Brief case - Legal Process outsourcing in India (Kazim Ali Khan Ma Foi)

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Legal Outsourcing is the new opportunity for Indian BPO industry - The note is made compiling variety of information just for the information of those who want to understand LPO industry and …

Legal Outsourcing is the new opportunity for Indian BPO industry - The note is made compiling variety of information just for the information of those who want to understand LPO industry and opportunities therein.

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  • 1. LPO- Approach Note Outsourcing legal work to India is no longer a novelty. It's a reality….. Introduction The outsourcing industry has been the stalwart in achieving rapid growth. An upward trajectory has been witnessed– moving from back office operations to becoming more knowledge intensive in nature. In other words, the movement has roughly been from BPO to KPO to now LPO. Legal process outsourcing refers to the off shoring of different elements in the legal process by law- firms, corporations, and in-house legal departments (mainly in US and UK) to offshore centers (mainly in India). The first firm to do legal outsourcing in India was Bickel & Brewer in 1995 with its office, I&A International, in Hyderabad. It dealt with digitalization of the legal documents and creating searchable databases. In 2001, GE was the first company to offshore its in-house legal work in India. There are four basic models of LPO firms under which the companies function in this domain. Captive centers (when a large corporation starts its own centre in foreign country responsible for its legal and business processing issues) for example, Fox & Mandal and ALMT Legal, two Indian based law firms, are teaming up with Patent Metrix, an Irvine-California based law firm), joint ventures by U.S./U.K based firms and third party vendors providing services to law firms and in-house counsel. According to US Census Bureau, the legal services industry in the US generated approximately $184 bn in revenue in 2008. Even a small fraction of legal work outsourced would translate into huge amount of business for offshore service providers. Ron Friedman on the basis of a survey, “The Change Agenda: Looking Ahead”, conducted by Rees Morrison and Aric Press came to a deduction that U.S. LPO spending in 2013 will be almost $2bn. Growth in LPO domain The LPO industry has in a span of few years seen major mergers and acquisitions, partnerships and alliances. The first acquisition happened when Mysore-based Software Paradigms International (SPI) India acquired the entire BPO/LPO clientele of Comat Technologies across the US and UK, which was served by Comat’s Mysore-based operations. Such deals are indicative of the pace of growth of the industry. Gavin Brier in his article “Recession” “Depression” Unemployment” “Meltdown” “Crisis” … wrote “The IT industry took 13 years to come to maturity, BPOs took half a decade and now LPOs are emerging in a big way.” Even magic circle firms like Clifford Chance are taking interest in doing business in the Indian subcontinent. Established LPOs including Pangea3, Jurimatrix and SDD Global have attracted a significant level of private equity and venture capital. 1
  • 2. Big player like CPA Global has entered into strategic alliances to further enhance their products thereby giving an edge to their services. In 2008, CPA Global entered into an alliance with major electronic discovery software provider Applied Discovery Inc., a division of Lexis Nexis. Recently UnitedLex entered into an alliance with Huron Consulting Group as well as Ocean Tomo, thus further enhancing and enriching the quality of their services and expanding their market. In terms of mergers and acquisitions, in 2008, Integreon acquired Datum Legal. CPA Global in the same year acquired SVPG to strengthen formers’ presence in German market. Services provided A plethora of services are provided by the legal offshore service providers. These services can be categorized under two categories: 1. Manpower intensive functions – Such as legal transcription, document conversion, legal coding and indexing, document review etc. 2. High-value services – They include patent and general legal research services like freedom- to-operate search, patent assessment, patent portfolio management, statutory and case law research, due diligence services such as technical, legal and financial analysis of companies for mergers and acquisitions, and contract drafting and review of contracts. 2
  • 3. For mature and stable providers of offshore legal services, the recession has only added to the business with clients expanding the offshore teams who had been serving them either in a shared model or as a dedicated team. As an example, one of CPA Global’s European telecommunication companies recently doubled the number of engineers performing patent research and analysis for them. In this manner, the ‘recession’ has further enhanced its attractiveness and financial viability. The present economic conditions have also made corporations, primarily the ones having large patent portfolios, to look for ways to reduce cost (e.g. by abandoning unused segments) or generate new revenue (e.g. by out-licensing/sale of patents). Large companies such as CPA Global, which have multi-shore operations and services catering to patent monetization, have also gained from such focus on the use of patent portfolios. Distinguishing aspects of LPO industry The LPO industry thrives on innovation, constant learning and development. A lot of emphasis is laid on the fact that employees are regularly updated with information as well as required skills. This education is not only limited to technical knowledge but also involves acquiring skills to be able to operate in a global environment. Himanshu Arora, Global Head, Learning and Development at CPA Global, in an interview told about the objective of providing training to the employees. Trends 1. LPO is big business generating US$ 61 million in revenues. This is expected to grow to US$ 605 million by 2010. 