Many corporate legal departments and even law firms in the U.S. are experimenting with Legal Process Outsourcing (LPO) as a means to reduce costs and increase efficiencies without sacrificing, or sacrificing too much, the expected Quality of Service (QoS). The momentum behind the current popularity of LPO is a reaction to the steadily increasing legal costs in the U.S. and to some extent as well the economic headwinds in a recently faltering global economy. LPO growth potential may perhaps directly correlate with the overall size and projected growth in the legal-services market in the U.S. In 2006 the legal-services industry in the U.S. generated $236 billion in revenue, and is expected to grow steadily at a rate of over six percent per year for the next decade, according to the U.S. Census Bureau. This sizeable market offers a ripe and lucrative environment for LPO to take hold.
Indeed, to meet perceived growing demand, innumerable LPO providers have entered the marketplace offering alternative service, resulting in the outsourcing of certain legal tasks and services. Only a few years ago, the LPO model was viewed with substantial skepticism and raised the question of whether it was “even legal,” but LPO is now viewed as a viable alternative in certain circumstances for companies’ legal needs. With that said, the framework required to regulate the LPO industry properly and to address the legal and ethical issues that are certain to arise is still in the nascent stage but is evolving. While the U.S. legal community has yet to take any kind of definitive stance on the viability of the LPO model, the LPO industry appears eager to embrace some form of self regulation to establish itself.
Specifically, a company selectively delegates certain legal functionalities and services that are traditionally performed in the U.S. to an LPO provider at an offshore location, such as India. That provider offers the combined benefit of a skilled or trainable workforce that is available at wages significantly lower than those demanded by U.S. counterparts. In other words, the basic value proposition of the LPO is that outsourced legal work is performed in the offshore location by trained lawyers (licensed in that jurisdiction) and paralegal staff at some fraction of the cost of having the same work performed by the U.S.-based legal professionals. Services subject to LPO can range from tasks such as legal coding and legal transcription to more involved projects involving legal research, litigation support, document review, contract drafting and management, legal publishing, and Intellectual Property (IP) related services, such as patent application preparation. In addition to the cost considerations of LPO, it may also enhance home-base productivity by “freeing up” the customer to focus on strategic and value-added legal work as well as to take advantage of time-zone differences in offshore locations, thus enabling 24x7 operations. For these reasons, among others, LPO presents a new strategic option for legal departments and law firms.
Whether a real benefit is available through LPO to a specific company, however, depends substantially on a sober assessment of the company’s legal needs and requirements, and whether the legal services and tasks at issue can be realistically outsourced without sacrificing important qualitative considerations — meaningful quality degradation can counter productively result in the added cost of home-base “redo” as well as increase the company’s risk profile. A properly performed initial assessment of the virtues and vices of an LPO, or basically an “LPO gating analysis,” should determine the answers to the questions of whether, to what extent, where and how a company may successfully deploy the LPO model to meet its legal needs consistent with its overall strategic business goals and objectives.
Some of the fundamental assessments under a thoughtful LPO gating analysis include: What are the legal needs, services, and requirements that may be suitable for an LPO? What are the dependencies where a complete handoff of the legal tasks and services is not possible? Are the services needed on a recurring basis (such as patent application preparation), a non-recurring basis (such as unique litigation involving facts peculiar to a large contract) or an intermittently recurring basis (such as periodic product-liability claims or certain due diligence tasks associated with transactions or filings)? Do the services at issue relate to core or non-core business functionalities? Does the customer take on some level of additional risk related to the source of the need for the legal services by engaging in an LPO with respect to the services, and if so how much? How important is cost savings vis-à-vis QoS? How do the possibly outsourced services support or fit with the overall strategic corporate business goals and objectives?
As part of the LPO gating analysis, companies contemplating LPO must also carefully assess the generically applicable risks, ramifications and ethical concerns inherent in offshoring legal work that come hand in hand with the benefits of LPO. Some of these key risks and ethical considerations peculiar to an LPO include (i) the risk of unauthorized disclosure of confidential information, (ii) liability concerns related to the unauthorized practice of law, (iii) how to protect, and avoid, the unintended or inadvertent waiver of the attorney customer privilege and assessing whether it even would apply in the first place, (iv) the lack of robust procedures to identify and resolve conflicts of interest, (v) the recognition when applicable of the need for client consent, (vi) fee-sharing arrangements and customer disclosure, and (vii) compliance with export control laws with respect to offshoring information regarding U.S.-originated inventions for patent-drafting services.
Most LPO demand in the U.S. currently involves “low-value” labor-intensive legal services, such as legal transcription, document conversion, legal coding and indexing, and legal data entry, predominantly provided by India-based LPO providers. As the LPO industry matures, the outsourced legal work will move up the value chain. A research company, ValueNotes, estimates that in 2006 India’s LPO industry generated $146 million in revenue and projects it to grow to $640 million by 2010, and by that time LPO firms in India are expected to employ over 32,000 professionals. While another research company, Evalueserve, is more conservative in its LPO projections, the fact that LPO is likely to become a sizable mainstay in the U.S. legal-services market is increasingly difficult to question.
