Many good points already have been made about what offshore legal outsourcing (or legal process outsourcing/LPO) has achieved in 2010, and what it is likely to contribute in 2011. But this is not just a new year; it's a new decade. This second decade of the 21st century is the one in which the legal world, as we know it, might be turned upside down. Along with related factors, offshore legal outsourcing is likely to continue to be among the leaders of the law revolution. Let us count the ways:
1. Meritocracy Beats Aristocracy
In the new, client-centric legal world, legal services providers can no longer rely on privileged positions. They can no longer depend on unwavering acceptance of the old model, which Cisco General Counsel Mark Chandler famously described as "the last vestige of the medieval guild system to survive into the 21st century." Lawyers and law firms must deliver value. That's what high-quality, offshore legal outsourcing is all about. This is the number one reason why the LPO (legal process outsourcing) sector is likely to continue to boom throughout the new decade.
The Association of Corporate Counsel (ACC), in effect the trade association for in-house legal departments worldwide, has noted that "[f]or the past two decades, there has been an unrelenting drive by companies and their suppliers to reduce costs while increasing quality and value in their products and services. The only outlier seemed to be the law firms." In response, the ACC has instituted a "Value Challenge... based on the concept that firms can greatly improve the value of what they do, reduce their costs to corporate clients and still maintain strong profitability."
The old days when clients would simply roll over and accept the cost burden of the "pyramid structure" of large law firms, under which clients traditionally have been asked to pay a king's ransom for massive hourly billing by an army of junior associates at the bottom, who do not know what they are doing, and who, as a result, conveniently bill more hours, increasingly are just that: "old." As reported in The Economist: "American law firms typically get fresh law graduates to do such grunt work and then bill clients for it at steep rates. But the recession has prompted clients to rebel. A recent survey by the American Lawyer found that 47% of large firms had seen clients refuse to have hours billed to beginner lawyers."
Nevertheless, a number of large law firms have been somewhat slow to catch on. Legal industry expert Jordan Furlong explains as follows: "LPOs failed to interest law firms with their promise of good legal work at low prices, but they captured the full attention of — and millions of dollars in work from — clients. LPOs represented the first legitimate third-party option for legal work, and their impact is only starting to be felt." As Furlong goes on to note, "[t]hese are unprecedented times for the legal profession, as our marketplace makes the difficult but necessary transition from a 20th- to a 21st-century model. Fasten your seat belts, because it’s going to be an increasingly bumpy ride."
This observation is seconded by a leading Australian newspaper, which reports that "[t]he legal profession is on the cusp of unprecedented change and legal services outsourcing is at the forefront of that change.... While there are still some in the legal profession who believe they can hold back the tide -- or who hope the force of change will die down to a mere ripple on the ocean -- the truth is corporate clients are ready for a radical sea change in the way legal services are provided. They have seen a new way of working and are not going back to the old way."
A continuing refrain from legal practice management experts is that Western lawyers and law firms need to start operating with the value-based metrics of a business. As lawyer and columnist Mitch Kowalski observed in Canada's Financial Post, with particular reference to the rise of offshore legal outsourcing: "It is well past time to face the fact that law is a business. And we better start acting like businesses, or soon, we’ll all be 'out of business.'"
The same warning is coming not only from outside commentators, but also from the managing partners of "BigLaw" firms themselves. Robert Ruyak, Managing Partner of Howrey, one of the world's top 100 law firms - a firm that recently lost 60 partners and may not see the end of 2011, according to some pundits - says: “It’s time for firms to start acting like other businesses - it’s a new world and you have to adjust."
Similarly, Tony Williams, the former Managing Partner of Clifford Chance, another large global law firm, has advised that for law firms, "creating links with legal process outsourcers (LPOs).... will be essential to dampen the effects of unpredictable markets."
What is the connection between law firms "acting like other businesses," and the use of offshore legal outsourcing? For starters, there is probably not a single Fortune 500 company that has not been outsourcing work to India for years. The business world knows well, what law firms only recently are learning, which is that to maximize efficiency, work should be done by enthusiastic, talented personnel in locations that are the among the least expensive and most productive, regardless of national borders.
Regarding the move to offshore legal outsourcing, David B. Wilkins, director of Harvard Law School’s program on the legal profession, recently told The New York Times as follows: “This is not a blip, this is a big historical movement. There is an increasing pressure by clients to reduce costs and increase efficiency.” According to the Times report, "with companies already familiar with outsourcing tasks like information technology work to India, legal services is a natural next step."
Many law firms are less than happy with the changing situation. ABA Journal columnist Patrick Lamb points out that "reaction against moving the profession into line with the business world reflects a persistent 'law firms are different' mentality which is, as [Kirkland & Ellis] former managing partner Fred Bartlit has said, “reminiscent of what the owners of the best buggy whip makers were saying when General Motors was first founded."
Indeed, if law firms can't adapt to a client-centric world and start living up to the values and practices of the companies they represent, they will be toast. Which is fine with some of the leading LPO providers, who are happy to eat them for breakfast, if it comes down to that.
But it will not come down to that. Forward-thinking law firms are embracing the change, and reaping rewards from it. Some of those law firms already are receiving more assignments and client revenue, not less. This is coming in part from (a) existing clients who send them “elective” legal work that otherwise would never have been performed, due to cost, but which is affordable when Western lawyers are paid to supervise and edit the work of attorneys offshore, and (b) new clients who hire those firms because of their reputation for developing a "value" alternative to the old model.
