Legal Process Outsourcing (LPO) Hype Vs. Reality

Transcription

1 Legal Process Outsourcing (LPO) Hype Vs. Reality Although the offshoring of IT services and other low-end business processes to lower-wage countries has been continuing for the past 15 years, the offshoring of legal services is still in its nascent stage. In fact, research conducted by Evalueserve shows that only 1,300 professionals are currently providing legal services to the US from India; however, this number is expected to grow to 5,200 by December 2010 and to 16,000 by December Evalueserve contends that Indian companies providing such services will generate approximately $56 million in revenue during July 2005-June 2006, $300 million in July 2010-June 2011, and $960 million in July 2015-June However, it is worth noting that during the same period, the legal services industry in the US is likely to expand from 975,000 professionals (legal and paralegal) in 2005 to million professionals in 2010 and 1.3 million in Correspondingly, the revenue generated by this industry is likely to grow from $270 billion in 2005 to $360 billion by 2010 and to $480 billion by So despite the seemingly large growth in offshoring of legal services, in actuality, only 1.2% of the legal and paralegal jobs would be offshored to India by 2015 and constitute only 0.2% of the total revenue! 1. Background According to the US Census Bureau, the legal services industry in the US generated approximately $184 billion in revenue in This figure includes revenue generated from law-firms, solo practitioners, title and abstract companies and various other organisations that provide assorted legal services; it does NOT include revenue corresponding to lawyers, paralegals and related professionals employed in various levels of the government, academia, corporations and other non-governmental organisations (NGOs). Also, according to the US Bureau of Labour Statistics (BLS), 695,000 lawyers and 200,000 paralegals (also known as legal assistants) held jobs in 2002, and of these, 75% lawyers and 70% paralegals worked in the first group (law-firms, title and abstract companies and with solo practitioners), whereas the remaining worked in various government offices, corporations and NGOs. Evalueserve estimates that in 2005, the total revenue of the US legal services industry will be approximately $225 billion (on the basis of the US Census Bureau definition); if lawyers and paralegals in all organisations are also included, this will go up to approximately $270 billion. Furthermore, according to our estimates, approximately 760,000 lawyers and 215,000 paralegals are employed in 2005 in all organizations within the US, supported by another 225,000 professionals that include secretaries, receptionists, agents, office administrators, IT professionals, HR professionals, and accounting personnel. These professionals work in various industry verticals, such as (though not limited to) taxation, accounting, telecom, biotech and pharmaceuticals. Since this article does not consider the offshoring of such ancillary services even within the legal industry these services will not be discussed any further in this article. Currently, many US organisations have in-house legal departments that consist of senior lawyers, associates, paralegals and related staff. However, many small and medium-size enterprises do not have any such departments and for various reasons (that include cost, quality and efficiency), even many large firms outsource legal work to external, US-based law firms. However, since both the price of and the demand for legal services has been rising rapidly, and this trend is likely to continue with the corresponding budgets not even growing at the rate of inflation, more and more organisations (including some law-firms) are beginning to adopt one or more of the following mechanisms to reduce costs without compromising on quality:

2 1. Utilising procurement departments for legal services As procurement departments have today become more like strategic sourcing departments with trained contract development professionals, many firms are asking their procurement teams to evaluate alternatives for legal services and assist with strategic planning, supplier evaluation and economic forecasting, legal spending reviews, and issuing of Request For Proposals (RFPs). Some examples of companies that are using their strategic sourcing departments to optimise legal costs include United Technologies Corporation, Oracle Corporation, Bayer AG, JP Morgan Chase & Company, Merrill Lynch & Company, Motorola Inc., Pfizer Inc., Tyco International Ltd. and Wyeth. 2. Increasingly using Information Technology applications to improve the efficiency of their internal legal departments and external law firms and to reduce their administrative overheads These IT applications include (a) e-billing to spot, flag and dispute charges that may have otherwise gone unnoticed, (b) use of extranets and a central repository of all work-product that can be searched electronically, and (c) e-filing of patent and trademark applications in order to improve efficiency and reduce cost. 3. Using paralegals to perform some of the same functions once reserved for lawyers Clearly, paralegals are expressly prohibited from carrying out functions that are considered practising law or setting legal fees, giving legal advice, and presenting cases in courts. However, paralegals are identifying appropriate applicable laws and analysing judicial decisions, researching legal articles and providing synthesised reports and files to their attorneys, who can more efficiently perform higher value-added work. Moreover, such paralegals are also performing more of the vital functions, including drafting of contracts, mortgages, divorce agreements, trust agreements, tax returns and planning estates. 4. Negotiating fixed price contracts This could include paying a fixed price for drafting and filing a patent application or a trademark application, or paying little, if any, overheads such as those for photocopying and faxing charges, to external law-firms. 5. Offshoring legal processes that conform to US export controls However, this would be without the offshoring firms giving any legal advice or constituting the practice of law in the US. The next section discusses the type of legal processes that will be offshored by various organisations currently as well as those that will be offshored in the near future. 2. Legal Services Being Offshored Between 1990 and 2005, the legal services industry grew at an approximate annual rate of 6.75% and our forecasts show that this industry is likely to grow at 6% per year for the next decade, Within the broad field of legal services, revenue growth is expected to be particularly strong in areas related to the aging and elderly, antitrust, environment, global trade and intellectual property. Although the offshoring of IT services, software code and call centres and other low-end business processes to lower-wage countries has now been underway for the last 15 years, the offshoring of legal services is still in its nascent stage. In fact, research conducted by Evalueserve shows that only 1,300 professionals are currently providing legal services to the US from India; however, this number is expected to grow to 5,200 by 2010 and to 16,000 by Evalueserve contends that the Indian companies providing such services will generate approximately $56 million in revenue in 2005, $300 million in 2010, and $960 million in However, it is worth noting that during the same period, the legal services industry in the US is likely to expand from 975,000 professionals (legal and paralegal) in 2005 to million professionals in 2010 and finally to 1.3 million in Correspondingly, the revenue generated by this industry is likely to grow from $270 billion in 2005 to $360 billion by 2010 and to $480 billion by So, despite the seemingly large growth in offshoring of legal services, in actuality, only 1.2% of the legal and paralegal jobs would be offshored to India by 2015 and constitute only 0.2% of the total revenue! The services that will be offshored within the broad area of legal and paralegal services include: 1. Electronic Document Management Services: These include word processing, creative design, legal transcription, legal coding, data digitisation, key word and XML tagging, and archiving. We estimate that 750 Indian professionals are providing these services today at rates of $11-13 per hour.

3 2. Research Services: These include statutory and case law research services. Since much legal research can be done using electronic databases, trained lawyers in India can sift through volumes of data and provide focused results to US attorneys. We estimate that 100 Indian researchers are providing these services today at $24-26 per hour. 3. Due diligence Services: For most mergers and acquisitions, lawyers must examine large amounts of data to verify the legal and financial status of the company that is being acquired. Since most of this information is now available in electronic form, Indian lawyers and researchers can set up a virtual data room and carry out the preliminary due-diligence for their US clients. This research can involve confirming thousands of supplier agreements to find out whether they will remain valid after a change of control or whether each might lapse after a certain period of time. Due diligence may also include checking of company books, board resolutions and shareholder resolutions to ensure that there are no surprises for the acquiring company. We estimate that 50 Indian researchers were providing these services during December 2005 at $24-26 per hour. 4. Contract Drafting and Proof Reading of Contracts: US organisations require a large number of contracts and agreements to be drafted, which include employee contracts, non-disclosure agreements, licensing agreements, supplier agreements, lease agreements, vendor agreements, and distributor agreements. Since each agreement typically follows a standard template, Indian lawyers can produce the initial drafts of such agreements, which can then be reviewed and modified by an attorney in the US. Furthermore, Indian lawyers can be used for proofreading or red-lining documents and ensuring these documents follow the guidelines provided by their client. For example, the Indian lawyers may check whether a given NDA has a time limit, after which, the confidentiality of information need not be maintained. We estimate approximately 50 Indian researchers were providing these services in December 2005 at $24-26 per hour. 5. Document Discovery in Litigation: In most litigation cases, lawyers and paralegals have to pore over large amounts of data as a part of document discovery. This process is often time consuming and usually has a critical deadline. Hence, often the involved lawyers and paralegals have to put in long hours or hire temporary staff to meet the deadline. Since this work is rule based and often in the form of electronic data (i.e., , electronic documents and scanned pages), some of this work is now being offshored to India. We estimate approximately 50 Indian researchers are providing these services today at $24-26 per hour. 6. Intellectual Property Services: These services include patent application drafting, prior art searching, patent proof reading, docketing, patent landscaping and patent valuation. Within the last three years, these services have grown quite rapidly in India and more details about the growth of these services can be found in my article titled, Offshoring of Patent Drafting and Prosecution Services, (IP Today, May 2005). We estimate approximately 300 Indian researchers are providing these services today at $40-50 per hour. Finally, many Indian offshore service providers have recently started providing similar services for trademarks. Essentially, the Electronic Document Management services within Legal Process Operations are quite similar to other business processes because these services require some but not necessarily deep knowledge of law in a given jurisdiction. However, the other five services require substantial domain knowledge and a fairly deep understanding of the law. Furthermore, some of these services are very qualitative in nature, wherein every word and punctuation mark is crucial, and where culture and trends in a given jurisdiction can also play a significant role. 3. Different Models for Offshoring of Legal Services With respect to the offshoring of legal services, the following four models seem to be emerging: 1. Captive Centers formed by US Law Firms and their Subsidiaries: Currently, Indian law does not allow foreign (i.e., non-indian) law-firms to practise in India. Hence, some law firms in the US and India are setting up subsidiaries, so that they do not practise law in India, but provide legal and paralegal services only for export purposes. For example, Schwegman, Lundberg Woessner and Kluth a law firm headquartered in Minneapolis has two captive centers for its subsidiary, Intellevate, located in Delhi-Gurgaon and Bangalore. Intellevate currently has over 80 professionals in India, who are involved in prior art searching and patent proof reading, and they will soon provide other IP related services. Other examples of this include Fox & Mandal and ALMT Legal, two India based law-firms;

