America the Gutted: when outsourcing isn't a zero-sum game

For lawyers and other legal professionals working on Wall Street, or in Washington, Boston, San Francisco and other high-cost regions of the United States, the law industry is changing rapidly. But that's not all bad news.</p>

For lawyers and other legal professionals working on Wall Street, or in Washington, Boston, San Francisco and other high-cost regions of the United States, the law industry is changing rapidly. But that's not all bad news.

BOSTON — Dayton, Ohio. Nashville, Tennessee. Wheeling, West Virginia.

These aren't the first places that come to mind when you think of booming centers of commerce.

But as large parts of the American landscape have been gutted by outsourcing and technology, these locations are presenting unexpected opportunities.

That's because the cost of labor has sunk right along with the cost of living, making lower-cost cities newly attractive as places to set up shop for cash-strapped global law firms.

Rather than shipping work overseas, at least six major US law firms have opened global offices in struggling US cities — Dayton, Nashville and Wheeling among them. 

Call it “Amerisourcing.”

A pioneer of this trend is Orrick, Herrington & Sutcliffe, a San Francisco-based international law firm with more than 1,000 lawyers spread over 21 offices worldwide.

Its day-to-day administrative operations, however, aren't in Beijing or New Delhi. Since 2002, the company has been run out of Wheeling, W. Va., a former steel hub where the population has been waning since the Great Depression.

By all accounts, and despite the hand-wringing of law school graduates, Orrick's 350-person Wheeling facility has been a grand success. 

According to the Pittsburgh Post-Gazette, the Wheeling facility generates Orrick an estimated savings of $10 million to $15 million a year. Orrick CEO Ralph Baxter called the move "one of the smartest decisions we've ever made.”

To be precise, the Wheeling office provides mostly back office support — like human resources, accounting and the like — for the lawyers who work elsewhere.

But it is also home to a slew of "career associates," who aren't eligible for partnership and who earn less than traditional associates. But these are lawyers, all doing legal work.

Though a risky move that received much criticism initially within the legal world, Orrick's Wheeling office has since been credited with helping pull Wheeling out of a slump. City leaders were quick boosters of the plan, and local organizations raised the $10 million necessary to renovate the Wheeling Stamping Building where the firm now resides.

The Stamping building itself illustrates the promise of the trend. The four-story building began as a metal stamping factory. In the 19th century, as a wholesale warehouse, it became the center of the Ohio Valley's grocery industry. It was literally days from being demolished when Orrick moved in.

Inspired by Orrick, several other major law firms have followed suit in recent years. 

“Within this industry, in the law firms, I would tell you that most of the Am Law 50 are now thinking about this,” said Mark Klender, a strategy and operations principal with Deloitte consulting, referring to the country's 50 biggest law firms.

“That’s not to say that they will all do this,” he added, but “there’s a trend. This should be a wave over the next five years.”

Deloitte has helped a handful of the major law firms open offices in lower-cost US cities — including WilmerHale, a Boston-based firm that opened a facility in Dayton, Ohio, in 2010; Pillsbury Winthrop Shaw Pittman, a New York-based firm that set up shop in Nashville, Tenn. in July of this year; and Bingham McCutchen which is due to begin operations in Lexington, Ky. by the spring of 2013.

Economic pressure is the clear driver. Clients are simply unwilling to pay what they used to pay, according to Brad Christmas, COO of Dow Lohnes, a DC-based law firm.

“Since 2008, the supply of lawyers has exceeded the demand, and so the prices become more competitive,” he said. “The general counsel at these big corporations are just not willing to pay for a very expensive lawyer in a major metropolitan area to do what can be done more inexpensively in lower cost markets.”

The number of law graduates in the US has increased five-fold since 1963, according to the American Bar Association. As a result, the percentage of new lawyers finding jobs has dramatically declined — plunging from 85 percent to 63 percent between 2011 and 2012.