For example, partners from three large US/UK law firms (including Latham & Watkins and Morrison & Foerster), and inside counsel at one large bank, recently quit their jobs to form a boutique law firm, radiant.law, that bills for value, rather than by the hour, and that embraces offshore legal outsourcing, rather than resists it. One of the radiant.law founders, former Latham & Watkins partner Alex Hamilton, explains: "We had all been working at large law firms or in-house at large companies and felt that there was a lack of movement towards change and development in law firms that we were all looking for, so we decided to set up our own firm with a view to offering services to clients that are better value... using a support network including offshore legal providers."
In the new decade, smart law firms will continue to form new models, adapt to change, embrace legal off-shoring, and learn how to make all of this serve not only the interests of their clients, but their own. And as for the clients, they will expand their use of offshore legal outsourcing providers, whether in conjunction with law firms or directly.
2. Change is Happening in the East as Much as in the West
Much has been written about the dramatic upheaval in the US and UK legal worlds. But just as rapidly as the Western legal market is changing, so too is the legal world in India. National law schools are proliferating, skill sets are improving, business-oriented metrics are beginning to prevail, and India's "demographic dividend" is in full effect.
15 years ago, if an average middle-class Indian son told his parents he wanted to become a lawyer, this would have been about as welcome as an announcement that he's leaving town to join a circus. The sclerotic Indian legal system, in which court cases can take as long as a quarter of a century to be resolved, rivals the slowness of the Dickensian litigation in Bleak House. And it has not been uncommon for Indian "advocates" to earn as little as the rupee equivalent of $100 per month, or less, as their starting salary, if they receive any salary at all. In the pecking order of prestige and pay in India, much of the legal profession historically has been located somewhere around the rank of policemen, plumbers, and corrupt politicians. Fields like information technology, engineering and medicine for a long time had a near monopoly in attracting the best and brightest.
Not so today. With the rise of India as an economic powerhouse, accompanied by the rise of Indian corporate law firms, and with a well-publicized boom in legal process outsourcing, young people in India, and perhaps more importantly their parents (who still call the shots in traditional Indian families), have come to see law as an excellent career choice.
This increase in the prestige in being a lawyer, combined with the sheer size and youth of India's population (1.2 billion people, 65% of them young) has profound implications for the entire legal world. As former government official Pavan K. Varma writes in his excellent book, "Being Indian," although the caste system that began several thousand years ago is now "officially frowned upon," still in India "the mentality of a stratified society is very much in evidence in everyday life," and there is still a ubiquitous "obsession with status." That's why the number of elite, or "national," law schools in India has increased from one to 14, to meet the new demand for upscale legal careers. That's why the Indian educational system now is turning out record numbers of outstanding, English-speaking law graduates. By contrast, as The New York Times reports, law school in the U.S. increasingly is being seen as "a losing game," as "the glut of diplomas, the dearth of jobs and [the law schools'] candy-coated employment statistics have now yielded a crop of furious young lawyers who say they mortgaged their future under false pretenses."
Back in India, the benefits of the upsurge in talent among the legal labor pool will not be fully realized by LPO providers who focus primarily on document coding. The on-campus perception of those companies, at least among the best law students, is that they are unsavory "document factories." For that reason, the main beneficiaries of India's demographic shift toward the legal profession, apart from Indian corporate law firms, will be those providers who place their emphasis on intellectually challenging, higher value work such as legal research, and legal drafting of everything from contracts, memoranda, and litigation papers.
3. The New Tort Reform
Now that high-profile U.S. law suits have been defeated with the use of high-end, offshore legal outsourcing, the corporate world is just beginning to realize that the best response to bogus claims is not a costly settlement payout, but instead, a cost-effective defense.
In a comprehensive law review article on offshore legal process outsourcing, Professor Cassandra Burke Robertson of Case Western Reserve University School of Law has highlighted how offshore assistance in the resolution of frivolous lawsuits in particular is revolutionizing the way in which law is practiced in the West. "International legal outsourcing is reshaping the practice of law," says Professor Robertson, in her 59-page report, "A Collaborative Model of Offshore Legal Outsourcing." Professor Robertson uses an actual high-profile litigation in Los Angeles to demonstrate some of the most surprising and profound ways in which LPO services are shifting the legal landscape:
Offshoring the defense in that case did not merely replace domestic legal services with a lower-cost alternative elsewhere; instead, it changed the nature of the defense entirely. It took a case that would likely have been handled outside the court system through a nuisance settlement and brought it within the formal adjudicatory system. As a result, the case was decided on the merits and the decision is publicly available, potentially discouraging further meritless claims.
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[I]nternational outsourcing can transform individual lawsuits, [and] it also demonstrates how outsourcing is quickly becoming a part of mainstream legal practice. Clients who experiment with outsourcing tend to continue their contracts and institutionalize the practice.
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Given the rapid growth of transnational legal outsourcing—and the large cost-savings associated with that growth—it seems safe to say that outsourcing is not going away anytime soon. The legal profession will have to adapt to incorporate this new way of providing legal services.
