The global outsourcing industry (estimated to be more than $950 billion), much like other industries, witnessed a slowdown in growth in the last year as a result of the global economic downturn. The recession brought on budget and cost cuts across all departments in companies across the globe. But there was a silver lining. Some sectors like the legal process outsourcing (LPO) appear to be benefitting from the recession and subsequent budget cuts.

The changing marketplace

Post recession, with corporations looking to cut costs, legal budgets have also come under tremendous pressure. There has been a considerable drop in billing rates as corporations are looking for ways and means to reduce their costs across the board.

This pressure on billing rates for law firms is likely to result in opening up of greater outsource/offshore possibilities. Cutting costs and better utilization of in-house lawyers is a compelling reason for corporations to consider outsourcing/offshoring in their strategy. While corporations have been pushing law firms to send work to low cost destinations, going forward this pressure will only increase, and offshoring will become more significant.
The downward pressure on costs, growing litigation, increasing compliance measures and the increasing use of technology will drive corporations as well as law firms to outsource/offshore some of their processes/services (with the prime motive of maintaining profitability).

Increasing momentum in the LPO industry

While the economic downturn is reshaping the global legal services landscape; the LPO industry is witnessing increased activity. Revenues from the offshore legal services industry were $370 million for 2009 and are expected to reach $440 million by end 2010. However, the industry seems to be picking up pace much faster as the global economy recovers.

Most of the corporations outsourced large volumes of document review and secretarial support work. This was due to the high level of offshoreability of these services. However, corporations are now looking to outsource and offshore routine legal work. With increasing emphasis on cost initiatives, corporations, large as well as mid-sized, will increasingly use LPO to gain a competitive advantage.

Growing level of interest

Microsoft signed a contract with Wipro Technologies for its IP portfolio. Earlier this year, the software giant also awarded a contract to Integreon for providing legal support services.
British Telecom recently announced its decision to shift work from its captive legal services center (located in India) to UnitedLex.

The established service providers have witnessed long term contracts in the last six to eight months. Last year, Rio Tinto, a leading international mining group based in the UK awarded a contract to CPA Global. Rio Tinto offshored contract review and drafting, legal research and document review to CPA Global. Similarly, Integreon won a seven year contract worth £50 million from UK based law firm Osborne Clarke. Integreon will provide knowledge and information management; technology and business intelligence services; transcription, secretarial, and word processing services to the law firm.

Increasing offshoring maturity

Earlier, buyers were experimenting with offshoring and hence restricted the work to smaller and short-term contracts/assignments. However, in the past three years, the legal offshoring market witnessed increase in the volume of contracts. There is a gradual shift towards recurring business and multi-service contracts. Further, the services offshored are a blend of legal and support services such as document review, legal research, litigation support, accounting and IT services.

Established service providers have witnessed some long term contracts in the last quarter. Osborne Clarke-Integreon; Eversheds-Exigent; Rio Tinto-CPA Global and British Telecom-UnitedLex are some of the recent longer term contracts in the industry.

Deals in the industry

Source: ValueNotes Research

Based on our discussions with buyers and legal service providers in India, we believe that the number of recurring business and annuity based contracts are gaining traction. Currently the contracts are tilted more towards support services. And this is benefiting larger service providers with multiple service offerings!

Going forward…

The recessionary environment has forced corporations to evaluate various options to remain profitable. Mitigation of a difficult business environment means stricter budget controls and increased outsourcing and offshoring.
Increased competition and recessionary pressures within the macro environment means that outsourcing/ offshoring will need to be more proactive in the future. On the outsourcing supply side, service providers have been building capabilities and expanding their presence in other countries. The momentum will build once the buyers of legal services start to look at how to retain their competitive advantage by lowering costs and increasing productivity.