And the savings associated with operating in one of America's downtrodden cities are significant. Real estate provides about 20 percent of the savings, according to Deloitte's Klender. 

Office space goes for $60 to $80 per square foot in high-cost cities like Boston and New York, he said, while comparable space costs only $20 per square foot in a city like Nashville.

Labor costs, however, make up the biggest part of those savings.

“If you look at the Bureau of Labor stats, places like DC, New York, San Francisco, LA, those are anywhere from 20-30 percent above the national average," said Sean Whelan, Pillsbury CFO, "and Nashville’s, depending on what statistics you look at, could be anywhere from 4-6 percent below the national average."

Pillsbury, newly opened in Nashville, houses 160 employees there so far, or 10 percent of its overall workforce.

For now, Pillsbury has only relocated non-legal processing operations — finance, accounting, IT, HR, document production and some parts of marketing. But Whelan said the firm would consider relocating legal processing, too.

“It’s not that we wouldn’t consider it in the future, but this project is really about realigning our back office operations to make them as efficient as possible,” he said. “Being spread across multiple different offices for functions that operate well in a consolidated environment, it didn’t make sense." 

But if efficiency was the only consideration, surely these firms would settle on the overseas option. The savings in New Delhi easily trump those in Nashville. 

Deloitte's Klender said the lower cost US cities these giant law firms are looking at fall around 100 on a cost of labor index that puts India at a 35 or 40. (New York would be 140, and Boston 125.)

Companies like Pangea3, a legal outsourcing firm that opened in India in 2005, can save law firms up to 80 percent, according to co-CEO David Perla. Pangea3 now employs about 1,000 people worldwide. 

But despite massive savings, the overseas option isn't right for every firm. Whelan said Pillsbury considered moving outside the US but decided against it.

“We talked about it. We just didn’t see that the additional challenges that were introduced by going there were really warranted at this point,” he said, citing "language barriers, time zone barriers, worth ethics, supervision from afar" as among the ultimate deal breakers.

There are simply limits to how much risk one can reduce remotely. 

“No matter how many different layers of protection you can construct, you’re still subject to another country’s laws," said Dow Lohnes' Christmas of offshoring legal services.

Of course, the legal industry is relatively risk-averse and slow to change in general. Many have suggested that Amerisourcing is a baby step on the way to more aggressive offshoring of legal services. Perhaps after firms get more comfortable with the concept of outsourcing in general, more will make the leap overseas. 

"They've got to come along to accepting the concept and then [get] comfortable that it's working, and it's easier for them to do this domestically with a center they can fly to, time zones, et cetera," said Klender.

"It could be 5 years or 10 years down the road that some might get comfortable in moving some of these processes offshore and quite frankly they just simply may decide not to go offshore," he said.

If firms can get the efficiency and quality they're looking for at a reasonable cost in US cities, "you may find a lot of law firms keep things domestically," he added.

There are compelling forces working against the offshoring of legal services. 

“One is automation, because the delta between what a machine can do and what a person in India can do is closing,” said Dow Lohnes’ Brad Christmas. “And then also, a great lawyer. You can’t replicate that.”

Amerisourcing may not be a silver lining that lasts forever. But for Aja Hendrix, 29, it's good enough for now.

Hendrix had been laid off twice since graduating from college in 2005 — first from a subprime mortgage company in 2007 and then from a mid-size law firm in 2010.

She wasn’t particularly hopeful when she saw a friend’s link to the Pillsbury job post on Facebook. But it paid off. Today, Hendrix is senior marketing technology coordinator at Pillsbury's Nashville office, and she feels that she has finally found her professional home.

“Jobs that I thought would turn into a career didn’t. That was just a reflection of the economy at the time, but I do feel like that this is the career path I will take.”

And thanks to her $40,000 yearly salary, she is pursuing a master’s degree in law firm management at George Washington University and has been able to start saving money to someday buy a house — the classic American dream.