In short, the offshore outsourcing of legal work is leading to an unprecedented new breed of effective tort reform, as defendants facing bogus or inflated claims are choosing to litigate and win. As Professor Robertson points out, this in turn discourages such claims. And the money that otherwise would be spent by defendants on nuisance payouts can be plowed by corporations right back into Western economies.
The implications are enormous. The average large corporation spends $19.4 million per year on outside counsel fees, much of it for litigation, and that is not including the huge amount of money wasted on nuisance payouts to plaintiffs and their lawyers.
In a brilliant review of the hit film, The Social Network, Harvard Law Professor Lawrence Lessig takes the example of the $65 million settlement extorted from Facebook founder Mark Zuckerberg by the Winklevoss twins (a deal the twins now say is not rich enough, so they are trying to void it in the courts) to point out that "the real villain" in the Facebook story is a legal system that taxes innovation and rewards frivolous litigation plaintiffs:
[A]ny legal system that would allow these kids to extort $65 million from the most successful business this century should be ashamed of itself. Did Zuckerberg breach his contract? Maybe, for which the damages are more like $650, not $65 million. Did he steal a trade secret? Absolutely not. Did he steal any other “property”? Absolutely not—the code for Facebook was his, and the “idea” of a social network is not a patent. It wasn’t justice that gave the twins $65 million; it was the fear of a random and inefficient system of law. That system is a tax on innovation and creativity. That tax is the real villain here, not the innovator it burdened.
In the coming decade, corporate and other defendants are increasingly likely to turn the tables on meritless lawsuits and realize tremendous costs savings, through offshore legal outsourcing.
4. Capital Funding of Litigation
The new development of third-party funding of plaintiffs' litigations, to the tune of hundreds of millions of dollars provided by seemingly unlikely investors such as Citigroup, means that corporations are under even more pressure to reduce their legal costs. Offshore legal outsourcing is an answer, not only to them, but also to the claims investors, who want to maximize their returns on worthwhile cases, rather than see most of their money go to legal fees.
Regarding third-party involvement in litigation funding, The New York Times reports as follows: “Total investments in lawsuits at any given time now exceed $1 billion, several industry participants estimated. Although no figures are available on the number of lawsuits supported by lenders, public records from one state, New York, show that over the last decade, more than 250 law firms borrowed on pending cases, often repeatedly."
This new trend "sends shivers down the spines of general counsels all across the globe,” says Lisa A. Rickard of the Institute for Legal Reform, an arm of the United States Chamber of Commerce. It's a development that could not have come at a worse time for corporate legal departments, which already have been told to reduce their spending on outside counsel. For those cases that cannot or should not be settled, one solution increasingly will be the use of litigation support services from offshore providers. Legal outsourcing attorneys in India already have proven they can perform the vast majority of the work involved in litigation, including virtually anything other than appearing in court, signing court papers, and offering legal advice. And apart from dramatically reducing costs, the Indian providers have demonstrated that they can help defendants actually win.
For the new investors in litigation, because every dollar in legal fees means a reduction in the return on their investment, they too may come to see offshore legal outsourcing as a crucial value proposition.
Given that the total amount of third-party investment in litigation already exceeds the total annual revenue of legal process outsourcing companies worldwide, this new funding trend is likely to provide yet another boost to offshore providers in the new decade.
5. The Billable Hour Bites the Dust
Value-based, flat-fee or fixed-fee billing already is beginning to turn the legal world upside down. Instead of trying to maximize hours and costs, law firms that practice alternative billing, voluntarily or otherwise, are now trying to minimize those same hours and costs. Under that scenario, offshore legal outsourcing is not a dangerous threat to law firms, but instead a great opportunity.
Although billing by the hour is by no means dead, it seems to be an endangered species. The American Lawyer magazine reports that 91% of law firms agreed to flat fee billing for at least some entire matters in 2010.
Susan Hackett, Senior Vice President and General Counsel of the ACC, says, in a joint news advisory: "[V]alue-based billing options are becoming institutionalized, and will likely increase steadily year over year. We were interested to see if in-house counsel would continue to experiment with - or continue to deploy - new fee structures once the markets began to rebound and budgets were not under the same level of stress in 2010. The fact that billing practices did not revert back to the ‘way we used to do it’ demonstrates that in-house counsel are not retreating, but instead continuing the march to drive costs and value away from measuring the value of hours alone.”
For example, Morgan Lewis & Bockius reports that 40 percent of its revenues are billed through alternative fee arrangements. That firm handles Cisco's commercial litigation nationwide for an annual flat fee, and it has been entering into similar agreements with other clients.
Another mega-firm, O’Melveny & Myers, distributed an eventually leaked internal memo saying that by 2012, the firm will "adopt a single rate card" and become "the leader in providing high-end legal services on a fixed-fee basis." The memo noted that “[d]ocument review and production have been outsourced altogether or client-directed to contract attorneys.” The firm goes on state that “litigation clients are looking for rate and fee reductions, and we expect that mindset will continue into the next good economy and beyond.” As for transactional departments, according to the memo, they "will not be able to deploy and charge for large numbers of associates in the deals that will be done when the economy rebounds.” Lastly the firm says it will “will seek out opportunities to take on high-value litigation and transactions engagements at fixed fees.”
