Legal process outsourcing on firm footing

After two lacklustre years, the LPO business is growing beyond most analysts’ expectations

In the first three months of 2010, legal process outsourcing (LPO) firm UnitedLex received more Requests for Information (RFIs) than it did in the whole of 2009.

“We were expecting more enquiries from April onwards, but we saw a more than 100 per cent increase in enquiries before that,” said Anup Bhasin, UnitedLex’s chief operating officer.

Many of these RFIs are being converted into solid business deals. One case in point is UK communication giant British Telecom, which transferred its five-year-old captive legal services centre in Gurgaon to UnitedLex, in March this year.

In April, Microsoft signed a deal with Los Angeles-headquartered Integreon for support services, including contract review, and named the LPO service provider its exclusive supplier of offshore managed document review.

“We are witnessing an upswing in the number, scale and scope of LPO engagements,” confirmed Mark Ross, Integreon’s vice-president, legal services.

The offshoring legal services business in India is still small — annual revenues account for less than 4 per cent of total BPO revenues — but it was among the fastest-growing segments of the BPO business. Inevitably, that meteoric, headline-attracting growth dwindled in 2008 and 2009. But now, the business is booming again, that too significantly beyond most companies’ and analysts’ expectations.

In November, research firm ValueNotes had estimated a relatively modest growth of 19 per cent for 2010 and predicted, “industry fortunes are not likely to improve much through 2010” because legal spends in the US, the market that accounts for 75 per cent of the Indian LPO business, had shrunk on the back of the slowdown.

That forecast now appears to have been outstripped already. “There has been faster growth momentum in March and April,” admitted Neeraja Khandala, who leads the legal practice at ValueNotes. She suggests that LPO revenues could grow as much as 25 per cent, still significantly slower than the 48 per cent between 2006 and 2008 but considerably faster than 16 per cent in 2009 (see chart).

Ironically, if the global slowdown squeezed revenues over the past two years, it is the impact of recession that is driving demand now. “As the saying goes, you need lawyers in good times and bad,” said Ganesh Natarajan, president and CEO of Chicago-headquartered Mindcrest.

The upsurge in demand is coming from both corporate legal departments and law firms. “The global legal marketplace is going through dramatic change. Because of the recession, overall spends on outside counsel dropped so law firms saw a drop in top-line from the earlier double digits with corporations pushing firms to reduce costs,” said Khandala.

Billing rates for legal services in India at $30 to $40 an hour are typically a third of US costs for comparable services. In cities like New York, the differential can be as much as ten times.

That cost differential is turning into an even bigger advantage now. “Legal departments routinely faced budget cuts of up to 20 per cent in 2009 and the squeeze looks set to continue,” said Integreon’s Ross, adding, “so increasingly our major multinational corporate and law firm clients are entering longer-term partnerships.”

There are numerous examples of the growth in demand both from law firms and multinational corporations, Ross added. In 2009, he said, leading global law firms Simmons & Simmons, Allen & Overy and Osborne Clarke all announced legal outsourcing engagements with Integreon.

The nature of the demand, however, has changed. ValueNotes’ November report pointed out that areas like mergers and acquisitions (M&As) and intellectual property have seen a “temporary softening” but bankruptcy and litigation support are expected to see a “notable increase”. Mindcrest’s Natarajan, for instance, said he foresees growth in the litigation support business “which will be a result of expected shareholder lawsuits”.

Within litigation support services, one of the fastest-growing segments is electronic discovery (or eDiscovery), which refers to document reviews in civil litigation of information in electronic format, such as email, instant messaging chats and so on.

“The volume of electronically stored documents has been a major problem for corporates. As the bytes of information continue to rise, the level of eDiscovery services sent offshore will also increase,” the ValueNotes report predicted, especially because it is more “measurable”.

Legal outsourcing engagements, added Ross, are most successful when it involves work that is “somewhat repetitive and process-driven”. Thus, contract management, drafting and review one of the highest growth areas within Integreon’s suite of LPO solutions. Legal research is another high-growth area, said Bhasin of UnitedLex.

Although low-cost remains the key driver for offshoring legal services, the ValueNotes report predicted a shakeout in response to the increasing sophistication of demand for clients. “The overall approach of the legal services industry will shift towards being more ‘strategic’ rather than ‘response to opportunity’ from the buyer as well as the service provider end,” the report said.

These developments mean that growing demand for legal services is unlikely to result in the kind of pre-2007 explosion in the number of service providers. According to ValueNotes research, there are about 140 LPO service providers in India, up from around 40 in 2005. These range from tiny ten-man start-ups to large global corporations like Integreon, Mindcrest, UnitedLex, CPA Global and so on with clients in the Am Law 200 list (this is a ranking of US law firms by the influential ‘American Lawyer’ magazine).

Increasingly, however, the larger LPO service providers are eyeing global delivery models. “Onshoring and offshoring each have their own place and Mindcrest is able to provide either service or a blend of both, depending on a client’s need,” said Natarajan. Multiple locations, backed by access to a scalable workforce are, quite simply, becoming a prerequisite,” added Integreon’s Ross.

Integreon has a “follow the sun, multi-shore” mantra and plans to expand its capabilities from Mumbai, Delhi and Manila to South Africa and China, where it has delivery centres. Falling wages in the US are also providing an opportunity to expand onshore capabilities. Last year, for example, UnitedLex set up a 50-man outfit in Kansas to provide clients with what Bhasin calls a “right-shore perspective”.

Many large service providers are eyeing countries like Philippines, South Africa and China for expansion but India’s primacy in the business is unlikely to be challenged because, as Khandala points out, none of these countries can deliver the kind of scalability that India offers as yet.