4 and Patent Metrix, an Irvine-California based law firm. Each of these has less than 25 professionals providing legal and paralegal services from India. 2. Joint Ventures by US-based Firms: Rather than opening their own captive centres, several US-based firms have joint ventures with firms in India. A good example is Cantor-Colbourn Esq., who has joined hands with Lall and Sethi, Esq. in India. Similarly, a well-known legal consulting firm in the US, Hilderbrandt International, recently tied up with an Indian services company, OfficeTiger, to provide such services jointly. However, since statistically most joint ventures fail especially in India one needs to be cautious while treading this path. 3. Third Party Vendors Providing Services to Law-Firms and In-house Corporate Attorneys: Evalueserve is a prime example of a third-party provider and currently has over 100 professionals providing legal support services. Evalueserve hires Indian engineers and lawyers and trains them to become proficient in US law and various USPTO, PCT and WIPO rules and regulations. Integreon is another company that provides Electronic Document Management services for the legal services industry and has approximately 80 professionals. Some examples of other Indian companies that have 20 or less professionals, but are providing such services include Manthan Services, Lawwave, Lexadigm, Lexworks, Atlas Legal Research, Bickel and Brewer, Quislex, Pangea3 and Mindcrest. 4. Captive Centers: General Electric that has more than 50 IP and other legal professionals working in its center in Bangalore India. They provide many of the services listed in Section 2. Although some other large companies are also trying this model, we believe that this model is unlikely to succeed, unless the corresponding center can grow to at least 100 professionals. Captive centers smaller than 100 will be unable to provide good career paths to its professionals, who are likely to leave quickly, especially because the job market in India is expected to remain hot for the next 4-5 years. 4. Reasons for Offshoring Legal and Paralegal Services Of course, the reduced labor costs, and therefore, the increased profit margins for the end-clients, are the most compelling reasons for these clients to offshore legal services to low-wage countries such as India. Besides the reduced labor costs, there are some other important reasons why many organisations large, medium and small offshore some of the work: 1. Improving Quality: Due to the substantially lower labour costs in India, Indian legal professionals can take substantially more time in doing a unit of work, thereby, making the additional end deliverable more robust and complete. Since this deliverable is then reviewed by a US attorney, such a deliverable is likely to have a better quality than a similar one produced in the US because of the extra attention it has received.. For example, since Indian companies charge between $40-50 per hour for patent drafting as compared to $ per hour in the US, Indian professionals can spend as much as 100 hours in drafting a patent application, which is then reviewed by an experienced US attorney, who can act as a patent examiner, before the patent application goes to through the actual examination process at USPTO. 2. Reducing Response Time: Offshoring also enables organisations to take advantages of multiple shifts and time zone advantages, which is especially important for contracts, legal research, electronic document management, document discovery, and in situations with strict deadlines. 3. US Lawyers and Paralegals can Move Up the Value Chain: Since the work done by Indian legal professionals is the same as that provided by a US associate with 2-3 years experience, US lawyers can move up the value-chain and provide a broader array of services to their clients. For example, if Indian lawyers complete most of the drafting, the US lawyers can provide more litigation services and spend more face time with their clients. Similarly, if the Indian IP professionals perform patent drafting for in-house IP attorneys of a corporation, these attorneys can spend more time with their R&D professionals and bring out more inventions that may be worth patenting. 4. Ability to Send Overflow Work: Approximately 98% of all US law firms and legal service providers have less than 20 attorneys, and in fact, 76% have less than 4 attorneys. Many such firms are often faced with feast or famine situations, struggling with either too much work or not enough work. Since they cannot afford to keep a large workforce on their payrolls, they face great difficulties hardship when they get a large project that needs to be completed in a short period of time. Such firms usually benefit a great deal by sending overflow work to offshore providers, who can provide a large number of reasonably experienced professionals with the right domain expertise at a reasonable cost. This can also help small and mid-size law-firms level the playing field because it allows them to compete more effectively with larger US-based law-firms.