When law firms are paid a flat or fixed fee for a transactional or litigation matter, regardless of the number of hours required to complete the assignment, all of a sudden there is a tremendous incentive to outsource as much of the work as possible to low-cost, high-quality locations. By the year 2020, offshore legal outsourcing providers may be performing a substantial portion of these services, including not only document review, but also legal research and drafting.
6. Unintended Effects of Regulatory Reform
The financial regulations that arose from the lack of transparency and oversight blamed for the recent recession that shook the core of the Western economy, together with the regulations contained in the new U.S. healthcare legislation, have created vast new compliance obligations for U.S. corporations, all of which cry out for cost-effective, offshore legal solutions.
For example, private equity advisers and hedge funds now have to register their firms with the U.S. Securities and Exchange Commission and reveal their books to regulators. Also, institutions accepting deposits will be required to comply with the bank holding regulations issued by the Federal Reserve Bank. Similarly, companies that issue mortgages are subject to new record-keeping requirements to discourage improper loans. The new Consumer Financial Protection Agency will require entities that create consumer debt to disclose more information. Energy and healthcare reforms also will impose new compliance requirements.
Corporate legal departments, already under pressure to reduce spending, are likely to turn to offshore legal process outsourcing throughout this new decade, in order to get the new regulatory compliance work done as efficiently as possible.
7. "Legal Trauma Units" Level the Playing Field
As the ABA Ethics Commission astutely recognized, offshore legal outsourcing can be a blessing to overworked and out-gunned solo practitioners and small law firms. LPO providers are acting as "legal trauma units" for such lawyers, expertly handling their deadline emergencies, leveling the playing field for them, magnifying their strength, and allowing them to not only meet difficult deadlines, but even run circles around the client-required, "lean staffing" of large law firms.
In other words, hidden behind the huge, headline-grabbing LPO events, such as mining giant Rio Tinto's retention of CPA Global, or the Thomson Reuters acquisition of Pangea3, is the following significant development: Solo practitioners and small law firms, who comprise the majority of lawyers in the West, have been turning to offshore legal outsourcing in droves. Smaller legal outsourcing providers in particular have been deluged with requests from such lawyers, while the largest LPO companies focus on large corporations and mega-law firms.
This development dovetails with the conclusions in the American Bar Association's Formal Ethics Opinion 08-451, in which the ABA Ethics Committee found that legal outsourcing is "a salutary trend in a global economy" -- a practice that "can reduce client costs and enable small firms to provide labor intensive services" that they otherwise might not be able to manage.
After that Opinion was announced, the ABA Commission on Ethics 20/20 solicited feedback and held extensive hearings in which clients, lawyers, and LPO providers testified. Following those hearings, in a Report and Discussion Draft announced last November, the Commission issued what amounts to a ringing endorsement of legal outsourcing, while making sure to say that it is not an endorsement. ("The changes... recommended herein constitute neither endorsement nor rejection of the practice of outsourcing by lawyers and law firms.") Regarding the cost benefits of outsourcing in particular, the Commission said the following:
This cost differential may be of particular benefit to solo practitioners and small and medium-sized U.S. law firms, allowing them to compete more aggressively for large matters without fear that if they secure employment by the client they may lack adequate resources to perform the legal work.
No wonder the LPO industry will continue to boom in the coming decade, and not just because of corporate clients and slowly awakening large law firms.
8. Offshore Beats Nearshore
While some companies reportedly are thrilled to pay $100-200 per hour for "nearshore" or onshore U.S. contract attorneys, and although this trend may thrive for some time in contrast to the $300-500 per hour that BigLaw firms charge for similar work, the nearshore/onshore providers will continue to have serious competitive trouble in the face of the reality that very high-quality, more reliable alternatives are available offshore for $20-40 per hour, or better yet, for inexpensive flat fees.
In an article in The Los Angeles Times earlier this month ("Growth of Legal Outsourcing May Herald Era of Cheaper Lawyering"), the Times reports that "companies such as Goldman Sachs and Accenture have been receptive" to using outsourced legal services at nearshore provider Axiom Global, Inc. "because Axiom lawyers charge about $200 an hour, about half the average rate of associates at the largest firms outside New York."
In a similar vein, The Economist reports as follows: "DLA Piper, a big American law firm, plans to set up its own outsourcing operation next year. Taking advantage of the tough legal jobs market, the firm will build a network of thousands of non-staff lawyers, says Peter Pantaleo, the managing partner of the New York office. These lawyers will be American but cheaper, perhaps because they are looking for a work-family balance. They will do for perhaps $100 an hour work that might otherwise cost the client $500, says Mr Pantaleo."
U.S. freelance attorneys, who don't have the overhead of companies like Axiom or firms like DLA Piper, are charging much less. Last month's Business Today magazine reports that the average hourly rate charged by U.S. freelance attorneys is $50-100, but that this is contrasted with an average of $25-40 for Indian legal outsourcing attorneys.
