2011 State of the Legal Outsourcing Sector

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2011 State of the Legal Outsourcing Sector

  1. 1. 2011 State of the Legal Outsourcing Sector Ravi Shankar Ravi Shankar 11/8/2011
  2. 2. EXECUTIVE SUMMARY Notable findings in the 2011 report include:  Large law firms are outsourcing their legal work: The majority of LPO providers said that in 2010, at least one of their clients was a law firm in the Global 100 2010, which is a list of the top 100 revenue generating law firms in the world in 2010. Three LPO providers said they had at least seven clients in the Global 100 2010. Subsequent surveys may ask the same question to establish whether more law firms are outsourcing their legal work.  Having many large law firms as clients may not be necessary for growth: Based on survey results, the relationship between (a) number of clients in the Global 100 2010 and (b) revenue generated in 2010 appears to be weak. One LPO provider with no clients in the Global 100 2010 reported 2010 revenue between $1 and $2 million. Of the respondents with 1 to 3 clients in the Global 100 2010 (n=5), two (40 percent) reported revenue between $1 and $2 million and one other reported revenue of greater than $2 million.  LPO providers may not be “concentrated”: It appears that LPO providers generate at least half of their revenue from many (>3) clients and thus, their business is not concentrated. Seventy-five percent of LPO providers receive 50 percent or less of their revenue from their three biggest clients.  Corporations, not law firms, may be driving legal outsourcing: Most LPO providers said that 20 percent or less of their revenue comes from law firms. When asked his opinion about this, the Chief Marketing Officer of one large LPO provider agreed.  The largest LPO providers report having generated more than $5 million in revenue in 2010.  All LPO providers report positive revenue growth in 2010.  It appears that growth in the LPO industry has picked up in 2011: LPO providers projected greater growth in 2011 when surveyed (a) in summer 2011 as compared to (b) in fall 2010 (when last year‟s survey was administered). 2011 State of the Legal Outsourcing Sector 1
  3. 3. TABLE OF CONTENTS EXECUTIVE SUMMARY ............................................................................................................. 0 TABLE OF CONTENTS............................................................................................................... 2 INTRODUCTION........................................................................................................................... 3 CLIENTS ............................................................................................................................................ 5 GLOBAL 100 2010 ................................................................................................................................. 5 TOP 3 CLIENTS ...................................................................................................................................... 7 LAW FIRMS ............................................................................................................................................. 7 BILLING ............................................................................................................................................. 9 REVENUE .......................................................................................................................................11 TOTAL REVENUE ................................................................................................................................11 2010 GROWTH ....................................................................................................................................11 2011 GROWTH ....................................................................................................................................12 COMPARING 2010 AND 2011 GROWTH ...........................................................................................13 SERVICES ........................................................................................................................................15 APPENDIX A ..................................................................................................................................16 METHODOLOGY .........................................................................................................................19 ABOUT THE AUTHOR..............................................................................................................21 2011 SURVEY ...................................................................................................................................22 2011 State of the Legal Outsourcing Sector 2
