Legal Process Outsourcing – Outlook and Opportunities

Legal Process Outsourcing (LPO) refers to the practice of a law firm or corporation obtaining legal support services from an outside law firm or legal support services company. When the outsourced entity is based in another country the practice is sometimes called Offshoring.

LPO services are at a nascent stage with relatively consistent market growth since the early emergence of LPO in 1997. LPO providers have established themselves in Canada, India, the Philippines, US, Israel and Latin America. They traditionally offer services in the areas of document review, legal research and writing, drafting of pleadings and briefs, and patent services outsourcing.

In-house law departments of major multinational corporations outsource some of their work in order to limit costs. Initially, legal process outsourcing gained traction in the Asian subcontinent. However, in recent years the so-called "near shore", "back-door" "specialized legal firms" have sprung up to satisfy law firms and corporations that demand quality and confidentiality.

Why LPO?
Most firms and corporations outsource primarily to save cash, and this is considered the biggest advantage for legal outsourcing. While an attorney in major legal markets such as the US may charge from $150–350 dollars/hour when performing rote services, legal process outsourcing firms can often charge a fraction of this. It has attracted major corporations to outsource specific work outside their legal departments.

LPO Industry and the Recession
LPO firms in India had predicted an annual growth of 100 - 200% (2007 - 2010) due to recession related litigation and the increased need to save costs in the US. Their expectations have not been met. The major reason for this is that US lawyers themselves have started looking at alternative fee structures due to the recession and job losses. In spite of some setbacks, the LPO industry has seen growth of about 40-60% in the last one year (2009). Although some areas of practice, such as real estate, have drastically collapsed due to the recession, some areas such as litigation, document review, and corporate compliance, among others, have gained ground, resulting in a good amount of business directed to LPO firms in India.

Confidentiality and Attorney-Client Privilege
LPO is entirely a different game. In other forms of outsourcing, there are issues like client confidentiality and data security. However, LPO has more complicated issues such as the liability of service providers and violation of the Attorney-Client privileges. During the early years of legal process outsourcing, many law firms hesitated to outsource their work. Attorney-Client Privilege is a doctrine that says anything conveyed between an attorney and his client shall be treated with utmost confidentiality and is exempted from disclosure even in a court of law. However, when either party discloses confidential information to a third party or the opposite party, the privilege is deemed to be waived.

Similarly, those people who are against legal process outsourcing claim that since communication is being sent to a country other than the US, the confidentiality is broken; hence, the privilege has been waived. However, the American Bar Association clarified this in 2008, clearing the way for the development of legal process outsourcing.

Global Lawyers
India has become one of the most popular destinations for companies wanting to outsource legal work. This is so because there are certain very obvious advantages like availability of English speaking, US and UK graduated, qualified lawyers working at less expensive rates. Besides the Indian legal system is based on English common law, much like the US, UK, and Australia. The other major LPO hubs are Japan, France, Australia, South Korea, China, Argentina and the Philippines. Some companies are also looking at setting up their own establishments in these countries to save costs. Many LPO providers are even using US-licensed attorneys residing in foreign countries who are willing to work at discounted rates. Countries like China and Sri Lanka are also stepping in as tough competitors to India. However, Indian legal professionals seem to be the most suitable ones due to their legal education system.
The business of legal process outsourcing emanate from:

• Several MNCs (in-house legal departments)
• Legal research firms
• International law firms
• Legal publishing companies
• Solo attorneys
• Attorneys-at-law

The key compelling reasons for outsourcing by law firms based in UK and US are:

• To adapt to meet changing opportunities
  
• To focus on broader business issues
  
• Cost effectiveness
  
• Increased external focus of the employees
  
• Access to world-class talent
  
• 24/7 working

The major legal areas which US law firms cover are:

• Banking laws
• Bankruptcy: business
• Bankruptcy: consumer
  
• General corporate laws
  
• Commercial laws
  
• Civil rights and liberties
  
• Criminal defense
  
• IPR laws
  
• International business laws
  
• Securities/financing laws
  
• Tax laws

The general legal market trends specific to operations of law firms in the US are:

• Changing economics: There are restraints on revenues driven by client fee resistance.
  
• Overheads are escalating, driven by support staff employment costs, IT expenditures, marketing costs, professional liability and health insurance premiums.
• Marketplace Maturation: There are shifts from the sellers’ market of the past to a buyers’ market in which clients increasingly determine pricing, staffing and strategy
• Firms are earning brand name recognition. The benefit of brand recognition is a 10% to 20% premium in fees and billing rates.
• Marketing expenditures are increasing, now approaching and even exceeding 2 % of revenues in some firms.
• Geographic expansion: In order to access new markets and clients, law firms increasingly are expanding geographically. This is true for diversified, full-service firms.