Some harsh economic facts, in addition to India's demographic advantage discussed in reason number two above, suggest that the cost differential between onshore and offshore providers will continue to point clients offshore. Dean David Van Zandt of Northwestern University School of Law estimates that given student loan obligations, living expenses, etc., $65,000 per year is the break-even point that U.S. law graduates must earn just to stay afloat. The reporters at Above The Law say that "[a] break-even point of $65K seems low to us, given high law school tuition, the borrowing costs associated with student loans, and the opportunity cost of going to law school when you could be earning a salary in some other industry." They cite another academic expert at Vanderbilt for their conclusion that "the break-even point is much higher." But even if the "low" $65k figure were accurate, the fact remains that super-smart, ambitious, enthusiastic, Indian lawyers from even the finest law schools, and highly trained in U.S. legal research and legal drafting, are justifiably happy to work for one-fifth of that amount, considering the lower cost of living in India, among other factors.
And it's not just about professional labor arbitrage. India also offers serious advantages regarding non-salary operating costs. The cost of office space in Mysore, for example, where India's #1 ranked LPO is based, is still 1/43rd the cost of comparable space in Manhattan. Housing and other living expenses there remain so low that the Indian attorneys have a standard of living that would be the envy of many Manhattan associates, yet the Indians receive less than one-tenth the salary. It is very true that salaries and expenses in India are rising, but that's not too important. Also rising are the skill sets of the Indian attorneys.
Indeed, the issues of quality and reliability are paramount, and they often cut in favor of India. Many clients have chosen Indian lawyers over U.S. contract lawyers because, according to the clients, the contract lawyers they tried were (a) not consistently available to do the work, (b) required on-the-job training by the clients, and (c) delivered a work product that required major revisions. This is all in addition to the fact that the U.S. lawyers usually, but not always, charge higher fees.
A managing attorney at an Arizona business law firm recently turned to offshore legal outsourcing, precisely out of exasperation with his experience in trying to make use of U.S. contract attorneys. This is from one of his emails:
The first project I'm sending along is a Response to a Partial Motion to Dismiss. The Complaint was drafted by an ex-contract attorney, and filed while I was in trial. There are not many documents or issues involved, and the client received a Cause Determination from the EEOC, so the Complaint should have been a cake walk. Instead, the Complaint is a piece of crap.... I mention all of this in the hopes that you will understand how eager I am to find a source of consistent, high quality work that does not eat-up all of our profits (and then leave as soon as soon as an offer comes along that includes box seats at Suns games).
And here is part of another email this law firm client sent after switching to Indian LPO services instead:
I would be happy to give a testimonial providing a comparison to U.S. contract attorneys who seem incapable of turning in coherent work product, on time, and without doubling the number of hours it should have taken.
And below is what this managing attorney said to one of his firm's clients:
I've used dozens of contract and full-time attorneys here in the U.S., and thus far, [the India team] is doing a far superior job at drafting high level motions and pleadings for me in federal court.
LPO critics accurately point out that it is also easy to find examples of unsatisfactory legal services at companies in India. So nobody is saying Indian providers are always better, or even always less expensive. But because often Indian providers are better, or just as good, and because usually they are far less expensive, US and UK clients probably are going to continue to hire them in massive numbers in the coming years. And, for the reasons discussed below, this actually does not need to mean less work for Western lawyers.
9. The Death of the "They're Taking our Jobs" Myth
The mostly untapped market for affordable legal services (a phrase now widely seen as an oxymoron) is vast. At some point, it will become apparent to the legal and corporate worlds that when offshore legal outsourcing allows otherwise unaffordable court cases to be opposed or prosecuted, and deals to be done, most of which require Western lawyers to supervise and implement, the amount of work for Western lawyers will go up, not down.
Regarding the bitter and continuing complaint that legal jobs are lost in the U.S. because they are outsourced, law professor Cassandra Burke Robertson concludes otherwise, in her law review article mentioned above. She cites facts to support her point that offshore legal outsourcing "creates more jobs than it eliminates... [and] the cost savings achieved from offshoring lower-level work may create more high-end jobs onshore."
Even the offshoring of high-value work creates job opportunities in the West. Deals previously undone, and litigations previously settled (or never filed), due to previously excessive legal costs, become suddenly affordable. Affordability means more work for the Western lawyers involved in supervision, editing, negotiating, and/or appearing in court.
Legal Outsourcing consultant Michael Bell makes a similar point in a post on his LPO Source blog:
Are the projected 5000 new jobs in the LPO industry directly correlated to a 5000 job “shift” (read lost, redundant, right-sized, etc.) at top US law firms? Is it economically sound reasoning to assume that economic interactions are tit-for-tat? In short, no.
Does the increase of LPO mean that there may be marginally less demand for legal support staff for certain low-value service areas? Perhaps. Alternatively, doesn’t allowing firms to offer new services so clients can economically litigate and conduct transactions also increase the demand for the services of law firms, and thus the demand for lawyers? Absolutely.
On a macro level, despite the perennial, election-time slogans against outsourcing, financial experts and politicians know that in fact, offshore outsourcing leads to more Western jobs than it destroys. In an interesting Wall Street Journal article by William S. Cohen, former U.S. Secretary of Defense in the Clinton Administration, Cohen cites persuasive studies (especially one from Dartmouth's Tuck School of Business) demonstrating that "for every job outsourced to Bangalore, nearly two jobs are created in Buffalo and other American cities." Cohen also points out that the new U.S. jobs enabled by outsourcing are "higher-skilled and better-paying—filled by scientists, engineers, marketing professionals and others hired to meet the new demand created...."