  4. 4. INTRODUCTION From June to August 2011, a 14-question survey was administered to legal process outsourcing (“LPO”) providers. Twelve LPO providers participated in the survey. This report (hereafter “2011 report”) is based on their responses. Purpose The purpose of 2011 report is to gather information about LPO providers‟ (I) clients, (II) billing rate, and (III) revenue. These topics may reflect the “health” of the LPO industry. For example, the 2011 report answers the following questions: Are large law firms outsourcing their legal work? How much revenue are LPO providers generating? By contrast, the 2010 report profiled LPO providers (e.g., number of employees, services offered) and solicited practical advice from them about entering the LPO industry (e.g., what training is offered to employees and should LPO providers establish an office in the United States).1 Additionally, the author consulted LPO providers and industry experts in drafting survey questions. As a result, survey questions may reflect what LPO providers sought to learn about one another. Understanding the 2011 Report Questions were chosen recognizing that few LPO providers likely would participate in the survey. For example, even though the 2011 report does not draw any inferences about what percentage of all LPO providers had a client in the Global 100 2010, that a single LPO provider had at least 11 clients in 2010 in the Global 100 2010 is informative. Therefore, survey responses are informative even though the reader cannot draw reliable inferences about all LPO providers. The 2011 survey defined the term “LPO” to avoid confusion about what services constitute “LPO.” The 2011 survey defined “LPO services” as: work that law firms provide. Stated another way, LPO work is work that was previously billable to a client at a law firm. It includes document review, legal research and writing, and contract management. LPO work does not include back- office support to law firms or corporate legal departments (e.g., payroll services, transcription, and secretarial services). (emphasis in original) Notably, this definition excludes back-office support to law firms and legal departments. Some “LPO providers” consider this back-office support to be “LPO” work.1 In fall 2010, the author administered a 49-question survey (hereafter the “2010 report”). Nineteen LPO providersparticipated in the 2010 survey, including large, reputable LPO providers. Please contact IndianLPOSurvey@gmail.com for acopy of the 2010 report. 2011 State of the Legal Outsourcing Sector 3
  5. 5. At least one LPO provider that responded to the 2011 survey deviated from theabove definition of LPO. That LPO provider told the author that its definition of“LPO” includes (a) outsourcing legal and intellectual property work to onshore LPOproviders and (b) “leveraging legal talent in low cost-jurisdictions.”Finally, readers should be cautious about drawing inferences about the entire LPOindustry from survey responses. The 12 LPO providers who participated in thesurvey may not be representative of the industry (see the Methodology section).Additionally, the response rate to the 2011 survey is low; only 12 LPO providersparticipated. 2011 State of the Legal Outsourcing Sector 4
  6. 6. CLIENTS LPO providers were asked three questions about their client-base: (I) how many of their clients are in the Global 100 2010, a list of the top 100 revenue generating law firms in the world in 2010;2 (II) what percentage of their revenue comes from their “top 3” clients (measured by revenue); and (III) what percentage of their revenue comes from law firms, as opposed to corporations and other non-law firm entities.3 GLOBAL 100 2010 Some LPO providers are garnering business from the largest law firms in the world. As Figure 1 shows, the majority of LPO providers (66 percent, n=12) said they have at least one client in the Global 100 2010.4 The plurality of LPO providers (42 percent, n=12) said they have between one and three clients in the Global 100 2010.2 The Global 100 2010 is a list maintained by ALM Legal Intelligence. It is available athttp://www.law.com/jsp/tal/PubArticleTAL.jsp?id=1202472338838&slreturn=1.3 Regarding questions (II) and (III), LPO providers were not given a timeframe—e.g., what percentage of their revenue in 2010came from their “top 3” clients. Therefore, LPO providers may have responded with different timeframes in-mind (e.g., in2011, in 2010, historically).4 “(66 percent, n=12)” means that 12 LPO providers answered this question. Of those 12 LPO providers, 66 percent (or eightLPO providers) said they have at least one client in the Global 100 2010. Correspondingly, if the answer was, “(25 percent,n=8),” then eight LPO providers answered the question and two LPO providers said they have at least one client in the Global100 2010 (25 percent of eight is two). 2011 State of the Legal Outsourcing Sector 5
