when outsourcing, just pass on the cost
Carolyn Elefant of MyShingle has asked “Is There An Ethical Obligation to
Pass On Cost Savings from Outsourcing?” After checking my own viscera,
and confirming them with Model Rule 1.5, and Comments thereto, and with the
Statement of Principles [in Billing for Services and Disbursements] of The Task
Force on Lawyer Business Ethics (ABA, 1996) (excerpts via LawCost.com), I’ve
concluded:
Every arrangement for fees related to legal services and
disbursements must be premised on “at the least, a fully
informed client.” Statement of Principles
A law firm that plans to outsource a client’s legal services
must fully disclose the arrangement to the client, and must
receive the client’s agreement. (see Model Rule 1.5(e) re
division of fees; Principles on Staffing)
“complaint Bill” “It is the obligation of the lawyer and law firm to
assure that the client fully understands and agrees to the basis for
billing for disbursements and other charges.” This includes
“whether overhead other than direct charges paid to the
vendor are included.” Principles on Disbursements/Costs.
A lawyer shall not make an agreement for, charge, or collect . . .
an unreasonable amount for expenses” (Rule 1.5 (a)), but may
only charge ”a reasonable amount to which the client has agreed
in advance or . . . an amount that reasonably reflects the cost
incurred by the lawyer.” (Comment [1] to Rule 1.5)
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. If it chooses, it might allocate reasonable overhead for arranging
the outsourcing (which is a “cost” to the firm), but it is difficult to imagine that this
amount is anything but de minimis. (I presume that attorney time spent within the
firm reviewing the work-product from out-of-firm sources will be billed to the client
or has otherwise been factored into the fees be charged.)
Therefore, I agree with George Washington University law professor Thomas
Morgan, who is quoted recently saying that ethics rules require law firms to pass on to
clients cost savings from outsourcing. (see Made in India By Daniel Brook, Legal
Affairs (May/June 2005). Unless Lisa Solomon is equating a “reasonable measure
of profit” with “properly allocated overhead,” I disagree with the promotional materials
written by Lisa, where she says that an “attorney may charge the client a premium or
reasonable measure of profit in excess of the research and writing provider’s cost to
the attorney, as long as the total charges to the client are reasonable.”
You can find relevant excerpts from the ethics materials cited in
this post, here.
city life–
even melting snow
costs money
spring rain–
hitting the windows
that cost me so much
saved from the fire
a nest in its beak…
the crow moves on
ISSA translated by David G. Lanoue
The when outsourcing, just pass on the cost by David Giacalone, unless otherwise expressly stated, is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License.