In another article, this one by Kieth Pounds in The Times and Democrat, the author points out that the lower domestic prices caused by outsourcing also create more American jobs by creating more consumer demand, and he observes that the number of jobs being "insourced" to the U.S. by foreign companies is growing at a faster rate than the number of jobs outsourced abroad.
Another factor in favor of outsourcing is the resulting increase in foreign demand for Western products. As Indians and other foreign workers see a raise in their standard of living due to offshore outsourcing, and as they deepen their ties to the West, this translates into heavy demand for products imported from the US and the UK. That is one of the reasons why, according to the McKinsey Global Institute, for every $1 outsourced, the economic gain to the United States in particular is $1.12 to $1.14.
In short, as anti-outsourcing myths are exposed and start to fall away in the light of facts, this will remove yet another potential barrier to tremendous expansion of offshore legal outsourcing by the year 2020.
10. More Proliferation Than Consolidation
Some experts talk, perhaps wishfully at times, about the supposedly upcoming "consolidation" of the LPO industry. In fact, there has been much more proliferation than consolidation. With the one exception of the acquisition of LawScribe by UnitedLex, it seems that so far there has not been a single example of one LPO buying or merging with another. Of course, several legal process outsourcing providers have disappeared entirely (some leaving their old websites intact for posterity, like electronic tombstones), but for every company that has gone under, another three or so have cropped up. The industry has gone from 15 companies in 2005, to over 200 today, and that trend will only increase, as offshore legal outsourcing becomes more popular. This can be a very good thing, not just a bad thing, to the extent that boutique and other niche LPOs emerge to satisfy client needs that go beyond the currently dominant trend of high-volume document coding.
In an article entitled "For LPO Clients, Small Is Beautiful," MSN cites the 2010 Black Book of Outsourcing survey as evidence that from the point of view of legal outsourcing clients, bigger is not better:
Global companies outsourcing their legal processes across the world seem to prefer doing business with smaller companies, the results of a new survey suggests. The survey conducted across 6,547 clients globally shows that smaller vendors, including legal outsourcing, LPO and legal KPO companies are satisfying more clients and to a greater degree compared to their larger counterparts.
Similarly, The Times of India reports, in an article entitled "Davids Take on Goliaths in Offshoring," as follows:
Although feedback on the big names... has been generally positive, the companies that have excelled in delighting the customers have been smaller players....
So what makes these smaller players stand taller in the global market? "Smaller outsourcing providers... have been pushing their specialist knowledge and deep client understanding as their unique selling point for some time now, claiming that specialists provide a better service. While all outsourcers talk up their ability to specialise, this survey suggests that... smaller players are best positioned to deliver on that promise,'' said Eamonn Kennedy, who led the research for Datamonitor.
Actually, the "small is beautiful" trend has been accelerating, especially in the Western legal markets, where boutique or niche law firms are very much in fashion. Corporate and other clients are looking for less overhead, fewer conflicts of interest, more responsiveness, greater expertise, and last but not least, lower fees.
Ironically, however, in India the word, "strength," with reference to a service provider, usually means the number of employees, with a greater number signifying greater "strength." In the West, by contrast, a large number of employees is often perceived as weakness, not strength. "Strong" providers are those who provide more value for the money. As law industry expert Jordan Furlong said: "The overall marketplace for legal services is fracturing.... It's unbundling, and specialists are emerging. Legal work will go to the provider best designed for that particular work...."
Accordingly, at a time when Western clients are focusing on value and expertise, not size, it might be a mistake for LPO providers to try to mimic the same Western "BigLaw" model that is falling out of favor. The specialist capabilities of offshore legal outsourcing providers, beyond large-scale document coding, seem almost endless. They range, for example, from legal analysis for Hollywood film studios, to assisting in the criminal defense of the former CEO of the world's fifth largest accounting firm, to defeating libel lawsuits, to pursuing royalty claims for indigent music recording artists, to incorporation and other legal services for a steel company. A proliferation of LPO providers that expertly can handle an even greater variety of legal work will help propel the industry in the years ahead.
The document coding sector, however, including e-discovery, due diligence, and other high-volume document review services, may be a huge, gaping exception to the above generalization. Given the price competition in the document review field, with effective hourly rates sinking to what appears to be an average of less than $10 per hour, greater size and the concomitant economies of scale might not only be preferable -- they could become the only game in town.
A low barrier to entry has led to well over 100 document review companies in India, the Philippines, South Africa and elsewhere, resulting in the fierce price competition. In India, for example, there are hundreds of thousands of lawyers and non-lawyers, who, after two weeks of training, are able to do this kind of work for as little as a couple of hundred dollars a month or less. This is many times what the average Indian is paid. India's "demographic dividend," coming from the fact that the country has, and will continue to have, one of the largest and youngest populations on earth, means that (a) back office work in India will continue to explode, and (b) the price competition among document review providers will continue to reduce profit margins.
