BusinessworldLALITA ALOOR AMUTHAN IN NEW YORK, VISHAL KRISHNA
IN MUMBAI AND VATSALA KAMAT IN CHENNAI
A decade after legal work began to be outsourced to India, the industry has grown to reach an annual turnover of $60 million(Rs 246 crore). But despite the hype over how legal outsourcing and other such value-added services would alter the global economy by moving high value, white collar jobs out of western economies and into India, the fact is that this is not happening.
While the growth in the volume of legal work handled out of India by third-party legal process outsourcing (LPO) companies and subsidiaries of law firms based in the US is estimated to touch 7 per cent a year by 2010, according to the BPO Council of the Associated Chambers of Commerce and Industry (Assocham), most of the business still focuses on lower-end drafting and documentation work. Significantly, most of this work does not come from Ivy League US law firms but from American corporations looking to reduce internal legal costs.
The reasons are not hard to see. For one, regulations governing the US legal system require that any legal work done by a person who is not a member of an American bar must be supervised and vouched for by someone who is a member. While it is easy enough for a third party to monitor routine paperwork, since law is largely interpretative it is much more difficult to vouchsafe more subjective work that requires expert knowledge and training.
The political incorrectness of outsourcing, a phenomenon that is growing as the US Presidential election nears, is also intimidating many law firms, who fear both a backlash from employees and possible litigation that would generate adverse publicity for these extremely shy and secretive firms. Growing concerns over security breaches by outsourcing firms are also worrying law firms in the US, where lawyers can be debarred for breaches of client confidentiality. All these are risks that most big law firms in the US feel are not yet offset by the gains they would stand in terms of cost savings and productivity.
William Tanenbaum, international chair of the technology, intellectual property and outsourcing group at Kaye Scholer LLP and a partner in the firm’s New York office, says the mistake LPO proponents make is in assuming their industry’s trajectory will mirror that of the business process outsourcing (BPO) industry. “There’s never going to be an absolute, compelling case with legal outsourcing the way there is for outsourcing of call centres and work that are commoditised,” says Tanenbaum. “U.S. law firms are not offshoring any work because they are afraid of confidentiality issues, lack of control, besides they still have to figure out what they can send out that would be high volume enough to make it worth it.”
Tanenbaum, who advises several U.S. clients on legal offshoring issues, also says legal outsourcing will not take off in the way that information technology support and other services have because the former are highly subjective and judgement-oriented and less reducible to standard delivery models. Further, he argues, “You really are tied to specific client information and don’t get the high-volume advantage that you do when you are doing commodity work. Others may disagree, but it is a major consideration.”
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Others do disagree. Christopher Arena, a partner at Philadelphia-based intellectual property law firm Woodcock Washburn LLP, says legal outsourcing will increase with time. “Corporate budgets are not getting bigger; they are getting tighter,” says Arena. “It’s an issue that’s here to stay, the law firms and the corporations and the LPOs in India should figure out a way to do it effectively.” He adds that ultimately it boils down to providing value to clients.
That could, in fact, be the key to the problem. “Law firms have less of an incentive to offshore as such, because it is their clients who foot the bill anyway,” says Sonny Ajmani, principal consultant at Opera Solutions in New York, a global consulting firm that advises clients on outsourcing and offshoring. “Unless there is peer pressure, which will induce competition or pressure from the clients to reduce costs, I don’t see law firms going the offshoring way.”
Murky Future
All this has raised a debate about the future of LPOs and any talk on the issue invariably raises widely disparate views. A study conducted last October by Evalueserve, a Gurgaon-based knowledge process outsourcing and business research firm, says that Indian LPOs were employing only 1,750 professionals. The study also took the pessimistic view that this number would grow only gradually, to 7,000 by 2010 and to 22,000 by 2015.
But local LPO firms cite a competing 2005 report from the US-based research firm Forrester, which had concluded that India had close to 12,000 LPO jobs in 2004, a number the report said would rise to about 80,000 by 2015. The local firms also claim that they are on the fasttrack to success by pointing to the scorching growth rate their industry has been enjoying over the past few years.
Mumbai-based Pangea3 is a case in point. Founded in 2004 by entrepreneurs Sanjay Sham Kamlani and David Perla, the firm has120 lawyers on its rolls and claims it can handle almost everything that a US law firm can. It boasts revenues of about $10 million (Rs 41 crore) from a roster of over 150 clients (37 of them Fortune 500 companies) and has gone through two rounds of private equity funding.
According to Valuenotes, a Pune-based business intelligence and research firm, there are about 60 such LPOs in India, performing a wide array of services for their US clients. These range from low-value services such as processing immigration documents to highly sensitive matters such as doing contract analysis for corporate mergers.
None of this is enough to convince Alok Aggarwal, chairman and co-founder, Evalueserve, and one of the pioneers of the knowledge-process outsourcing business in the country. “Unlike many areas, such as information technology, banking, finance and insurance services, where as much as 10-12 per cent of the services may be offshored to India by 2015, the corresponding figure for legal services is only 1 per cent.”
The reasons are many. For one, when companies assess their costs, legal expenses normally figure at the bottom of their list. This is partly because legal costs are not fixed and difficult to estimate. There is also a reluctance to tinker with legal costs because of the high risks entailed by negative legal outcomes.
"Nobody wants to touch legal costs because your internal counsel will tell you that if you lose one major litigation, you’ll wash away any savings you can get through offshoring," says Opera Solutions’ Ajmani.
Ajmani says there is still scope for Indian LPOs to grow. First, they should forget about trying to win the real high-end work that has a significant impact on the future of the firm like, say, litigation. Instead, he says, they should focus on more routine jobs, such as the drafting of contracts, which is essentially a standardised process and relatively easy to farm out to third party service providers.
Already, the great part of legal work being outsourced to India is of this type, with patent and trademark filings constituting about 70 per cent of all LPO revenue.
Currently, only around 10 per cent of LPO work is related to litigation support, which is categorised as high-end LPO business. However, in terms of the total global legal process outsourcing market, which is pegged by the Quatrro research firm in TTTT at $20 billion (of this $6 billion are offshorable), it is precisely the latter segment where bulk of the opportunity lies.
LPO industry leaders expect major breakthroughs in the high-end segment over the next three years.
One way of LPO firms breaking the ice on high-end work could be through enlarging their presence in the US. Acknowledging the psychological benefits attached to a local presence in some legal areas, Puneet Mohey, president, Michigan-based Lexadigm, an offshore provider of legal support services, has a team of attorneys in the US and the remaining in an office in India. "That way, the client has an attorney based in the US to interface with. That greatly increases the comfort level with offshoring.” While Mohey admits that the larger law firms in the US have not yet begun offshoring (“it’s still a wait-and-watch strategy," he says), he is confident that it will not be long before that happens as well.
