Part – II – Due Diligence
The ABA ethics opinion focuses on the challenge of ensuring that the tasks are delegated to competent individuals and adequately and appropriately overseeing the execution of the outsourced project. The due diligence checklist is fairly rudimentary:
- Background checks, including educational qualifications of the employees of Outsourcing Firm
- Interviews with the principal lawyers of the outsourcing firm
- Inquiry into hiring practices, the quality and criteria for selection of employees
- Security measures for protection of sensitive client data, including physical security of premises, physical, administrative and logical security of the network, and data destruction.
The New York City Bar Association’s Ethics Opinion that due diligence continues as an ongoing process of supervision, as a duty to communicate with the non-lawyer to ensure understanding of the assignment and review whether the assignment is being carried out according to the lawyer’s expectations.
Cultural and Environmental Gaps
The ABA ethics opinion highlighted the risks of hiring foreign lawyers, whose services might not be competent for U.S. legal support due to any one of many cultural and environmental gaps i,e. Lack of comparability of legal training to American legal system, Lack of cultural inculcation of core American ethical principles, Ineffective policing by foreign disciplinary enforcement system. The American lawyer may still hire the foreign-trained lawyer, but would need to consider the foreign-trained lawyer is just a paralegal for U.S. clients.
Country Risk
Country risk” identifies those business and legal risks that arise from the constitutional and geo-political environment where the foreign lawyer (or paralegal) delivers the work. Particular concerns are Susceptibility of confidential documents and records to seizure in judicial or administrative proceedings and Susceptibility of client data to “cyber extortion” or inaccessibility if the provider and the attorney have a dispute that local courts cannot promptly resolve.
Avoid Surprises to Client
Clients have a reasonable expectation that their attorneys will inform them of “who or what entity is representing them” because LPO involves client confidences and general lacks a high degree of supervision and control. According to the ABA ethics opinion, it is necessary to disclose the outsourcing to the client. Outsourcing and offshoring require “informed consent” when there are risks that a client should be aware of. Florida’s Bar leaves the door open to disclose, or not disclose, a foreign LPO provider’s role, depending on materiality. If a client would think it is material to its decision to entrust the legal services to the law firm, the law firm must disclose the outsourcing. In the context of legal services, the level of information necessary for “informed consent” depends on a client’s sophistication.
Protecting Confidentiality
The ABA opinion strongly advises individual confidentiality agreements. The Florida Bar considers that a law firm hiring an LPO provider should limit the overseas provider’s access to only the information necessary to complete the work for the particular client and bar any access to information about other clients. The Association of the Bar of the City of New York recommends “contractual provisions addressing confidentiality and remedies in the event of breach, and periodic reminders regarding confidentiality.
Avoid Conflicts
Further, the outsourcing service provider should be vetted for possible conflicts of interest in representation of adversaries of the firm’s clients on the same or substantially related matters.
Avoid Overcharges and Fee Disputes
The most controversial element of the ABA opinion lies in its conclusion that the fees charged by a lawyer hiring outsourced LPO services must be reasonable and, if the services are hired by a law firm, the law firm may not mark up the costs of the outsourced service provider. However, some markup would be allowed for overhead expenses (such as office space, support staff, equipment and supplies) and “a reasonable allocation of the cost of supervising these services. The New York City Bar and Florida Bar generally concur in this approach, which is based on a 1993 ABA Formal Opinion 93-379 on the subject of pass-throughs of expenses for non-legal services.
Avoid Ineffective Business Practices
Adopting effective LPO business practices requires an understanding of project management, competitive bidding procedures in complex services, filling gaps in implicit and explicit assumptions about instructions and cost-benefit analysis.
Law firms and corporate counsel may know how to manage paralegals, but legal process outsourcing requires a more holistic approach to client protections. Achieving effective outsourcing may require hiring experienced legal and business consultants to accelerate benefits, reduce risk and provide a clear framework for effective supervision and evolution of the LPO relationship.
