The recent economic crisis proved a boomtime for those in the outsourcing trade
One man’s trash is another man’s treasure, as they say, and for those in the outsourcing business the recent economic crisis was far from economically catastrophic.
Outsourcing providers are becoming ever-more ubiquitous: even the legal services profession – once thought to be the last bastion against cost cutting – is facing an onslaught of vendors, known as legal process outsourcing (LPO) providers, singing the siren song of ‘cheaper, faster, better’.
‘The LPO vendors’ sweet spot is basic, repeatable legal work – things that are highly scalable,’ explains Professor David Wilkins of Harvard Law School, referring to tasks that require sifting through mountains of paperwork, such as litigation-related discovery, or routine review processes such as document management.
The number of LPO vendors has mushroomed from around 40 firms in 2005 to 170 at the end of 2009, according to Fronterion, a niche consulting firm that advises in-house and outside counsel on emerging LPO issues. Exact revenue figures on a global scale are more difficult to come by, however. ValueNotes, an Indian market research firm, reports that 2009 saw $440 million in growth – a 38 percent increase over the previous year – among India-based LPO firms. Many anticipate the global industry will be raking in billions of dollars within the next five to 10 years.
‘A lot of these projections are coming from the outsourcing companies themselves, which is a little like GM’s projections about how many cars it is going to sell, so you have to be a little skeptical,’ Wilkins cautions. ‘[But] I started looking at this in 2006 and the growth between then and now has been enormous.’
While India tends to dominate the outsourcing space, and the vast majority of LPO vendors – more than 85 percent, according to Fronterion’s research – are at least primarily based in India, a growing number of providers are setting up shop elsewhere. The Philippines is a particularly popular alternative destination right now, and Fronterion pegged South Africa as the emerging destination in 2010.
Another interesting trend to emerge recently is what’s known as onshoring or near-shoring, where companies remain within the US but move their operations to economically depressed areas where legal service wages tend to be lower. ‘Onshoring is certainly a major trend in – and will likely become an integral part of – legal outsourcing,’ predicts Fronterion managing principal Michael Bell.
Data export controls are a key driver in this. ‘There are limitations on what can and can’t be pushed offshore,’ explains Daniel Masur, a partner with the law firm Mayer Brown. ‘In some cases it comes down to specific legal prohibitions. These US firms offer an alternative to clients that otherwise would be unable to use LPO providers because of the offshore issue.’
No global green light
Despite the hype, outsourcing as a panacea for rising legal costs has yet to receive universal approval. Kenneth Lefkowitz, a partner at the law firm Hughes Hubbard, is staunchly opposed to the idea. ‘This is just one of those flavor-of-the-month things,’ he says. ‘We’ve always been able to come up with fee arrangements with the client.’
Wilkins, on the other hand, sees the continued reliance of in-house counsel on LPO firms for the routine review processes as inevitable. The legal function, as he points out, is already an outsourced service. Bell agrees. ‘Outsourcing has been an integral part of the legal profession basically since it came into existence, so the issues now are how the work is performed and in what jurisdiction,’ he explains.
Even ardent outsourcing supporters like Martin Shively, associate general counsel of Microsoft, whose patent department outsources some of its work to vendors in India, says outsourcing faces a major challenge when it comes to the unbundling of legal projects.
‘Culturally, we lawyers are accustomed to just handing work to outside counsel and expecting them to manage it and bring the entire results back,’ he explains. ‘With outsourcing, however, you need to look at your project, split it into various components and then send each of those components to the most efficient resource. It’s a big challenge to ask lawyers to view legal work as a process – a set or series of steps – as opposed to one cohesive work of art.’
On a related note, there are issues of supervision. Many LPO providers will be quick to point out that they are not in the business of practicing law. In order to prevent any misstep into the unauthorized practice of law, legal guidelines call for a supervising attorney to oversee and take responsibility for the outsourced work.
‘If we were approached by a corporate counsel who wanted us to provide IP support services, but the client didn’t have an IP counsel on its legal team, we would be unable to provide those services,’ explains Mark Ross, vice president of legal services at LPO provider Integreon. ‘That’s because the client would have no in-house IP counsel to competently evaluate the work product we would provide.’
The special relationship
An interesting caveat, Ross points out, would be if the corporate client engaged outside IP counsel. Although law firms have been slow to embrace the outsourcing trend, Ray Bayley, CEO of LPO firm Novus Law, says he’s noticed a shift ‘in the last 24 months or so of law firms becoming far more interested in what we do.’
This tripartite relationship, and the attendant issue of who assumes supervisory responsibilities, is raising some interesting ethical issues. In fact, Bell says it was one of the hot topics discussed at the recent American Bar Association Commission on Ethics 20/20 – and one the commission will be discussing further when it meets again in October.
In Shively’s case the need for direct supervision – and more involved training – of the outsourcing employees led him to move to New Delhi, and now Microsoft’s patent team has set up a rotating ex-patriot position overseeing the India-based outsourcing operation. ‘When I first went to India I viewed it as a one-time event,’ he explains. ‘But somewhere along the way we realized we were getting sufficient value from our teams out there to make it worthwhile to keep it going.’
Ultimately, when it comes to working with a legal outsourcing vendor, both Shively and many LPO firms underscore the point that successful legal outsourcing relationships require time to develop. ‘We took very small steps,’ Shively says of the process. ‘We like to experiment, have quiet failures and learn from those. There were some interesting challenges to work through, but none of it was insurmountable.’
