What Should Corporate Legal Teams Outsource in the Generative AI Era?

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

Outsourcing legal work is often understood as handing the first-pass review of standard contracts to an outside party. However, I think one should be cautious about starting to outsource on that premise. This is because carving out only the first-pass review work does not reduce the workload of the in-house legal team as much as expected.

The work required of a legal department, such as reading contracts, handling day-to-day legal consultations from business divisions, and being involved in financings and M&A, can increase as the business grows. At the same time, it is not easy to hire people with practical corporate legal experience. Even if you manage to hire them, it takes time before they understand your business characteristics and internal practices deeply enough to give advice that can be used on the ground.

Therefore, before having the legal department carry all of the work on its own, think separately about "areas that should be decided internally" and "areas that can be entrusted to outside attorneys." The value of outsourcing lies not merely in sending work outside, but in building a relationship in which outside attorneys understand your business background and decision criteria and can move matters forward from a position close to that of your in-house legal staff.

Decision-Making Areas the In-House Legal Team Should Retain

The work the in-house legal team really wants to focus on is judgments directly connected to the company's final decisions. Policy decisions such as which business partner relationships to prioritize, how much risk to accept as a business decision, and at what stage to report to management are deeply tied to the company's management strategy and policies, and cannot be entrusted entirely to outsiders.

If you look only at the contract clauses, you will find items for which revisions should be requested from a legal standpoint. In practice, however, some legal risk may remain as long as the transaction continues. The final decision to set a policy such as "we will accept this risk" or "we will not concede on revising this condition," taking into account the importance of the transaction as a whole, the relationship with the counterparty and the company's risk tolerance, remains with the company.

That said, the in-house legal team does not need to prepare all of the groundwork leading up to that decision from scratch. If there is a system in which outside attorneys take on everything from reading the contract to drafting proposed revisions and preparing a starting draft for internal explanation, the in-house legal team can concentrate on forming the company's policy and engaging with the business divisions and management. The role of identifying matters that exceptionally require careful handling also functions as work that the in-house legal team should carry out.

Why Outsourcing First-Pass Reviews Leads to Rework

A problem seen in legal outsourcing is that the in-house legal team ends up rereading almost the entire review result returned from outside.

Outside law firms sometimes return comments that are accurate as a matter of law but hard to use in practice. They may contain an excessive number of minor wording changes, make excessive revision demands that do not fit the relationship with the counterparty, or take a lot of effort to explain to the business divisions. When this happens, the in-house legal team, after outsourcing, is kept busy scrutinizing the comments, deciding what to keep, and rewriting them into language that can be presented to the counterparty. As a result, the overall workload does not decrease, and a new burden arises of reworking the outside deliverables to fit internal practice.

Practical legal outsourcing places importance on curbing the rework in which the in-house legal team redoes the review. The company still carries out its final check and approval procedures. What matters is that the outside attorneys present deliverables having understood from the outset "what the company values" and "what level of risk it regards as acceptable." Only when this standard is met does the burden of review and explanation on the in-house legal team go down.

Whether this collaboration is working can be verified by checking, for the first few matters after introduction, how much the comments returned from outside needed to be reworked internally. If internal revisions have become minimal, that serves as a guide indicating that decision criteria are being shared with the outside attorneys.

Sharing Decision Criteria With Outside Attorneys and Adapting to Busy and Quiet Periods

To make good use of outside attorneys, giving one-off instructions matter by matter may not be enough. It is desirable to share information in advance, such as contract types, the company's position and the standard limits of concessions, and to keep aligning decision criteria on an ongoing basis.

Priorities differ from company to company, such as how carefully to look at the scope of the definition of confidential information and the survival period in a non-disclosure agreement, or how far to negotiate the ownership of deliverables and the cap on damages in a service agreement. If the outside attorneys understand these criteria, they can go beyond presenting general legal views and give advice in a practical form, such as "In light of the background of this matter, I think we should request a revision to this clause, while there is room to accept that one" or "This clause is a matter that should be referred to management rather than left to the discretion of the business division." This produces an effect close to adding one dedicated in-house legal staff member.

We provide details of this kind of ongoing legal support on LegalAgent's Legal Outsourcing page.

In addition, increasing legal headcount is a decision that involves an increase in fixed costs for a company. Considering personnel costs, various insurance, training and the burden of management, the burden of hiring experienced people is not small. Moreover, legal work has busy and quiet periods. The workload spikes at particular times, such as financings, M&A, the launch of new businesses and the concentration of contracts at the end of the fiscal year.

If you always try to meet peak demand solely by hiring full-time employees, you run the risk of being short-staffed in busy periods and carrying excessive fixed costs in normal times. A system in which outside attorneys can be used as an extension of the in-house legal team, at the moments when they are needed and in line with the required workload, ties in with the idea of operating the legal function as a variable cost. Flexible adjustments, such as increasing the volume of requests in busy periods and narrowing it down to day-to-day contract reviews in quieter periods, are also easier to make with outside resources. If you expand the scope entrusted to outside parties while maintaining the role of the in-house legal team, you can secure time to engage with management and business divisions while retaining your own decision criteria.

Designing a Division of Roles That Uses AI, and Consulting Us About Support

With the spread of generative AI, the work from reading contracts to drafting proposed revisions and comments can now be made more efficient.

However, while generative AI used as is excels at producing text that looks polished at first glance, it is difficult for it to make judgments that take into account the position of an individual company, the subtleties of negotiation and business priorities. An answer from AI alone may be wrong as a general proposition, or, even if its content is correct, may not fit the particular transaction.

The value of AI lies in quickly laying the groundwork for outside attorneys to make judgments from a position close to that of the in-house legal team. The AI reads the contract, extracts the issues, organizes the differences from past templates and presents options for clauses. Taking that output, an attorney with corporate legal experience verifies it and, in light of the company's decision criteria, separates the issues that should be negotiated from those that are acceptable. This division of roles makes it possible to speed up the work while confirming that the content fits the transaction.

What is expected of outside attorneys in actual work is concrete, practical deliverables that go beyond simply pointing out that "this clause carries legal risk." When examining the scope of services, the ownership of intellectual property rights and the scope of liability for damages in a service agreement, deliverables such as the following are required:

• Proposed revisions that can be presented to the counterparty as they are, together with an explanation of the reasoning that should be kept internal
• A clear distinction between conditions that may be accepted at the discretion of the business division and conditions that require management approval
• Alternative clauses that could serve as a compromise if negotiations become difficult

For a contract that has no limitation of liability for damages, it is necessary not merely to stop at the principle that "a cap should be set," but to present multiple options in light of the transaction size, the anticipated damage and the relationship with the counterparty, such as "an amount equal to the contract price," "the fees for the most recent twelve months" or "excluding willful misconduct, gross negligence and the like."

If deliverables are presented in a form that can be used immediately in practice in this way, the in-house legal team can reduce the effort of reworking the answer for the business divisions. The amount of rework that comes back internally after outsourcing is also a yardstick for evaluating legal outsourcing.

At LegalAgent, through collaboration between generative AI and attorneys well versed in corporate law, we provide support such as contract review, financing and legal outsourcing. We place importance on not stopping at AI-based preparation, but on having attorneys verify the work in light of the company's business background, risk tolerance and past decision criteria, and returning it in a form that can be used immediately in practice. If you are considering reviewing your legal function or speeding up contract reviews, please feel free to contact us.

• Legal Outsourcing