India’s emerging prominence in LPO is not surprising given the remarkably successful Indian market for IT outsourcing (ITO) and Business Process Outsourcing (BPO). More recently, many U.S. companies have engaged in what are known as Knowledge Process Outsourcing (KPO) transactions, which leverage India’s vast resource of highly skilled, educated workers to perform knowledge-driven or “high-end” processes that require specialized domain expertise. LPO — a specific example of KPO — is one for which India offers enormous potential because of its large reservoir of English-speaking lawyers and paralegals whose salary demands are extremely competitive at typically only 10 to 15 percent of those of their U.S. counterparts. This professional labor pool shows no sign of shrinking; indeed approximately 80,000 Indian lawyers graduate each year from law schools. These graduates are also particularly well-suited to service the U.S.-based legal needs because, like the U.S. and the U.K., India’s legal system follows the common law model and its rapidly modernizing legal and regulatory environment is based on the U.S./U.K. model of jurisprudence.
Most of the LPO demand has been met primarily by two service delivery models: Captive centers of U.S. corporations or law firms in India (such as those set up by GE, Cisco, Oracle, Dupont, and Bickel & Brewer, to name a few) and third-party LPO firms that provide legal services to U.S. corporations and law firms (these firms include niche firms such as Pangea3, Qusilex and Lexadigm that only provide legal-services and multiservice firms such as Infosys and WNS, which provide legal services in addition to other BPO offerings). Variations of these models will emerge as the LPO industry matures to better service LPO customers.
Each model has its own advantages and risks that must be evaluated carefully so as to identify and assess the relative pros and cons for a particular LPO strategy. LPO customers should adopt different delivery models taking into account numerous variables, including the nature and scope of the activities to be offshored, previous offshoring experience, a qualitative due diligence review of the potential providers’ work, concerns about security and control of confidential or privileged information, risk tolerance, tax considerations and budgetary constraints.
In sum, LPO can present a viable alternative to companies seeking to reduce their legal costs. Its usage, however, must be considered very thoroughly and carefully taking into account the circumstances and needs involved. A company considering an LPO must, therefore, objectively evaluate the specific and unique gating issues described above relating to the value proposition of a particular LPO, the generically applicable risks of any LPO, the offshore location and the provider involved, and the type of LPO model that best suits the needs of the potential LPO customer.
Dan Masur and Sonia Baldia are partners in the Business & Technology Practice Group at the law firm Mayer Brown LLP in Washington, D.C.Mayer Brown LLP
India: The Hottest Offshoring Destination
for Legal Services
By Neeraja Kandala, Principal Analyst, Legal Services, ValueNotes
The legal-services offshoring business in India is growing at a tremendous pace. Even as several other segments within BPO are being buffeted by the global economy, outsourcing legal services is steaming ahead with robust growth rates of over 40 percent. While several large, mid-size and small companies are enthusiastically entering LPO, the industry is rapidly moving toward more innovative business models and offerings led by the earlier entrants, as they try to differentiate themselves from the pack.
Though the LPO industry is growing rapidly, it addresses a mere three percent of the offshorable potential. India revenues from LPO were $225 million in 2007, and are expected to reach $640 million by end 2010. The Indian provider landscape comprises over 100 players employing more than 7,500 people. There are around 12 to 15 large-service providers who employ over 100 employees. Third-party providers dominate the segment by employing the majority of the workforce in the sector.
Over the last two years, the LPO space has seen a rapid change in terms of attracting investors, maturing provider capabilities and luring large BPOs to enter the market.
Investors Get Interested
Most providers started off as self-funded companies and a few received funding from angel investors. In order to build marketing presence or significant knowledge base ahead of others, LPO providers are also seeking out Venture Capitals (VCs)/Private Equity (PE) players/angels. Funding from VC/PE firms has now started coming in, but is still limited as most companies are quite small.
Moving up the Value Chain
Legal transcription and litigation support were amongst the initial services to be offshored to India. However, over time, service providers have developed additional capabilities, and are offering a far broader range of services today. The leading vendors, such as Pangea3, QuisLex, Mindcrest, LawScribe have now built multiple capabilities within their focus areas. Services such as transcription and document review are now provided by a majority of service providers, all of whom claim experience and capability in these areas.
Among the various functions in the legal-services segment, the non-core and manpower intensive processes are more easily offshored. The relatively low-value, high volume services include processes like legal transcription, document conversion, legal data entry, legal coding, indexing, online content management, paralegal services and database management. These jobs are typically quite process-oriented, do not require very specialized legal skills, and hence are billed at lower rates, typically $10 to $25 per hour.
In contrast, the high-end jobs such as legal research and patent-related work require relatively higher skill/knowledge levels and a professionally qualified workforce, and hence command a higher billing rate, between $25 and $90 per hour, depending on the specific service and nature of content.
Large BPOs Jump in
While the pure-play legal-services providers are gearing up with aggressive growth plans, there is rising competition from large, cash-rich, generic BPOs such as Infosys BPO and Wipro. The entry of large players will help boost awareness of the possibilities in offshoring legal work, which in turn will expand the overall market. However, the pure-play legal-services providers will now have to work harder to attract and keep talent. Further, the race to acquire capabilities and scale will trigger inorganic growth.
“It makes logical sense for large generic BPOs to add legal services to their service offerings. They could enter into this business through acquisitions or even grow organically, though execution is going to be key,” says Ram Vasudevan, CEO, QuisLex. These companies are likely to focus initially on the high-volume, process-driven markets such as document review, conveyancing services and other process-driven legal-support activities. The larger amongst legal-services providers today employ less than 350 people in its offshore center. Infosys on the other hand aims to employ over 1,000 people over the next five years. As these large multiservice players actively look to build presence and scale, the acquisition of smaller providers is an option.