On top of that, the economies of scale and technological advances created by top-notch document review companies, such as CPA Global, UnitedLex, Clutch Group, Integreon, and Pangea3, mean that it is possible that only the very largest of providers, such as those five, will be able to make any significant profit from document coding, thanks to the sheer volume of their operations. Speaking of high volume, the 440-million-pound venture capital funding of CPA Global indicates that in some ways, at least a few of the leading offshore legal process outsourcing companies may come to resemble BPO (business process outsourcing) and IT companies, rather than law firms. Indian IT provider Infosys employs over 85,000 people, and it seems that CPA Global, which already has 1,300 personnel on its payroll, and which now has the investment to hire many more and engage in expanded marketing, is on that large-scale path. Similarly, Pangea3, recently acquired by Thomson Reuters for a rumored $100 million, is expanding its size rapidly.
Having said all that, the wave of the future for the most part is proliferation, not consolidation, especially since the vast majority of legal services involve drafting and research, not document review. A growing number of expert service offerings, and companies to provide them, will mark the new decade.
11. Western Lawyers Switch to Football
Instead of complaining about the supposed loss of jobs, forward-thinking Western lawyers are realizing that offshore legal outsourcing provides them with an opportunity, and maybe even a necessity, of moving up the value chain. Whether they are litigators or transactional lawyers, they have the opportunity to focus on becoming quarterbacks or team coaches, or as Jordan Furlong puts it, "solutions managers." That's what clients want from them the most. As for young associates, they will be trained to negotiate deals, appear in court, supervise offshore providers, and provide legal advice. None of those tasks can be done best (or in some cases, at all) by foreign lawyers. All of those roles provide an opportunity for growth, not decline, at least on the part of modern law firms that are willing to embrace the future, rather than resist it.
Law.com journalist Gina Passarella, in an article in The Legal Intelligencer ("Are Law Firms Morphing Into Managers of Legal Providers?") recently reported on this:
"Smart firms will say they still want to manage the process and sit at the client's right hand," [Jordan] Furlong said, adding however, that they need to realize there are some things the firm is good at and other things a legal process outsourcer may better handle. The real battleground for law firms in the near future will be over who will serve as the quarterback, or the solutions manager, Furlong said.
According to the article, several large law firms have been taking up the challenge. For example, Lovells, now Hogan Lovells, has sent over 9,000 matters to smaller firms to save its clients up to 20% on fees, while still maintaining oversight and supervision. "In turn, Lovells was able to increase its rates for the high-end work it was doing, given the fact that the clients were still saving money. That also made up for sending out some of the work...." The article concludes as follows:
"There used to be one monolithic legal services provider -- the law firm," Furlong said. "Now there are many and clients will choose among them." The "huge role" for law firms, he reiterated, is the quarterback.
A legal blog, or "blawg," namely, The Complete Lawyer, provides another example:
Although many law firms are still not eager to publicize the practice, at least one national firm in Boston has been using an LPO for three years to do first drafts of briefs. When the Managing Partner of the office presents the idea to her corporate clients, they are very supportive.
This one small example speaks volumes about how the practice of Western law is likely to evolve in the next 10 years and beyond.
12. The Future May Belong to the "Just Crazy Enough"
In a now-famous New York Times article, business journalist David Segal reported on the surprising fact that many venture capital funds deliberately look for entrepreneurs who have a mental disorder. The investors are looking for potential business leaders who are "just manic enough" or "crazy enough." In the LPO field, about 6 years ago, Indian providers like Mindcrest, Lexadigm, Quislex, Pangea3 and others were "just crazy enough" to provide document review and other services that most Western companies and law firms would never imagine sending overseas. Now, the sending of document work to India is routine. Today, arguably "crazy" legal outsourcing entrepreneurs and other LPO leaders are setting their sights on the highest-value, highest-profit-margin mother lode, which is legal research and legal drafting. It is in those areas that offshore legal outsourcing is likely to make its greatest mark.
In the above-mentioned article, the New York Times reporter discusses the most sought-after kind of entrepreneur:
If you give him $750,000, he says, you can have a stake in what he believes will be a $1-billion-a-year company.
Interested? Before you answer, consider that the man displays many of the symptoms of a person having what psychologists call a hypomanic episode. According to the Diagnostic and Statistical Manual — the occupation’s bible of mental disorders — these symptoms include grandiosity, an elevated and expansive mood, racing thoughts and little need for sleep.
* * *
The attributes that make great entrepreneurs, the experts say, are common in certain manias, though in milder forms and harnessed in ways that are hugely productive. Instead of recklessness, the entrepreneur loves risk. Instead of delusions, the entrepreneur imagines a product that sounds so compelling that it inspires people to bet their careers, or a lot of money, on something that doesn’t exist and may never sell.
* * *
“You need to suspend disbelief to start a company, because so many people will tell you that what you’re doing can’t be done, and if it could be done, someone would have done it already,” says Paul Maeder, a general partner at Highland Capital. “There are six billion human beings on this planet, we’ve been around for hundreds of thousands of years, we’re a couple hundred years into the industrial revolution — and nobody has done what you want to do? It’s kind of crazy.”
So what's risky or arguably "crazy" about "high-end" legal outsourcing?
For starters, most Western corporate clients and law firms only recently have been learning about the usefulness of sending legal work overseas, and many see India and other low-cost jurisdictions as suitable for "chore" work, but not "core" work. Just like a decade ago, when sending "chore" document review projects abroad was either unheard of, or seen as dangerous, today there is considerable resistance to sending legal research and drafting assignments to India, the Philippines, or other foreign jurisdictions. That's why document coding and other repetitive, routine processes are definitely the "low hanging fruit" for most of today's LPO providers.