Local firms are becoming regional, regional becoming national, national becoming international, international going global.
n Offshore Outsourcing: Offshore outsourcing of patent prosecution is increasing. Patent applications and litigation support are the two areas of focus for offshore legal outsourcing to India, New Zealand, South Africa and other English speaking, low-labour cost locations around the world.
India leads in the LPO industry
The following advantages make India the leader in the legal process outsourcing industry:

• Vast resource of talented English speaking lawyers
• Pay rate between 10 to 15% of that of US lawyers
• Helping US law firms operate 24x7- friendly government policies for IT and ITES exports
• India, like the US, is a common-law jurisdiction rooted in the British legal tradition
• Appellate and Supreme Court proceedings in India take place exclusively in English
• Indian legal opinions are written exclusively in English

Average billing rates
Area Amount (US$ per hour)
Telemarketing 5-12
Transaction Processing 10-14
Tech Support (inbound) 11-12
Printing Support Services 15-25
Basic Back Office 15-25
F&A 15-35
Document Management Services 30-50
Research & Analysis 40-90
Patent Drafting & Legal Research 150

Types of services covered in the legal research and information area

• Draft research memoranda, law surveys and comparisons of the laws of various jurisdictions with respect to US federal and state case laws, statutory laws and regulations
• Collection, organising, reviewing data and preparation of the due diligence reports pursuant to a due diligence investigation, including M&A due diligence and due diligence related to SEC filings and financings
• Review documents for transactions and litigation and preparing appropriate reports
• Preparation of legal opinions for all practice areas and of briefs and facts at all levels of courts
  Patent oriented services
• Patent Portfolio Analysis
  
• End-To-End Patent Application Drafting and Filing
  
• Patent Mining and Administration
  
• Competitor Analysis
  
• Patentability Assessment
• Licensing Support
• IP Monitoring
• Patent Claims Mapping
• Patent and Technology Landscaping

Current market size
Current forecasts indicate the market size in 2011 to be $850 million with a growth rate of approx 34%.
Global Market for LPO.

The current addressable potential (demand) is expected to be in $3 billion by 2015. While India is expected to take approx 60% of the market they have currently tapped only 5-10%.

Global LPO outlook in 2011/12
The forecast of the 2011 LPO market is showing high growth in all areas of the legal community. The main user of LPO continues to be Corporate Law Departments, who are forecast to add $129 million of spending in 2011. Law firms are shaking off traditional caution and are fuelling 41% of the projected growth. On these forecasts, it is expected that at least nine high profile deals will be announced by law firms in the next 12 months.

Public sector use of LPO is the largest new source of growth in 2011. Political considerations and ongoing caution across all sectors will support the growth of the on-shore delivery market, though India remains the most common delivery location.

Drivers of LPO growth
The global LPO market is expected to grow 34% ($217 million) in 2011, from a base of $640 million, to $857 million. Corporate legal departments are the largest drivers of the growth; closely followed by UK-based law firms. US law firms are very active in the market but continue to be cautious relative to their UK counterparts.

Overall the US market continues to be constrained by political considerations. Ongoing discussions in Congress continue to create an environment in which potential buyers of LPO services are treading cautiously. This will remain an issue until at least 2012 and is holding back US organizations from getting the full value of outsourcing.

The UK public sector will be the major new growth opportunity for the LPO market as it reacts to extreme cost pressures. While this segment of the market has been a regular user of external legal resources, full scale outsourcing of in-house legal functions is now firmly on the agenda across the UK, in particular within local authorities.

Reputation risk and political considerations will benefit low cost, onshore locations, namely Northern Ireland for the UK and relatively low cost US states e.g. Utah, Oklahoma. India continues to be the preferred offshore delivery location, with countries such as the Philippines and South Africa hampered by relatively low volumes of skilled resources.

Ongoing economic uncertainty makes any organization wary of adding fixed costs and fixed capacity, and that makes LPO even more attractive. All deals benefit from significant cost savings, but market leaders are taking a strategic decision based on the value of having a variable cost base and a flexible talent pool.

Where does Sri Lanka come in?
As the latest global surveys indicate, Sri Lanka is a rapidly rising star in the IT/BPO firmament. With a highly skilled and resourceful workforce, a significant cost advantage relative to other regional players, a well-developed infrastructure, and geneous government assistance, Sri Lanka represents a unique outsourcing opportunity. Innovation, value, precision and reliability are the hallmarks of Sri Lanka’s IT/BPO industry. It is a centre of excellence in the areas of Finance, accounting, Travel and Aviation, Mobile and Telecommunications, and more recently in Legal Services. Furthermore, the country’s comparatively modest costs make the benefits of outsourcing accessible even to small and medium size companies.

