Outsourcing: the straight and narrow

The Society recently commissioned research into the profession’s use of outsourcing to allow it to identify what additional guidance and support would

The Society recently commissioned research into the profession’s use of outsourcing to allow it to identify what additional guidance and support would be helpful to members. The research focused on firms’ current use of outsourcing and their plans to use it in the future. In addition, discussions were held with Marsh in relation to the Master Policy, and other professional bodies to ascertain their experience and responses.

The work was a follow-up to the Society’s advice and information on cloud computing, which received excellent feedback from members following its launch, in terms of balancing the opportunities and risks for law firms.

Based on all of this, the Society has prepared and approved new guidance, and advice and assistance, as well as made adjustments to a number of the current practice rules. These will be available on the website from November 2013, and members using or considering using outsourcing are recommended to read them in detail. This article offers a summary of some of the important elements.

Coral Riddell, head of Professional Practice at the Society, commented: “This was a comprehensive study and we are grateful in particular to those firms who provided detailed case studies and analysis. The legal market continues to change and develop, and the way that firms deliver their services makes this guidance increasingly relevant.”

Responsibility remains

The new “General Statement on outsourcing” offers two categories or types: outsourcing of (1) business operational functions such as HR, payroll and cashroom, and (2) aspects of legal service provision such as legal research and document production. The advice and assistance provides checklists and case study examples to help to illustrate the range of activities that fall within it.

The Professional Practice team is on hand to assist members with queries, and can be contacted on its confidential helpline or by email. Coral Riddell explained: “The critical advice for members is to ensure that, whoever undertakes these outsourced functions, the obligation to meet regulatory requirements and to adhere to professional rules remains with the member. In addition, it is not permissible to outsource reserved matters unless that is to another entity regulated by the Society.”

As a result, contractual arrangements with outsourced providers should ensure that those providers are required to comply with the practice rules. It is essential to ensure that the Society continues to have access to all data, information and documents required for all regulatory inspection and compliance. This includes access to confidential passwords and user names.

Members are also reminded of the need to comply with all relevant legislation, including data protection and EU competition legislation.

There are positive opportunities for firms, and outsourcing can provide additional resources and expertise, as well as efficiencies and cost savings. However, the management of outsourced providers requires specific skills and resources, including sourcing appropriate providers, contractual arrangements, and project management and reporting. It is also important to consider the implications for service quality provision, client contractual arrangements and professional indemnity insurance requirements.

Another option is to become an “outsourced provider”, by undertaking work for another practice unit or legal services provider. This will be a strategic business decision and will need to be carefully considered and resourced.

Three-way risks

It is essential to look at the implications and risks associated with the implementation of any business change. These tend to fall into three categories – business risk, service risk and regulatory risk. It is important that the written contract sets out the obligations of both parties. However, as outsourcing implies that the firm will no longer have direct observation of how the work is being done and who in fact is doing it, it is vital to consider the implications on the business, on regulatory compliance and on service delivery.

The risks associated with outsourcing include that: 

• professional and legal obligations, such as client confidentiality, data protection and avoiding conflicts of interest are not maintained;
• the ability to run the business effectively may be affected;
• the firm may have insufficient skills or resources to manage the contract effectively;
• the firm becomes dependent on the outsource providers in relation to the current and future provision of that service;
• the firm is vulnerable to fraud and dishonesty by the outsource providers, their business failure and/or failure to provide the firm with an effective service;
• clients, when advised of the arrangement, have concerns in relation to the firm’s
• service provision.

PII points

There are a number of insurance issues that need to be reviewed in relation to outsourcing. These include that the firm’s fidelity guarantee insurance contains provisions that require it to have satisfied itself as to competency, financial stability and honesty. Marsh will need to have the insurers endorse the firm’s cover to the effect that the outsourced arrangement is acceptable to them. If the outsourced provider is a solicitor, there is certainty as regards the terms and conditions of the compulsory (Master Policy) part of the provider’s cover, e.g. as regards run-off cover. However, top-up cover is in a different position and its terms and conditions ought to be checked. In particular, it is important to consider:

• Have the firm’s selection/client vetting criteria been complied with?
• Have terms of engagement been negotiated/agreed with the provider?
• Are the terms of engagement in the firm’s standard form?
• Do the terms of engagement address the following issues:

- responsibility to client for provider’s work;

- communication with/instructions from client;

- who is responsible for diarying/complying with critical dates;

- responsibility for payment of consultant’s fees and outlays – client or firm;

- who is project managing work that they are working on together;

- contractual commitment to maintain professional indemnity insurance (at a level not less than £x) for appropriate period;

- requirement to evidence the cover?

• Have the following aspects of the consultant’s professional indemnity insurance been checked and appropriate undertakings incorporated into the terms of engagement:

- Limit of indemnity? Is it adequate, and does it apply to each and every claim or is it an aggregate limit?

- Scope of cover? Does the policy cover include: contractual liability; client documents; fraud, including dishonesty of partners and employees; breach of warranty of authority?