypassing central administration (if it existed,) cases were kept moving and clients were happy… at least until the bill arrived. While this was horribly ineffective outsourcing, it was still a better option than any other internal solution.

By the turn of the millennium, outsourced discovery and legal review were becoming big business. What was a $300 million business in 2000, grew into a $3 billion market by 2011 and is expected to be $10 billion by 2017. Document review is now a high volume, multi-billion dollar market but is still treated with a “one-off” mentality. This miss-match in the business and the process just doesn’t work. Consider how this “one-off” process has impacted legal outsourcing:

CASE BY CASE: Individual lawyers match the case to the vendor resources,  usually based on their familiarity with the vendors rather than the use of vendor performance metrics. Every lawyer has a different selection process, which includes determining which tools will be used, which vendor will staff the review, AND which vendor/tool will be used to host the document collections. The combination of these factors (lawyer, tools, hosting site, contract conditions, linear vs. TAR, etc.) makes it difficult for any individual lawyer to compare or improve cost, time or results…. Since they only use a limited set of each. Yet, a centralized function (say, procurement) might be able to collect some metrics to show if any specific confirmation of tools and vendors is dramatically more effective.

DIFFERENT TOOLS: Hundreds of review tools are on the market, each with different features, licensing agreements and costs. If tested, some tools would be found to be more accurate or faster. A tool with a higher initial cost per user could easily justify the higher cost if reviewers processed more documents per hour. This would reduce the hours billed, and (depending on how the tool is billed) might require fewer licenses or licenses for a shorter period of time. The number of “documents reviewed per hour, per reviewer” is the key factor for determining the efficiency of the review, and is known to vary dramatically between tools. In a linear (manual) review, a reviewer is expected to examine 40 documents per hour or more. Linear tools have limited automation, such usually have at least basic document sorting and organization features. Advanced tools claim reviewers can complete 200 or more document per hour.

Full blow document review automation (often referred to as Technology Assisted Reviews, or TAR) can read thousands or millions of documents on day one, and then automatically do the reviewer’s job of tagging the documents, with little or no “reviewer” time. While the very conservative legal industry is only beginning to embrace true TAR systems, that provide a dramatically higher quality document review at a significantly lower cost.

CONTINUOUS IMPROVEMENT: Outsourcing is the right step in an ongoing process of improving efficiency. When an outsourcing program begins, several competing processes may be identified. Over time, less effective processes are stripped away and the remaining processes are standardized and become more efficient… even if they stay in-house. Eventually, best processes are identified and applied, and improvement initiatives are developed for any problems that arise. The fractured and siloed management of legal review works against the usual cycle of continuous improvement, making new efficiencies difficult to implement. Individual vendors do learn how to work effectively with a given client, but when a best practice is learned by one vendor, this information is rarely shared with other groups and vendors. With many different products used, expertise is dispersed, and new innovations become unnecessarily rare.

Understandably, the old silo culture is under pressure to change. Some law firms have created centralized, global, outsourcing programs. But his is more likely to be the case for support services, than document review.  Still, the rise of Global Procurement is exposing the many inefficiencies, and the many opportunities to reduce cost. However, to be effective, each legal group’s connection with their own vendors must be broken, and the financial control over these contracts must be moved to an objective contract management group, that can leverage the entire firm’s spend in document review.

PROJECT MANAGEMENT: Tobacco cases started the current trend in mega-lawsuits, but billion dollar lawsuits have taken on a life of their own and have become common. Tobacco litigation is being replaced by lawsuits over: psychiatric drugs, telecommunications, mortgage fraud, the general malfeasance by banks during the collapse of the financial industry. Mega-lawsuits don’t just require a larger number of document reviewers. These reviews may go on for years. That means: more managers, longer-term management, replacing and resizing staff, retraining staff, changing instructions, communicating changes, etc. A review that requires 10 times more staff requires more than 10 times the management.

NEW CHALLENGES: The cost for legal review is growing because the legal industry has not kept up with technology and best practices. Linear review dominates, while more modern TAR is relatively rare, even though TAR produces more accurate results at a lower cost. The explosion in email created the rise in review costs, but email (for the first time in 20 years) is finally on the decline. Rather than going away, email has transformed into social media: Facebook, twitter, LinkedIn and other social media sites. Law firms took decades to understand eDiscovery, which largely deals with information in their client’s hands. Now there is more information in the “Cloud”, outside of the client’s control. Social media requires new tools and different skills. Consider a gaffe on Facebook and Twitter, from Reed Hastings,  Netflix’s CEO. He posted Netflix’s new July record of 1 billion hours of content viewed. Hey, new record… congratulations! Or is that a private message to a privileged group or individuals (insider trading). Or was it a CEO memo to shareholders, or a new release that could manipulate the streaming content market? Whatever it was, it wasn’t vetted by compliance. Ouch!  Legal needs a partner to deal with the issues raised by social media and the “Cloud”.

COST: The cost of litigation rose sharply between 1998 and 2011, increasing from $166 to $281 billion. This rise might have been curtailed if lawyers used the latest technology, or if they outsourced more aggressively. Because of the down economy, many legal firms could rely on outsourced local lawyers and law students to perform reviews. This has worked for years, and the economy is improving, but clients are not showing an appetite for higher rates. If anything, rates continue to be under pressure from clients for lower rates, while law firms are under just as much pressure to raise rates. Some domestic lawyers have been employed at just above minimum wage. Even so, the offshore rate has been lower still. Doc review work has continued to move offshore. However, the record low prices in India provided a one-time benefit. The worldwide economic collapse forced offshore rates to record lows. Yet, offshore inflation has continued to be two to three times that of the US. At some point, prices must rise.

At its most basic, legal review is merely the process of reading documents and finding the ones you need. Today you hire many people to read through the pile, new instructions are periodically issued, and the work is frequently re-worked. This is an incredibly inefficient process. Compare this to a nearly identical process that you perform every day, looking for documents on the Internet. The Internet (or Cloud or Web) is a vast collection of documents and other media. When you want something, you type in or speak a search request, and seconds later Google provides results from its collection of trillions of documents. Search engines aren’t perfect, but they are better than any other method of navigating these documents. Yahoo!’s early search engine relied on human beings entering website information, just as document searches rely on lawyers. But Yahoo abandoned human based “indexing”, decades ago, and built computer-based search engines.

The average legal review takes months to complete and costs nearly $2,000,000 to search a few million documents. Every Google search examines billions to trillions of documents in just seconds. The cost? FREE. A legal review is more complicated than the average Google search, but TAR tools can provide accurate and inexpensive legal reviews. Most legal firms haven’t grasped how great their failure is, producing poor quality results while charging clients millions of dollars more than alternatives. The legal industry gets an “F” for document review. But, don’t worry! Social media and an economic recovery bring new challenges AND the chance to earn a new grade. The creation of documents both inside and outside of the corporation is growing and changing faster than law firms can manage. Law firms need to partner with LPO providers and other knowledgeable experts to meet these challenges. At least, that’s my Niccolls worth for today!