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Is There An Ethical Obligation toPass On Cost Savingsfrom Outsourcing?

by Carolyn Elefant on June 27, 2005 · 14 comments

in Business Models, Ethics & Malpractice Issues, Outsourcing & Hiring

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Are lawyers required to pass on cost savings from legal outsourcing (or any other cost savings measures to clients?  Rees Morrison considers this question, first raised in another article on outsourcing to India (Daniel Brook, Legal Affairs, May/June 2005 issue)  The article quotes Thomas Morgan, a law professor at GW as stating that bar association ethics rules require law firms to pass on to clients cost savings from outsourcing.

Like Morrison, I’m not familiar with the rule that Morgan mentions.  In fact, according to this piece by Lisa Solomon, an attorney specializing in providing outsourcing, the opposite is true:  most bars permit lawyers to charge a reasonable premimum or profit for legal research and writing in excess of the actual cost.

If you outsource legal research, do you bill the costs dollar for dollar or take a mark up?  And what about outsourced paralegal or secretarial work?  Do you charge for that or roll it into overhead, just as many law firms roll the costs of permanent staff into overhead.  What’s the most equitable — and ethical — result?

Update: There’s a discussion on this topic going on at David Giacalone’s f/k/a and I’ve chimed in there, as has  Lisa Solomon.

  • http://blogs.law.harvard.edu/ethicalesq/2005/06/28#a4090 f/k/a

    when outsourcing, just pass on the cost

    A law firm wouldn’t charge a client a “profit margin” above the fee of an expert consultant or witness, and therefore should not do so with fees for outsourced legal services.

  • http://blogs.law.harvard.edu/ethicalesq/2005/06/28#a4090 f/k/a

    when outsourcing, just pass on the cost

    A law firm wouldn’t charge a client a “profit margin” above the fee of an expert consultant or witness, and therefore should not do so with fees for outsourced legal services.

  • http://www.QuestionOfLaw.net Lisa Solomon

    Anyone who questions whether it is ethical to charge a reasonable premium or profit for legal research and writing in excess of the actual cost should read the following ethics opinions: ABA Formal Op. 88-356; Alaska Bar Ass’n Ethics Op. 96-1; Calif. State Bar Ass’n Formal Op. 1994-138; Colo. Bar Ass’n Ethics Op. 105; D. C. Bar Op. 284; Ga. Formal Advisory Op. 97-1 (June 5, 1998); ISBA Op. No. 98-02; Oliver v. Board of Governors, Kentucky Bar Ass’n, 779 S.W.2d 212 (Ky. 1989); S.C. Op. 91-09 (1991); Virginia Legal Ethics Op. 1712 (July 22, 1998); and Wis. Op. E-94-4. Many of these opinions adopt ABA Formal Op. 88-356 in whole or in part, and many also note the importance of supervision by the hiring attorney.
    These opinions address the issue in the context of questions concerning the use of “contract” or “temporary” lawyers. A lawyer admitted to practice in at least one US jurisdiction, who happens to provide legal research and writing services only (as distinguished from doing depositions or making court appearances) is a “temporary attorney” covered by these opinions.
    Furthermore, as I point out on my website, regardless of whether or not an attorney chooses to charge the client more than the attorney pays for legal research and writing services, outsourcing is still cost-effective for the client, since even a rate that includes a reasonable profit to the attorney will generally be less than the attorney’s own hourly rate. Therefore, outsourcing legal research and writing leads to an equitable result. In fact, the result may be preferable from the client’s perspective: an attorney who does only legal research and writing for a living, and thus has expertise in those areas, can frequently perform research more efficiently, and write a better brief, than the hiring attorney.
    Finally, I note that the Legal Affairs article referenced in your post simply states that “Thomas Morgan, the professional responsibility expert, says bar association ethics rules require law firms to pass on to clients cost savings from outsourcing.” The article does not state the basis for Mr. Morgan’s opinion.