  7. 7. These responses support the hypothesis that a few LPO providers are capturing the legal outsourcing market.5 Just three LPO providers (25 percent, n=12) report having at least seven clients in the Global 100 2010, compared to nine LPO providers that do not. Survey responses may reveal a correlation between (a) number of clients in the Global 100 2010 and (b) number of LPO employees (one measure of an LPO provider‟s size).6 On the one hand, no LPO provider with fewer than 50 LPO employees responded having more than three Global 100 2010 clients. On the other hand, some “large” LPO providers (as measured by number of LPO employees) had few clients in the Global 100 2010. Of the LPO providers with at least 76 LPO employees, 60 percent (n=5) had no more than 3 clients in the Global 100 2010. Therefore, the absence of a client in the Global 100 2010 may not be a bar to an LPO provider‟s growth (as measured by number of LPO employees). Additionally, even small LPO providers (≤50 LPO employees) report working for law firms in the Global 100 2010. Forty percent of LPO providers with 50 or fewer LPO employees (n=5) had at least one client in the Global 100 2010. None of these LPO providers, however, had more than three clients in the Global 100 2010. See Appendix A, Table 1 for a breakdown of LPO providers‟ size, as measured by number of LPO employees, versus its number of clients in the Global 100 2010. There appears to be a weak correlation between (a) number of clients in the Global 100 2010 and (b) 2010 revenue. While the two LPO providers with at least 11 clients in the Global 100 2010 both responded that they earned at least $2 million in revenue in 2010, having clients in the Global 100 2010 is not necessary for high revenue. One LPO provider with no clients in the Global 100 2010 reported 2010 revenue between $1 and $2 million. Of the respondents with 1 to 3 clients in the Global 100 2010, two reported revenue between $1 and $2 million and another reported revenue of greater than $2 million.5 In the 2010 report, when asked what their “biggest challenges” were, a majority of respondents (57 percent, n=7) respondedthat a few LPO providers capture the market. (2010 report, p. 17) Senior employees at two LPO providers have told theauthor that a few firms (about a dozen according to one of them) capture the “high-level” legal outsourcing market (i.e., wheremajor corporations and law firms send their work).6 In other words, all else equal, the more clients a LPO provider has in the Global 100 2010, the larger that LPO providerlikely is. 2011 State of the Legal Outsourcing Sector 6
  8. 8. Top 3 Clients LPO providers vary in what percentage of revenue they derive from their “top 3” clients (i.e., the 3 clients that generate the most revenue for the LPO provider). This may be thought of as a measure of “concentration”—to what extent do LPO providers depend on a few clients for their business. One-third of LPO providers (n=12) receive more than half of their revenue from their “top 3” clients. At least two LPO providers each answered (a) less than 20 percent, (b) between 31 and 40 percent, and (c) between 41 and 50 percent. The biggest LPO providers (as measured by revenue) may be big because they have many clients, not because a few clients outsource a lot of business to that LPO provider. Concentration was compared to the LPO providers‟ 2010 revenue. Among respondents to both questions (n=9), there appears to be a slight correlation between “concentrated LPO providers” (generating at least 51 percent of their revenue from “top 3” clients) and 2010 revenue. Concentrated LPO providers (n=3) were no more likely to generate $500,000 in 2010 as they were to generate $1,000,000 to $2,000,000 in 2010. On the other hand, LPO providers that generated more than $5,000,000 in 2010 (n=2) were not concentrated (no more than 30 percent of their revenue from “top 3” clients). See Appendix A, Table 2 for the responses of these nine LPO providers. 2011 State of the Legal Outsourcing Sector 7
  9. 9. LAW FIRMS Law firms do not appear to be the entities driving legal outsourcing. Rather, corporations and other non-law firm entities may be driving legal outsourcing. Most LPO providers (58 percent, n=12) said that 20 percent or less of their revenue comes from law firms. Another two LPO providers said between 21 and 40 percent of their revenue comes from law firms. In total, at least 75 percent of respondents (n=12) report that less than half of their revenue comes from law firms.77 One LPO provider said that between 41 and 60 percent of its revenue comes from law firms. If less than 50 percent of thisLPO provider‟s revenue comes from law firms, then 10 of 12 LPO providers (83 percent) report that less than half of theirrevenue comes from law firms. 2011 State of the Legal Outsourcing Sector 8