2. One study estimates that this domain is likely to generate 79,000 jobs by 2015. Indian lawyers working for these firms typically do what paralegals would do in US. 3. The range of services includes low-end services like legal transcription, document coding and docketing. High-end services include prior art searches, drafting patent documents and conducting due diligence. 4. The industry is largely driven by the sheer number of law graduates the country generates and the fact that it has a legal system that is similar to the one in the USA or the UK. Captive outfits have the lion’s share of high-end work on account of their confidential nature. 5. LPO opportunities can transform that five per cent to something closer to 40 per cent, by drawing law graduates into work that’s not just large in volume but tremendously diverse. 6. Rising legal costs in the U.S., and more recently in the EU, are amongst a variety of other factors that are driving a diverse portfolio of legal work to India. For a young legal professional, a career with an LPO is attractive for several reasons: it is a sunrise industry which should see a boom in the next 3-5 years; there is a tremendous variety of work at all levels of expertise; high-end opportunities for graduates of top law schools; attractive remuneration and future management prospects; an opportunity to work in a corporate 3
  • 4. structure that straddles borders; a learning opportunity for those considering legal and paralegal careers in the U.K. or the U.S. 7. Forrester Research estimates that there could be a demand for as many as 79,000 LPO professionals in the next 7-8 years. The Future Law firms to go in for a cylindrical makeover Major Law firms in US, Canada and Australia have a pyramidal set-up. The top echelons are occupied by the partners who are supported by an army of supporting staff constituted by associates, counsel and non-equity partners placed at the bottom. The cylindrical structure will not only further enhance the productivity and quality of large law firms but it will also make the clients reap the benefits of smart work culture at leading offshore based providers of quality legal support services. Such offshore companies employ talented lawyers and engineers who are only too keen on working for and being associated with marquee law firms from the developed world. What is seen as “grunt work” by associates in the law firms is seen as a fantastic opportunity to learn about the practice of common law overseas. As with all things, attitude matters and American, Canadian and Australian law firms only stand to gain by tapping the positive attitude. LPO salaries for Indian lawyers are generally well below $10,000 a year By comparison, a U.S. contract lawyer usually earns around $30 an hour while associate base salaries at major firms in New York start at $160,000 a year. But the math is not that simple. Maintaining a group of lawyers in India imposes significant infrastructure costs on the outsourcing companies. Aside from office space and computers, the leading companies also have U.S.-trained lawyers working in both India and the United States to supervise the work of Indian staff. They also maintain client development teams to market services to U.S. companies. Such costs explain why outsourcing companies usually charge clients around $30 an hour, lower than what a U.S. staffing agency would generally charge but not by the magnitude simple labor- cost arbitrage would suggest. Price is not ultimately where Pangea3 wants to compete though. Perla is forthright in stating his belief that Pangea3 does better work. The only lawyers who work for staffing agencies, said Perla, "are the ones who couldn't make it as real lawyers." 4
  • 5. In his view, the temporary lawyers typically hired to perform document review on major litigation have minimal skills and zero motivation. In contrast, Pangea3 can attract the best and the brightest young lawyers in India, fluent in English and trained in English common law. Perla said clients have held "bake-offs" in which the Pangea3's Indian lawyers were asked to perform the same tasks as U.S. contract lawyers. He said the Indians soundly trounced the Americans. Pangea3 has attracted significant backing for its ambitious vision. Two years after its 2004 founding, the company garnered a $4.4 million investment by GlenRock Capital, the fund headed by former top private equity lawyer Lawrence G. Graev, who now serves as Pangea3's nonexecutive chairman. Last year, the company scored a $7 million investment by venture capital firm Sequoia Capital, which also helped shepherd Yahoo, PayPal and YouTube. Onshore Option New York-based Quislex, another leading LPO company, with around 130 lawyers in the southern Indian city of Hyderabad, has taken a slightly different tack. The largely self-funded company last year entered a joint venture with Strategic Legal Solutions, a leading domestic contract attorney agency. The venture, called SQ Global Solutions, markets offshore and onshore outsourcing options together. Ram Vasudevan, the chief executive officer of Quislex and a onetime Skadden, Arps, Slate, Meagher & Flom associate, said there are some tasks for which Indian outsourcing may be appropriate