5 5. Extending Venture Capital Money: For most startups, the cost of money is the highest in the initial stage, which is also the time when they need to patent their technology. Therefore, it is not surprising that a survey done by Evalueserve of 70 startups in the San Francisco Bay Area in 2001 revealed that one-third of the startups would not even consider patenting their technology, if the total cost of a patent application exceeded $6,000. Hence, the offshoring of patent applications by startups and its corresponding funding partners will allow the VC dollars to have more of an impact. 6. Reducing the Law-Associate Churn: Law-associates churn occurs when junior lawyers switch from one law firm to another or when they open their own law firm. Since most of these junior lawyers remain in the same geographical neighbourhood as the firm they left, this churn is much worse than simple attrition because the firm may have actively contributed to its competitor s growth, or even created a new competitor. Equally important is the fact that many law-associates especially, the more experienced ones have their own clients and their departure may also cause the corresponding movement of these clients to the firm s competitor. Hence, it is not surprising that most law-firms invest a substantial amount of resources in reducing such churn. Indeed, the offshoring of various legal and paralegal processes can help in lowering this churn because the senior lawyers in the firm would require fewer junior lawyers. 5. Impediments in Offshoring Legal and Paralegal Services The following are the main impediments associated with the offshoring of legal services: 1. The legal services industry has long had an aversion to risk. This is particularly true within the corporate legal area, where stakes are very high. Here the general counsel and other in-house lawyers are more comfortable outsourcing work to known US based law-firms. Hence, this industry will be slow to embrace offshoring as a means of reducing cost and improving efficiency. 2. Since the cost of client acquisition in the legal services industry is rather large, many law-firms and solo practitioners try to maximise the number of billing hours from each client. However, when they have to outsource or offshore some of the work, they need to reveal this to the client. Hence, sending work offshore clearly reduces the number of billing hours, and some times, the law firms can make up for the lost hours by being more profitable, but at other times, not! 3. Sending work offshore also raises the risk of losing confidentiality; although more and more research and development work is being done offshore, sending confidential material offshore still creates apprehensions in the minds of US lawyers. 4. Conflict of Interest issues are very important for law-firms, solo practitioners and in-house attorneys. And, most legal services providers in the US are bound by ethics and guidelines that incorporate such issues. Hence, an appropriate framework needs to be created while working with any offshore provider, and this can slow down the process of offshoring. In fact, the closer the work is to litigation (e.g., document discovery or patent claim mapping), the more important the issues of confidentiality and conflict of interest). 5. Approximately 80% of the lawyers and paralegals in the US work for the government, academia, nongovernmental organisations, and law-firms with three or fewer lawyers. Since the unit of work that can be offshored by most of these organisations is less than that can be accomplished by one full-time person per organisation, it will be very costly for offshore service providers to market and sell their services to this group. In fact, the real market for Indian offshore providers is the larger law-firms with 10 or more lawyers and mid-size and large corporations. Together these form about 15% of the total US market and about $40 billion in revenue in Currently, Indian law does not allow foreign (i.e., non-indian) law-firms to practice in India. Since India is a strong emerging market, whose GDP has been increasing at 7% a year, and its legal system is similar to that of the US, many US-based law firms are quite eager to open their own subsidiaries in India. Once this happens, they will have an automatic incentive to send work offshore in order to reduce costs and improve efficiency. So, where as much as 10-12% of information technology, banking, finance and insurance services services may be offshored to India by 2015, the corresponding number in legal services is likely to be 1.2%. As this percentage is so small, it is quite likely that some of the Indian service providers mentioned above may not survive beyond the next 2-3 years.

6 6. Evaluserve Disclaimer The information contained in this article has been obtained from sources believed to be reliable. The author disclaims any and all warranties as to the accuracy, completeness or adequacy of such information and the author shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.