  10. 10. BILLING LPO providers were asked one question about their billing rate, paraphrased here: What is your average hourly billing rate for document review?8 The typical LPO provider charges between $21 and $30 on average for document review (50 percent, n=12). Nonetheless, there are both “inexpensive” and “expensive” LPO providers. LPO providers charge an average fee of from less than $15 to more than $41 for document review. It may be incorrect to associate a LPO provider charging a cheap price with poor quality. One of the LPO providers who charges $15 or less, on average, for document review reports having between one and three clients in the Global 100 2010. The inference is that a large law firm would not outsource its legal work to a poor-quality LPO provider. Also, a cheaper document review fee may reveal what type of document review projects these LPO providers work on (low-end or high- end (complex)). One of the LPO providers who charges at least $41 on average for document review explained its “high” billing rate: “[We] focus[] on „higher-end,‟ more complex document review and risk management.” Additionally, “inexpensive” LPO providers may be smaller (as measured by number of LPO employees as well as revenue). Of the two LPO providers that charge at8 The full question is: “What is the average hourly billing rate for document review? If the LPO firm engages in “alternativefee arrangements” (e.g., billing by task, contingency, or other non-hour based fee arrangement), please estimate what theeffective hourly billable rate would be. The effective hourly billable rate is: revenue / total hours worked.” 2011 State of the Legal Outsourcing Sector 9
  11. 11. most $15 on average for document review, the larger one had between 26 and 50LPO employees. Of the three LPO providers that charge at most $20 on average fordocument review, two generated at most $500,000 in revenue in 2010 and the otherdid not answer the this revenue question.This analysis is limited because it only focuses on average document review billingrates. A “cheap” document review-LPO provider may be expensive for otherservices. A “cheap” document review-LPO provider also may not generate much ofits revenue from document review. Of the two LPO providers that charge at most$15 on average for document review, one said it received 10% of its revenue fromdocument review (the other 50%).See Appendix A, Tables 5 and 6 for additional analysis on LPO providers‟ averagedocument review billing rates. 2011 State of the Legal Outsourcing Sector 10
  12. 12. REVENUE LPO providers were asked three questions about their total revenue: (I) what their revenue was in 2010; (II) by what percentage their revenue increased in 2010; and (III) what their projected revenue growth for 2011 is.9 Additionally, (IV) the responses LPO providers gave in response to the 2010 survey are compared to their 2011 responses. TOTAL REVENUE The largest LPO providers generated more than $5 million in revenue in 2010. Two- thirds of LPO providers (n=9) generated at least $1 million in revenue in 2010. 2010 GROWTH All respondents report positive revenue growth in 2010. Two-thirds of LPO providers (n=12) report substantial growth—revenue grew by at least 41 percent in 2010. Just 13 percent of LPO providers report growth of 20 percent or less in 2010.109 The 2011 Survey clarified that all years referred to the calendar year (January to December), not the LPO providers fiscalyear, which may differ.10 LPO providers were asked, “What was the LPO firm‟s revenue growth from 2009 to 2010?” 2011 State of the Legal Outsourcing Sector 11
  13. 13. 2011 Growth In both the 2010 and 2011 surveys, LPO providers were asked to project their 2011 revenue growth. It appears that growth in the LPO industry has picked up in 2011; LPO providers projected greater growth for 2011 in summer 2011 (when the 2011 survey was administered) than in fall 2010 (when the 2010 survey was administered). A smaller percentage of LPO providers projected at most 20 percent growth for 2011 in summer 2011 (17 percent, n=12) than in fall 2010 (29 percent, n=14). The percentage of firms projecting growth of at least 41 percentage remained stable (57 percent in fall 2010; 58 percent summer 2011). Among LPO providers that responded to both the 2010 and 2011 surveys (n=4), one LPO provider predicts greater growth (Appendix A, Table 3, Row C); one LPO provider projects smaller growth (Row B); and the other two LPO providers project comparable growth (Rows A and D). (Note that the possible answers LPO providers could give differed between the 2010 and 2010 surveys.) 2011 State of the Legal Outsourcing Sector 12
