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Corporate hard times may not be all bad news for law firms. The economic crunch is causing more and more companies to change the way they do business, and that has given rise to a new niche practice area for law firms: helping clients outsource parts of their business to cheaper labor markets, often overseas. Many of the law firms in The National Law Journal’s survey of the nation’s 250 largest law firms have created specific outsourcing practices. In recent years, Jones Day, Skadden, Arps, Slate, Meagher & Flom, Morgan, Lewis & Bockius and Latham & Watkins have all recognized the profit of expanding an outsourcing practice to attract new clients and serve existing ones. “Clients know about outsourcing and are looking for counsel that have real expertise,” said Allen Klein, an outsourcing partner in the Washington office of Latham & Watkins. Outsourcing lawyers typically advise clients on the customer side of the transaction. Lawyers describe it as a “handholding process,” from matching the client with the right outsourcing vendor to dealing with a range of issues, including regulatory, cost-cutting and personnel and software agreements. There may also be a host of industry concerns that creep up in fitting an outsourcing agreement to a client’s specific business: for example, claims and collections for an insurer or transcribing doctor’s notes for a health care provider. Three firms — Washington’s Shaw Pittman; New York’s Milbank, Tweed, Hadley & McCloy; and Chicago’s Mayer, Brown, Rowe & Maw — led the procession into outsourcing in the mid- to late-1990s. Firms that have followed their lead are finding clients from a broad array of industries: from manufacturing to financial services to health care. “There’s a lot of activity, and firms look at that and say we want our share,” said John Funk, a partner in the Dallas office of Jones Day, who was brought in six years ago to build that firm’s practice. The outsourcing boom started in the area of information technology, according to outsourcing lawyers. Traditionally, issues like software licensing and computer support fell into a firm’s technology practice. Many technology groups, therefore, contributed to the rise of the specialized area of outsourcing. In recent years, a new area of outsourcing has cropped up in business processes outsourcing. This includes administrative functions, human resources and customer-service centers. Analysts predict a growth rate of about 20 percent a year in IT outsourcing. The growth rate for BPO is much higher, lawyers say. Firms are finding that the stamp of a strong outsourcing practice can be a competitive advantage to complement a global practice and attract big clients. “For firms like Jones Day, it plays to our strengths as a law firm for corporate America with an international footprint,” said Funk. Latham identified outsourcing as a strategic area for a similar reason. “It complements our global platform and blue-chip client base,” said Klein. Firms that have built up a productive outsourcing practice have seen their business come from two main sources: new clients who sign on specifically for outsourcing expertise, and existing clients who see a way to benefit from a new business model. “It’s … bringing in new business based on having a reputation in outsourcing,” said Jennifer Mattingly, who was hired by Pillsbury Winthrop last year to build its outsourcing group. “And the practice also lends itself very well to cross-selling within the firm’s client base.” Pillsbury’s practice grew out of its London office, which, as the gateway to the European Union, holds an important connection for law firms trying to develop outsourcing groups. The London market was also early in adopting an outsourcing model both in its private sector and within British government agencies, according to lawyers. In firms such as Pillsbury that have developed an outsourcing practice, the lawyers are not centrally located. Rather, a handful of lawyers that specialize in outsourcing are scattered in offices around the globe. Firms that have turned a deaf ear to the outsourcing eruption may be trying to service a client’s needs through their technology or corporate groups. But outsourcing lawyers warn that clients will see through it. These deals require a unique skill set, they say. “With the corporate downturn, firms began to see outsourcing as a way to fill that gap, and a lot of lawyers who were either tech or M&A lawyers tried to rebrand themselves,” said Mattingly. A hybrid of technology and corporate skills, however, cannot prepare a lawyer for the nuances that an outsourcing deal requires, specialists say. For example, if you represent the customer and push a vendor too hard to accept your terms, the contract may not work because it won’t be profitable for the vendor, explained Mattingly. “It’s really a balance to protect your client and develop a workable relationship,” she added. A good outsourcing lawyer has to understand the commercial end of the transaction, know the marketplace and be familiar with the vendor community, say these lawyers. An outsourcing deal is not like an acquisition where it is final once the parties sign on the dotted line. The contract can last up to five years and has to be workable for both parties. “These deals are not a snapshot,” said Latham’s Klein. Over five years, the substance of the contract will change. The technology that the vendor uses to perform the services will change, as will the customer’s business and processes. Law firms like outsourcing deals because the revenue is high. The deals can last a long time and generate work for firms’ other areas, like employment or tax law, in lending support to the central outsourcing lawyer. But if the key to building a good outsourcing practice is finding the right talent, recruiting may prove the biggest hurdle for a firm. “I hate to use the word fraternity,” said Funk, “but there really are very few of us who do this and we all know each other.” Funk, who has been an outsourcing lawyer for 25 years, said he feels like one of the original club members. From Milbank, Hadley, Tweed & McCloy he moved to Jones Day, where he is often approached by other firms with lateral offers. Ditto for Mattingly. “I’m approached by firms quite regularly,” she said. “There really aren’t a lot of lawyers out there who do this.” Mattingly got her start at Shaw Pittman and has been an outsourcing lawyer for 10 years. Latham has made a priority out of recruiting talent to its outsourcing group, said Klein. The firm has 30 “outsourcing specialists” who have been involved in 35 deals in the past 12 to 15 months. In the last year and a half, Latham has recruited four outsourcing partners and a number of associates. “It is a very competitive market,” acknowledged Klein. “Fortunately, the available talent has viewed us favorably.”

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