Sri Lanka’s business climate is exceptionally welcoming. There is a vibrant open market economy, a refreshing lack of red tape, and a slew of tax incentives and other concessions. Small wonder then that some of the world’s biggest names have chosen to invest in Sri Lanka. With a proven track record and constantly expanding capabilities, Sri Lanka now offers a diverse range of IT solutions that can meet any need, on time and on budget.

The country is fast emerging as one of the world’s leading IT-BPO destinations. It is among the Top 20 Global Outsourcing Destinations according to AT Kearney’s Global Services Location Index (GSLI) 2009. Colombo, the commercial capital, is considered one of the Top 20 Emerging Cities by Global Services Magazine.

Sri Lanka offers world-class talent which is low cost, highly adaptable, English speaking and with strong work ethics. Sri Lankans are known to be friendly, highly productive, creative and adapt very fast to different cultures and environments. This results in easy integration to operating units of other countries. The 40,000-strong IT/ITES workforce is growing at a rate of 30% per annum. With 20,000 graduates per annum, many of whom have international exposure, there is a large and dependable pool to draw from. Furthermore, the attrition rate is remarkably low by international standards – only 6.6%.

Sri Lanka has little wage appreciation in comparison with other major global sourcing destinations such as India. With wages ranging from $60 to 1500 per month, a recent World Bank study revealed that Sri Lanka’s total cost per associate/worker can be as much as 30 - 50 % lower than other off-shoring centres.

Sri Lanka offers a uniquely salubrious business climate for the IT-BPO industry. Recognizing the potential of the sector, the government is providing a wide range of powerful incentives and concessions. Total foreign ownership is allowed and there are no restrictions on repatriation of earnings. Tax holidays range from 5-12 years. In addition, a concessionary rate of income tax of 15 % (up to a maximum of 20 years) is also extended after the tax holiday period.

Sri Lanka has an open economy and was the first country in South Asia to liberalize its markets. The economy is stable and resilient and many global companies have been operating in Sri Lanka for decades. The safety of foreign investment is guaranteed by the constitution (although this may change).

Legal systems
Sri Lanka has an independent judiciary system and follows the British Commercial Law principles and practices in its legal system, giving peace of mind to UK investors and outsourcers, as well as facilitating the set up of contracts.

Sri Lanka is a signatory to international treaties on intellectual property rights such as the Berne Convention and WTO/TRIPS and adopted a comprehensive IP regime. Sri Lanka also enacted an Electronics Transactions Act, Computer Crimes Act and is a signatory to the latest UN e-contracting convention. A Data Protection Code of Practice is also under preparation

Centres of Excellence
Sri Lanka has immense potential for Finance and Accounting Outsourcing with the world’s second largest pool of UK qualified accounting professionals (second only to the UK itself).
Colombo has been recognised as a global centre of excellence for Finance and Accounting, with Global Services Magazine ranking the city fifth in the world. Leading global companies such as WNS, Amba Research, Quattro and HSBC have set up their FAO centres in Sri Lanka.

In addition, Sri Lanka’s comparatively modest costs enable Small and Medium Enterprises (SME) to enjoy premium access to Sri Lanka’s tier one talent pool. Sri Lanka has a number of joint ventures with smaller companies of 50-150 employees. 75 % of the ITO-BPO companies in Sri Lanka are SMEs and 65 % of them are foreign direct investments.

Several European SMEs have started
R and D centres in Sri Lanka.
Sri Lanka has eight telecom operators and is connected to the world with four international submarine cables providing ample redundancy. Broadband, leased line and satellite connectivity are widely available.

Sri Lanka is among the first South Asian countries to establish a 3G network. The Telecom Regulatory Commission also provides special access facilities to IT and BPO companies enabling easy importation of equipment and commissioning of international connectivity.

Blue Chip portfolio
Some of the world’s leading IT-BPO companies have operations in Sri Lanka. These include HSBC, London Stock Exchange, WNS Global Services, Aviva, Microsoft, Motorola, Industrial & Financial Systems (IFS), Amba Research, RR Donnelly, Quattro, Virtusa, e-College, Valista, Millennium Information Technology and Innodata.

Legal Solutions Forum (LSF)
LSF is a group of like-minded Legal Professionals who have come together to establish a Forum that can address and cater for the opportunities presented by the expanding global Legal Process Outsourcing (LPO) market by:

n Creating awareness of Sri Lanka's capabilities in LPO, and
n Raising Sri Lanka's profile on the business stage and showing the world why Sri Lanka is a preferred outsourcing destination.

n Developing business opportunities in order to tap the vast global LPO market
LPO services that can be offered by Sri Lankan companies are;

• Commercial contracts
• Company formation and secretarial support
• Immigration Services
• Document Review/Electronic Discovery/ Litigation Support
• IP
• Legal Research
• Legal Transcription

More details and inquiries can be obtained by writing to basl.lawnet@gmail.com. (The writer is a consultant at the LSF).