but other tasks for which U.S. contract lawyers may be better suited. "There can be parallel teams working in the U.S. and India," said Vasudevan. "There are no hard-and-fast rules." He said U.S. clients may favor domestic contract lawyers for work involving highly restricted data, for which proximity may be important, as well as upper-level tasks like drafting documents. But he thinks Indian lawyers may appeal to clients that are seeking stable, long- term teams to work on their matters. Compared with U.S. staffing agencies, turnover at legal outsourcing firms is quite low, he said. Leading LPOs do offer many attractions to Indian lawyers. The top law firms in India tend to be family affairs, with few chances for advancement for those lacking the proper connections. On the other hand, LPOs offer a technology startup-like environment. At Pangea3, that even includes stock options. The opening of the Indian legal market to foreign competition would no doubt affect the ability of outsourcing firms to recruit top candidates. Foreign firms would likely be able to pay even higher salaries and would put more direct pressure on Indian law firms to open up their top ranks as well. 5
  • 6. Perla said market liberalization in India would clearly affect the LPO business but he expressed confidence that Pangea3 would be in a strong position by the time that happened, if it ever did. Competition for Talent Robert Glennie, the managing director of New Galaxy and former chief executive officer of KPMG legal arm K Legal, said opening in a smaller market was the only way to meet U.S. and European clients' expectation on costs and service. Glennie also thinks the competition has grown too great in the document review area. He said New Galaxy is focusing more now on routine commercial law tasks, such as performing due diligence or customizing boilerplate purchase contracts. Because of the newness of the field, Gregg Kirchhoefer, an outsourcing lawyer with Kirkland & Ellis who spoke at last week's LPO summit, said there were still no industry standards for how a mishap or mistake would be handled."With U.S. lawyers, you always have the rules of ethics," he said. "Going to a service provider offshore, you have to replace that gap-filler with contract." Glennie said LPO firms increasingly hold professional liability insurance policies similar to those of law firms. Moreover, many are based in the United States or Europe, so clients would not find them beyond reach in the event of a dispute. But Lawrence Schultis, an outsourcing lawyer at Pillsbury Winthrop Shaw Pittman who also spoke at the summit, said such safeguards needed to be considered as part of the "hidden costs" of outsourcing legal work to India. He also said he thought the cost advantages of outsourcing firms may soon be complicated by software advances that make sifting through discovery documents more like using an e-mail spam filter. "Where we've seen successful outsourcing is not where you just do labor arbitrage," he said. "We feel a better way is to improve technology so a process works better and more efficiently Through litigation funding, companies and organizations can seek funding to support their litigation and arbitration claims. If a claim is approved for funding because of its merit and other factors, it receives funding for legal fees and other litigation costs through to resolution and hopefully to recovery. If there is a recovery, the Funder receives out of the proceeds, the money it spent to pursue the case, and in addition, a negotiated share of the proceeds. Of course those within the LPO industry have all referenced many times the much vaunted KPMG estimate that first level document review encompasses anywhere between 58% and 90% of total litigation costs. 6
  • 7. Both LPO and litigation funding possess synergistic solutions to this dilemma. In addition, the very existence of LPO as an option can increase the likelihood of a litigation funder to commit to funding a particular matter, whereas the involvement of the funding company might help assuage some of the main barriers to entry into LPO on the part of the client’s outside counsel representation. Specifically pertaining to document review, conservative estimates identify cost savings of 50% achievable through the utilization of offshore legal process outsourcing. If we hypothesize a case with anticipated pre-LPO legal fees in the region of $2 million, and if we base our calculations on the KPMG figures, with LPO, those anticipated legal fees for our hypothesis now come down to $1.1 million to $1.42 million. In addition, the very existence of LPO as an option can increase the likelihood of a litigation funder to commit to funding a particular matter, whereas the involvement of the funding company might help assuage some of the main barriers to entry into LPO on the part of the client’s outside counsel representation. “Clients are demanding greater transparency of charges, pushing law firms to change their old ways and move to fixed fees and off shoring. In the future, the success of your firm will depend on how you embrace new technology and how you approach offshore legal services, shared knowledge and fixed fee charging.” Furthermore the “O” in LPO stands for “outsourcing” not “off shoring”. None of the aforementioned LPOs are restricted to just the Philippines or India. Whether through wholly owned subsidiaries, dedicated delivery centers, joint ventures, or strategic partnerships, all are capable of providing a “best shore” or “blended shore” solution. Cutting edge technologies, stringent security (above and beyond what is prevalent in the vast majority of domestic based law firms), and