  • http://www.QuestionOfLaw.net Lisa Solomon

    Anyone who questions whether it is ethical to charge a reasonable premium or profit for legal research and writing in excess of the actual cost should read the following ethics opinions: ABA Formal Op. 88-356; Alaska Bar Ass’n Ethics Op. 96-1; Calif. State Bar Ass’n Formal Op. 1994-138; Colo. Bar Ass’n Ethics Op. 105; D. C. Bar Op. 284; Ga. Formal Advisory Op. 97-1 (June 5, 1998); ISBA Op. No. 98-02; Oliver v. Board of Governors, Kentucky Bar Ass’n, 779 S.W.2d 212 (Ky. 1989); S.C. Op. 91-09 (1991); Virginia Legal Ethics Op. 1712 (July 22, 1998); and Wis. Op. E-94-4. Many of these opinions adopt ABA Formal Op. 88-356 in whole or in part, and many also note the importance of supervision by the hiring attorney.
    These opinions address the issue in the context of questions concerning the use of “contract” or “temporary” lawyers. A lawyer admitted to practice in at least one US jurisdiction, who happens to provide legal research and writing services only (as distinguished from doing depositions or making court appearances) is a “temporary attorney” covered by these opinions.
    Furthermore, as I point out on my website, regardless of whether or not an attorney chooses to charge the client more than the attorney pays for legal research and writing services, outsourcing is still cost-effective for the client, since even a rate that includes a reasonable profit to the attorney will generally be less than the attorney’s own hourly rate. Therefore, outsourcing legal research and writing leads to an equitable result. In fact, the result may be preferable from the client’s perspective: an attorney who does only legal research and writing for a living, and thus has expertise in those areas, can frequently perform research more efficiently, and write a better brief, than the hiring attorney.
    Finally, I note that the Legal Affairs article referenced in your post simply states that “Thomas Morgan, the professional responsibility expert, says bar association ethics rules require law firms to pass on to clients cost savings from outsourcing.” The article does not state the basis for Mr. Morgan’s opinion.

  • http://blogs.law.harvard.edu/ethicalesq/2005/06/29#a4100 f/k/a

    our outsourcing decision affirmed (by me)

    Lisa Solomon and Carolyn Elefant have disagreed with yesterday’s post “when outsourcing, just pass on the cost.” I believe a lawyer/firm should (1) tell a client whenever legal services are going

  • http://blogs.law.harvard.edu/ethicalesq/2005/06/29#a4100 f/k/a

    our outsourcing decision affirmed (by me)

    Lisa Solomon and Carolyn Elefant have disagreed with yesterday’s post “when outsourcing, just pass on the cost.” I believe a lawyer/firm should (1) tell a client whenever legal services are going

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  • Nathan Flach

    I was reviewing the thread on whether there was an ethical obligation to pass on outsourcing costs to clients. I know that my comment might be stale, but there is a relevant ABA opinion that I didn’t see anyone discuss.
    Check out ABA Formal Op. 00-420. Since the discussion dates back to 2005, and this opinion was issued in 2000, I thought it might be helpful to you and retaining lawyers for your contract services.
    It is squarely on point and seems to answer the question very specifically. It basically says that if the services contracted for are billed as a service fee as opposed to an expense, then the retaining lawyer may markup the services. Furthermore, the opinion suggests that disclosure to the client is desirable, but not required, even when there is a markup, as long as the service is not billed as an expense. At least, that’s my interpretation.

  • Nathan Flach

    I was reviewing the thread on whether there was an ethical obligation to pass on outsourcing costs to clients. I know that my comment might be stale, but there is a relevant ABA opinion that I didn’t see anyone discuss.
    Check out ABA Formal Op. 00-420. Since the discussion dates back to 2005, and this opinion was issued in 2000, I thought it might be helpful to you and retaining lawyers for your contract services.
    It is squarely on point and seems to answer the question very specifically. It basically says that if the services contracted for are billed as a service fee as opposed to an expense, then the retaining lawyer may markup the services. Furthermore, the opinion suggests that disclosure to the client is desirable, but not required, even when there is a markup, as long as the service is not billed as an expense. At least, that’s my interpretation.

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