  14. 14. Comparing 2010 and 2011 Growth In the 2011 survey, LPO providers were asked (a) by what percentage their revenue increased in 2010 and (b) what their projected revenue growth for 2011 is. Comparing the results of the two questions does not reveal whether LPO providers are predicting greater revenue growth (measured by percentage growth) in 2011 than 2010. On the one hand, on the whole, LPO providers report greater growth for 2011. Fewer LPO providers report 21 to 30 percent growth for 2010 than for 2011. On the other hand, among individual survey respondents, more LPO providers (a) project greater growth in 2011 than they realized in 2010 (n=4) than (b) vice versa (n=3). 2011 State of the Legal Outsourcing Sector 13
  15. 15. 2011 State of the Legal Outsourcing Sector 14
  16. 16. SERVICES LPO providers were asked what percentage of their revenue comes from the following services: (1) document review; (2) legal research and writing, including contract drafting; (3) contracts management; (4) patents and intellectual property; and (5) other. Ten LPO providers responded to this question. The purpose of this question is to evaluate what services LPO providers generate their revenue from. The author received feedback from the 2010 survey that just asking LPO providers what services they offered (2010 report, p. 22-24) was insufficient. The resulting answers do not reveal what services clients purchase; LPO providers may claim that they can handle a variety of legal work but not have the skill to offer those services.11 LPO providers generate most of the revenue from document review (33 percent) followed by patents and intellectual property (21 percent), contracts management (17 percent), other (15 percent), and legal research and writing (14 percent).11 This presumes, to some degree, that clients won‟t purchase services from LPO providers lacking the skill to provide thatservice. 2011 State of the Legal Outsourcing Sector 15
  17. 17. APPENDIX A 2011 State of the Legal Outsourcing Sector 16
  18. 18. 2011 State of the Legal Outsourcing Sector 17
  19. 19. 2011 State of the Legal Outsourcing Sector 18
  20. 20. METHODOLOGY The methodology section discusses (I) which LPO providers were contacted and (II) sources of bias. Who was Contacted The 2011 survey was administered to LPO providers from June to August 2011. In total, 12 LPO providers responded to the survey. The author attempted to contact most LPO providers. First, unsolicited emails were sent to LPO providers—over 200 of them in total. The author primarily identified LPO providers from Internet research. At least three reminders were sent to LPO providers who had not responded to the author‟s survey. Second, on July 29, 2011, a notice about the 2011 survey was posted on the blog LPO Savvy, http://lposavvy.info/. No LPO provider responded to that notice. Sources of Bias There are at least two sources of bias that affect what interpretations may be drawn from survey responses: (1) response bias and (2) participant bias. Response Bias The 2010 report does not make statistical inferences about the entire LPO industry. Respondents to the 2011 survey may not reflect the entire industry:  Small, recent entrants may be underrepresented. To find LPO providers to contact, the author primarily relied on the names of LPO providers he had gathered from Internet research conducted in fall 2010.  Non-India based LPO providers may be underrepresented. When the author conducted Internet research in fall 2010, he was interested in LPO providers based in India. Additionally, respondents to the 2011 survey may systematically differ from non- respondents. For example, some non-respondents may not characterize themselves as “LPO providers” even though they fell under the author‟s definition of “LPO provider” (see Introduction section). For example, it appears that the managing director of one company declined to participate because the company was based in the United States. As a result, the company may not have thought of itself as an outsourcing company. This may have deterred other “LPO providers” from participating in the survey. 2011 State of the Legal Outsourcing Sector 19
  21. 21. Participant Bias“Participant bias” means the bias that occurs when participants either unintentionally(does not know the correct answer but answers/guesses anyway) or intentionallygives an incorrect answer. Regarding unintentional bias, the most frequentrespondent was the LPO provider‟s CEO, President, or a chief officer (50 percent,n=12). There may not be much unintentional participant bias among these persons;presumably, they know their company‟s business well.Regarding intentional bias, respondents have an incentive to provide answers thatmake the LPO industry appear stronger than it actually is because that mayencourage more law firms and businesses to outsource their legal work. Case-in-point is the question about how many of the LPO providers‟ clients are in the Global100 2010; as more large law firms outsource their legal work, other law firms thatpreviously didn‟t outsource their legal work may follow. 2011 State of the Legal Outsourcing Sector 20