innovative solutions including non linear review, multi-shore operations, and fixed pricing, are all commonplace within the leading LPOs. LPOs to add more punch to India action The legal process outsourcing (LPO) sector in the country is likely to see more action in the coming months. As of now only around 30% of the top ten Indian BPO players have evinced interest in entering this segment. But, according to industry experts, big players like Infosys, Wipro and others are studying this model and could look at entering this business in the near future. It makes sense for the BPOs to enter this segment because the profit margins in LPOs are higher. And legal-process outsourcing is part of high-end knowledge process outsourcing, which many of these BPOs are already into. However, this buoyant sector could present many challenges to the BPO sector; the biggest among them is finding the requisite talent. 7
  • 8. Also, with LPO firms across the country having smaller teams and serving niche clients, defining a suitable business model is important for these large-scale BPOs. There is huge potential in the LPO segment, but there is gestation period of about 3 years that slows down the growth. Many of the LPO companies are more specialized and boutique kind of firms which are doing higher-end work and having smaller teams. It could be very difficult for the BPOs to scale up the operations in such a scenario,” said Avinash Vashistha, CEO, Tholons. Conclusion LPO as an industry is quite different from other knowledge-based industries. The work done is high on intellectual level and is also expertise-centred. As it is in the growing stage, one can expect a lot of innovations happening. With the newly enacted LLP Act, it is expected that international law firms will also be making foray into the Indian legal market. Sec 59 of the LLP Act allows law firms to set up their business within Indian boundaries. Such firms will act both as consumers and producers of trained force suitable for addressing the legal support needs of global corporations. In that respect, the LPO industry and the international law firms will converge and are expected to fuel the growth of each other. It is also expected that some international law firms may also setup their own ‘captives’ that will address the offshore legal support needs of their clients. Knowledge intensive outsourcing functions such as offshore legal off shoring aka LPO have the real potential of becoming indispensable tools in a corporate strategists’ toolkit. What is needed is a ‘leap of faith’ to move from transaction-oriented client-vendor relationships to a relation that is a true partnership. Anyone who has used an external provider for legal needs, offshore or otherwise, knows that depth and ability to fulfill complex needs comes with time. The same is true for work done by engineers and lawyers located offshore. Offshore companies that have healthy client relationships and talent retention practices that actually work would be ideally placed to grow into the role of such partners. 8
  • 9. Name of the No of S. No Location Area of Work client Employees. 1 United Lex Delhi Litigation Support, IP, Contract Drafting support 325 2 LPO Legal Adv Hyd Legal Research, Doc Review, patent 150 3 Bickel and Brewer Hyd Legal Transcription, Legal Research 50 4 CPA Global Delhi Document Review, Contract Management, Legal Research 250 5 Cobra Legal Chennai Litigation 125 6 Quattro Delhi Litigation, Contract Management, IP, Legal Research. 125 7 Quislex Hyd Legal Research, Litigation 200 8 Clutch Group Blr Legal Research, Doc Review, patent 200 9 ITAG Business Sol Kolkata Domestic, Geographic patenting 80 Legal Research, Contract Management, Paralegal, Litigation 10 Evalue serve Delhi Support 100 LPO or Legal Process Outsourcing is one of the value added BPO services which involves legal work that companies outsource to more economical destinations. It consists of various processes which can be classified into low skilled quantitative tasks or high end qualitative tasks. Low skilled quantitative tasks consist of: 1. Paralegal Services & Legal Coding 2. Corporate Secretarial Services 3. Legal Memo Development 4. Medical & Legal Transcription 5. Document Management 6. Litigation Support 7. Data entry 9
  • 10. 8. Immigration data analysis and working on labor relations Whereas the high end qualitative tasks include: 1. Intellectual Property Rights & IPR Portfolio Management 2. Patent Search & Application drafting 3. TM and Copyright Registration 4. Legal Research/Opinion work 5. Document Review and Analysis 6. Intelligence Services 7. Contracting and Administration Challenges in Outsourcing to India 1. Along with a wide range of advantages listed above, legal off shoring also brings some major challenges, which must be taken into account before law firms embark upon outsourcing legal work at full-scale to India. 2. Cutback in the domestic legal jobs in the US and UK 3. Risk of loss of maintaining an attorney – Client Confidentiality 4. Initial cost of training the respective Indian lawyers to maintain quality 5. Regulatory Scrutiny under varying privacy laws 6. Malpractice / Practice law without license 7. Conflicts of interests and ethical considerations – Very difficult to determine when the 8. LPO vendor has the liberty to accept work from any client 9. Unpredictability in regular flow of work 10. High attrition – Many firms switch at last minute due to minor changes in fees 11. Complete quality assurances from firms are difficult to get 12. Performance and quality issues while delegating work to somebody who is more than 13. 10,000 km away in terms of monitoring and control 10