A Guide to Outsourcing Compliance Management Process for Law Firms

Running a law firm isn’t simply managing lawyers and sending them to courtrooms. There is just a lot of other work involved such as human resources, information technology, marketing, accounting, and so on. This is where compliance management outsourcing can be leveraged.

It is true that managing risk and compliance is becoming increasingly complex, especially in a world ravaged by COVID-19. More than ever, it takes skills, experience, and knowledge to fulfill compliance functions, making it even more important for firms to have capable experts on deck to manage these activities. As a result, outsourcing compliance process has become a rising trend, where firms can recruit specialists who understand the gravity of the job.

However, to make the most out of outsourcing, firms still need a good understanding of what the process is, why they are outsourcing and certain issues that may arise when finding a compliance partner.

1. What does outsourcing compliance process mean exactly?

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Compliance outsourcing is delegating compliance-related functions and processes in the business to another party that is not part of a firm’s in-house staff. Normally, the outsourced are third-party providers, but sometimes they can also be a captive organization, which is a legal subsidiary of the parent firm. It allows them to separate insurance costs from the main body of the firm, protecting them in the event of a large insurance payout.

There are many areas in which outsourcing compliance process can be beneficial for law firms, such as:

• Global compliance management
• Contract management
• Data governance
• External spend management
• Knowledge/content management
• Matter management
• Contract drafting/review

Among these, global compliance is the biggest challenge for many firms in this day and age.

Outsourcing often gets used interchangeably with offshoring, yet they are not the same:

• Outsourcing occurs when a company contracts a specific process out to a third party, finding someone who specializes in whatever needs to be done.
• Offshoring happens when businesses send in-house jobs overseas.

Outsourcing compliance is subcontracting another party to perform a compliance process, such as filing tax returns, handling data, or maintaining the integrity of procedures. This is often done when the firm is interested in cutting down operating costs or wants to allocate key manpower to other vital areas.

On the other hand, offshoring compliance actually means relocating the risk & compliance management process from one company to another company or from one country to another entirely.

Typically, the activities involved in offshoring include operational and support processes, such as accounting.

Both methods can cut down operational costs for firms and allow them better access to skilled labor. However, outsourcing compliance offers significant labor flexibility that offshoring simply does not have.

Let’s say your firm needs extra help for a 6-month project. In such a case, offshoring would be infeasible as it will involve moving assets or establishing new offices in another location, which would cost too much for such a short project. Outsourcing, in contrast, allows you to hire contractual partners who can help you focus more on your firm’s core competency, which is “legal work”.

2. Why are law firms in need of outsourcing compliance processes?

Nowadays, there are more compliance requirements than ever that businesses need to keep up with. Law firms are definitely affected by government regulations, reporting standards, and rules in different jurisdictions. However, there are specific factors that drive the decision of outsourcing the compliance process:

• A lack of talented professionals

Law firms often lack locally available talents. Despite the relatively high demands for compliance specialists from firms that want to stay highly regulated, skilled agents are still scarce. Furthermore, many law firms nowadays operate across borders and in multiple jurisdictions with vastly different laws, complicating the demands and requirements for compliance. As a result, the need to recruit, train, and retain specialists with specific risk management knowledge is and will be rising.

• Continuous changes in compliance requirements and tighter budget

The world’s regulatory landscape has been changing at an increasingly quicker pace, especially during the COVID-19 pandemic. As a result, law firms often have to deal with more complex rules at every turn, racking up their operational costs in order to keep up with the shifting pace – with 40% of US law firms saying they are planning to cut costs in the coming year, while 79% of firms globally do not think their business is prepared for compliance risk (according to Deltek). At some point, the quality of a firm’s compliance solutions might suffer, too.

• A great priority in technology infrastructure

Just like companies in any other field, law firms must continuously find ways to keep up with the changes in the world, especially in terms of technologies and infrastructure to tackle evolving regulations. However, unlike companies in other fields, law firms are notoriously rigid and slow in changing. Yet, faced with globalization, there is no other choice.
Firms can no longer afford to address regulatory questions by stacking up more and more systems on top of each other. The need for a streamlined workflow and integrated tech infrastructure among law firms is greater than ever.

• More and more sophisticated demands from clients on the market

As the world changes for firms, their clients also mature. Nowadays, clients expect every firm to understand the process, and be able to bring value to agreements (simple or complex) through negotiation. They also require firms to provide them with flexible options, while focusing more on the outcome of legal services, all at a lower cost.

Some clients may have irregular compliance needs and demand service for specific tasks. For instance: Corporate compliance and financial crimes compliance, including transaction monitoring, know your customer (KYC), and enhanced due diligence processes.

3. Some potential problems when outsourcing compliance process

Many law firms are still hesitant of outsourcing compliance process, or aspects of it, due to the fear of losing control to a third party. The fact that your management is one step removed from the client’s case may lead to a slippage in quality control and upholding of standards. After all, the ultimate accountability when compliance requirements are not met still lies with the firms themselves. That is why many law firms elected to keep the process in-house.

Some firms are also concerned about the quality and capabilities of the provider’s delivery. They fear poor services and failure to meet expectations, leading to devastating non-compliance penalties. Moreover, there remains skepticism regarding an outsourcing partner’s ability to understand the nuance and complexity of work in the legal fields.
Finally, outsourcing compliance has the potential to bring data security risks into the mix, since compliance partners can now gain extensive access to sensitive client data that law firms must keep secret. As such, firms will need to go through the hassle of making sure that their third-party compliance provider takes all the necessary steps to protect the safety and confidentiality of their data.

Finally, outsourcing compliance has the potential to bring data security risks into the mix, since compliance partners can now gain extensive access to sensitive client data that law firms must keep secret. As such, firms will need to go through the hassle of making sure that their third-party compliance provider takes all the necessary steps to protect the safety and confidentiality of their data.

4. Conclusion

All in all, there are many aspects for law firms to take into consideration when outsourcing compliance processes. Potential problems can include the loss of control, subpar quality, and risks of data breach. However, as long as firms can understand what they need and what their partners can provide, the search for a prospective alliance becomes a rewarding effort.

Need an outsourcing partner for your firm’s global compliance tasks? Chat with one of our friendly consultants for actionable advice, or drop us a message via service@bbcincorp.com.