  22. 22. ABOUT THE AUTHOR Ravi Shankar is a 2010 Harvard Law School graduate and presently works as a lawyer at a large U.S. law firm. His full biography is available at http://www.linkedin.com/pub/ravi-shankar/11/877/60b. Relevant to this report, in fall 2010, Ravi worked at a business process outsourcing (“BPO”) provider in Chennai, India that sought to enter the LPO industry. This is Ravi‟s second LPO report. Ravi may be reached at IndianLPOSurvey@gmail.com. 2011 State of the Legal Outsourcing Sector 21
  23. 23. 2011 SURVEY Before beginning this survey, note that I define “LPO” work as work that law firms provide. Stated another way, LPO work is work that was previously billable to a client at a law firm. It includes document review, legal research and writing, and contract management. LPO work does not include back-office support to law firms or corporate legal departments (e.g., payroll services, transcription, and secretarial services). Additionally, all years (2010, 2009) in this survey refer to the calendar year (January to December). Some LPO firms may have a fiscal year that is different than the calendar year. Background Information 1. Name and title of the person filling out the survey: 2. How many LPO employees does the LPO firm have? ≤25 26 to 50 51 to 75 76 to 100 101 to 200 ≥201 2011 State of the Legal Outsourcing Sector 22
  24. 24. Who Are The LPO Firm’s Clients 3. How many of the LPO firm‟s clients in 2010 are in the Global 100 2010? The Global 100 ranks the world‟s highest grossing law firms. Find a copy of the Global 100 2010 at the end of this Survey. 0 1 to 3 4 to 6 7 to 10 ≥11 4. What percentage of the LPO firm‟s revenue comes from its top three clients (i.e., the three clients generating the most revenue)? ≤20% 21% to 30% 31% to 40% 41% to 50% ≥51% 5. What percentage of the LPO firm‟s revenue comes from law firms (as opposed to corporations, for example)? Do not restrict the answer to law firms in the Global 100 2010. Rather, include all law firms. ≤20% 21% to 40% 41% to 60% 61% to 80% ≥81%Billing 6. What is the average hourly billing rate for document review? If the LPO firm engages in “alternative fee arrangements” (e.g., billing by task, contingency, or other non-hour based fee arrangement), please estimate what the effective hourly billable rate would be. The effective hourly billable rate is: revenue / total hours worked. ≤$15 $16 to 20 $21 to $25 $26 to $30 $31 to $35 $36 to $40 ≥$41 2011 State of the Legal Outsourcing Sector 23
  25. 25. Revenue 7. What is the LPO firm‟s revenue in 2010? All values are in U.S. dollars. ≤$500,000 $500,001 to $1,000,000 $1,000,001 to $2,000,000 $2,000,001 to $5,000,000 ≥$5,000,001 8. What was the LPO firm‟s revenue growth from 2009 to 2010? Negative or zero growth ≤20% 21% to 30% 31% to 40% 41% to 50% ≥51% 9. What was the LPO firm‟s projected revenue growth from 2010 to 2011? ≤20% 21% to 30% 31% to 40% 41% to 50% ≥51% 10. What percentage of the LPO firm‟s revenue in 2010 came from the following types of services? Give a percentage for each answer, rounding to the nearest ten (e.g., 25% rounds to 30%). All percentages should add up to 100%.  Document review: Click Here.  Legal research and writing, including contract drafting: Click Here.  Contracts Management: Click Here.  Patents and intellectual property: Click Here.  Other: Click Here. 2011 State of the Legal Outsourcing Sector 24
  26. 26. Market Analysts 11. In your opinion, how reliable are Valuenotes‟ market projections? For example, Valuenotes has predicted that by 2014, the LPO sector will be generating $1 billion per year. This is an often quoted statistic in reports about the LPO industry. Not reliable and/or inaccurate Somewhat reliable Very reliable No opinion 12. In your opinion, how reliable are the Datamonitor Group‟s market projections? The Datamonitor Group projects that legal outsourcing revenue will be $2.4 billion by 2012. This was cited in a June 2, 2011 New York Times article. Not reliable and/or inaccurate Somewhat reliable Very reliable No opinion 13. In your opinion, how valuable and reliable are the Black Book of Outsourcing‟s LPO firm rankings and consumer satisfaction surveys? Not reliable and/or inaccurate Somewhat reliable Very reliable No opinion 14. Feel free to add any additional comments about Valuenotes, the Datamonitor Group, or the Black Book of Outsourcing. These comments will be included in the Report: 2011 State of the Legal Outsourcing Sector 25

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