Another reason why the path of least resistance leads to document work is that legal research and drafting requires extensive and ongoing training -- the kind of training that law schools and law firms, in both the West and the East, traditionally do not provide. In order for Indian and other foreign professionals to learn to perform such "high-end" work for Western clients, experienced Western legal practitioners usually are needed to share their expertise, through intensive training sessions.
A third obstacle that leads many LPO companies to focus instead on "low-end" work is the fact that recruitment of talent to perform higher value assignments is much more difficult, and expensive. In the case of one particular legal research and drafting provider, only one out of every 900 job applicants has been able to score well enough on an aptitude test to be considered eligible for hiring. Also, competition in recruiting the best Indian law graduates, for the most part, comes not from the LPO industry, but from elite Indian law firms and companies, multinationals, and even "magic circle" London law firms. So starting salaries must be relatively high, compared those of most LPO providers.
Nevertheless, several offshore legal outsourcing companies, large and small, are undeterred. They are attracted by the prospect of higher profit margins, the ability to attract top-notch law graduates who want to be involved in international work, the availability of Western lawyers willing to do the training, and the fact that most Western legal services fall within the "high-end" category, making the addressable market worth well over $100 billion.
In an article, "Innovators at the Barricades," published by the Adam Smith, Esq. blog, law industry expert Bruce MacEwen argues that the not-so-secret strategy of even some of the largest LPO providers is to advance from down-market upstarts to up-market leaders, by moving up the value chain and "taking law firms out of the equation altogether":
Outsourcing is here to stay. Whatever you call it, and whatever you think of its quality, clients have tasted of the fruit of the forbidden tree and they're not going back.
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A particularly interesting firm, which has ambitions you may deem admirable or frightening or a combination thereof, is CPA Global, which bills itself as the world's leader in legal process outsourcing, and which raised a mere $700-million in a private placement in the UK this past spring. For that nice sum, the investors got what? 49%. Not even control. This is a war chest on a scale the AmLaw 10 and the Magic Circle, put together, would be very hard-pressed to match. And they'd probably have to cede control.
* * *
The ambitions, and business strategy, of CPA Global and their ilk are no secret: Bypassing law firms altogether and marketing their offerings directly to clients. If another word for outsourcing is disintermediation, welcome to the ultimate disintermediation: They would like to take the law firm out of the equation altogether.
* * *
And this [offering of not only document review but also higher value work, all at "Bangalore" rates] is precisely where the independent outsourcing firms can have an impact. Once clients begin to get accustomed to the notion of being able to unbundle, or unchunk, legal engagements - be they disputed matters or transactional ones - there's potentially little end to it.
In a more comprehensive article, Jordan Furlong points out that off-shore providers are "moving up the value chain," far beyond "first-year associates’ grunt work," to the point where they are "rewriting the rules of the game":
LPOs, it has to be emphasized, are not just doing first-year associates’ grunt work, not anymore. They are moving up the value chain steadily and with surprising speed, taking on the work of second-, third- and fourth-year lawyers -- not just by using lower-cost labor, but by doing the work more systematically and efficiently. As I said a while back, these companies will not be content with basic work forever; they see no reason why they can’t eventually do the toughest legal jobs. Billion-dollar legal services providers, unfettered by traditional lawyer restrictions, can go global instantly and almost effortlessly. They’ll have more than enough money to acquire the top talent from the best firms worldwide, to invest in new systems and innovations that will reduce costs even more, and most importantly, to change clients’ expectations about what a law firm can deliver. They will be law firms, in effect, and even if lawyers in a given jurisdiction somehow succeed in keeping them out, the landscape will have changed: clients will demand their lawyers compete on the same playing field."
Professor Robertson makes a similar point in her law review article, cited above. She shows how offshore legal outsourcing is not only confined to quasi-legal work such as filling out forms, coding documents, and transcribing depositions, but also includes complex work such as legal research, drafting contracts, drafting briefs, and preparing patent applications. Robertson points out that, “while this higher-level legal work represents only fifteen percent of the LPO market right now, it is quickly growing; as LPO firms become more established, they tend to take on increasingly more sophisticated work.”
Twenty years ago, Indian software giant Infosys had only one client, and its founders struggled in poverty. At that time, Western IT industry experts probably thought it was impossible that a relatively poor country such as India would become a huge center for software development. Only ten years ago, who could have predicted that Indian lawyers by the thousands would be performing document review for U.S. law firms and their clients? Looking back, those apparently impossible occurrences, now that they have happened, somehow seem inevitable. In this new decade, the same will be true for the outsourcing of sophisticated, higher value legal work that Indian and other foreign companies can provide, and already are providing, at a high level of quality and speed, and at dramatically lower cost.
This is a tremendous article, clearly setting forth the developments that inform the steady (and overdue) deterioration of the old model for law firms and delivery of legal services. Worthy of a careful read by all practitioners, from large law firm managing partners to solo practitioners--especially as to the core change--ditching the tired old billable hour for value based fees. Sound, articulate sources. (Jordan Furlong is always at his prescient best on this topic.)
One question--can you report on O'Melveny's progress to date in fulfilling its promise to switch over to value billing?
Posted by: Betsy Munnell | January 20, 2011 at 04:27 PM