Legal Process Outsourcing (LPO): A sunshine outsourcing sector
November 3, 2009
In recent years, legal process outsourcing (LPO) has emerged as a sunrise outsourcing industry offering a huge potential cost savings for both law firms and corporations with large legal departments along with significant opportunities for outsourcing vendors and offshore locations.
1. LPO growth
Legal process outsourcing is simply the practice of obtaining external legal support services from a legal support services company that often has its operations based offshore. Although the industry has existed in some form or another for decades, offshore LPO received a huge boost in 2006 when so called “e-discovery laws” were enacted in the USA. This set of regulations was created to govern the storage and management of electronic data for federal court actions and hence, and literally overnight, the sheer volume of litigation information that needed to be stored, archived and reviewed swelled tremendously. Given the lack of enough affordable lawyers and paralegals in the USA to perform the new workload required by law, law firms and the legal departments of major corporations were forced to look for offshore alternatives.
Today, LPO clients are typically law firms or in-house legal departments of large multinational corporations and the services they typically seek include legal research, patent research, documentation writing, document review, and the drafting of pleadings and legal briefs. In other words, the legal work that is typically outsourced to an LPO vendor would be the type of routine legal and corporate secretarial work performed by paralegals and junior lawyers.
This will largely remain the case as a lawyer based in one country generally cannot practice law in another country due to the fact that the legal profession is governed by unique and intricate ethical and licensure rules set by jurisdiction. Hence, a November 2008 Wall Street Journal article quotes Forrester Research as estimating that only 35,000 USA based legal jobs will be moved offshore by 2010 and 79,000 will be moved offshore by 2015 –a small portion of the estimated 1.2 million licensed lawyers in the country.
Nevertheless, given that the legal provision is both well known for and despised for its high fees; LPO still has huge growth potential because it offers enormous cost savings. A 2004 article in the New York Times estimated that offshore LPO can save some companies as much as 50% while a more recent 2008 USA Today article states that some LPO companies will charge as little as US$25 an hour for work that would otherwise cost more than US$125 an hour in the USA. Furthermore, an April 2008 Time Magazine cites a 2007 Altman Weil survey that shows that law firm partners in the USA bill at a national average of US$318 per hour and this rate rises to US$550 per hour at large New York City law firms while starting salaries at large and prestigious law firms can average US$160,000 a year. Thus, even a simple legal problem can end up costing hundreds of thousands of dollars a year in legal fees.
Moreover, cost savings from LPO come not just in form of salary or savings on legal fees but also in the form of savings on rent since many of the expenses associated with running a corporate legal department or a large law firm, especially a high end corporate law firm based in a major city like New York or London, are rent and real estate related. Thus, any cost savings achieved by LPO has the potential to level the legal playing field as individuals and smaller law firms and companies may now have a better chance of taking on or defending themselves from entities with deep pockets while LPO also means that they can have an amount of work done that rivals the scale of what can be obtained for affordable rates in the USA or UK.
2. Major LPO Offshore Destinations
In addition, the basic structural nature of legal systems around the world gives a tremendous boost to the LPO industry as the most obvious destination for offshore LPO type of work would be a country or countries with legal systems that are structurally similar. Hence, legal work originating from countries with civil legal systems based upon Roman law or the Napoleonic code which includes most continental European countries, could potentially be outsourced to Latin American and African countries that were colonized by France or Spain as their overall legal systems would be structurally similar. Likewise, countries with common law systems in place, generally those that were colonized by Great Britain, would also share the same basic legal framework. Thus, India and the Philippines have emerged as leading offshore LPO destinations while other countries also have the potential to perform LPO type of work.
India by far is the preeminent LPO provider given its common law system, widespread use of the English language, and huge talent pool. In fact, 300,000 Indians enroll into law schools every year across India and the industry offers an attractive career alternative as India’s overburdened and understaffed court system is characterized by backlogs and delays while many law firms in the country remain family affairs.
Thus and according to a 2008 Washington Post article, India’s LPO industry has been growing 60% annually for the past three years and will employ at least 24,000 people and earn US$640 million in revenue by 2010. Meanwhile, a December 2008 Washington Times article quotes Evaluserve as predicting that India’s LPO industry will grow from US$52 million in revenue back in 2005 to US$970 million in 2015. The article further mentions that 70 new legal outsourcing firms have opened in the country just in previous six months alone. In addition, a November 2008 Wall Street Journal article states that India’s LPO industry earns around US$250 million per year and further points out that starting salaries for associates at big USA firms are often more than US$200 per hour but experienced lawyers in India bill at US$75 to US$100 per hour or roughly what some USA based paralegals charge.
However, Indian LPO employees still need rigorous training in order to become familiar with USA legal and judicial practices. Furthermore, Indian legal professionals are accustomed to writing in flowery British style English and not the short and straight to the point writing style that Americans are accustomed to using – especially in the legal profession. Hence, Indian LPO professionals will literally need to relearn English, specifically American English, before taking on any project that involves legal writing.
2.2. The Philippines
And just like India, the Philippines also has a large English speaking population, low labor costs, and a legal system that is actually an amalgamation of the world’s major legal systems including Roman Civil Law and the Catholic Church’s Canon Law that was inherited from the Spanish, English Common Law that was inherited from the USA and Islamic Law. Moreover, the country has a plentiful supply of legal professions as the Integrated Bar of the Philippines currently has more than 40,000 members nationwide and there are 105 law schools in the country capable of producing thousands of graduates with a legal background every year.
Although these figures are smaller than the number of legal professionals available in India, a September 2006 Business Week article points out that Philippines based legal professionals have an added advantage over their Indian counterparts because they generally know what Roe vs. Wade and other key USA legal decisions are as most lawyers in the country also sit for USA bar exams. Furthermore, as another September 2006 Business Week article points out, Filipino lawyers are competitive on the cost front as a lawyer with five years of experience can be hired for US$30,000 a year including benefits – half of what an experienced USA based corporate paralegal would earn and on-fifth of what a New York based first year attorney can earn.
2.3. Other Countries
In addition, LPO work is not just confined to low cost countries and LPO decisions alone are not just made for the cost savings. In fact, the 2004 New York Times article mentioned a USA based telecom company that relies on a patent firm based in New Zealand. The USA based firm was impressed with the engineering knowledge of the New Zealand lawyers after working with them on a past acquisition project and the fact that current exchange rates at the time meant that the New Zealanders charged 30% less in fees than their American counterparts. Thus, legal professionals in other developed countries also have the opportunity to leverage their specialized skills, knowledge and exchange rate differentials to do LPO type of work.
3. Issues and Concerns
Nevertheless and despite the obvious potential for outsourcing legal work, offshore LPO has sparked controversy and concerns – especially among the paralegal community who view their livelihood to be under threat by the LPO trend. Paralegals will often cite issues surrounding security, confidentiality and language barriers as their chief concerns but a far greater concern may come from the fact that new junior lawyers will have fewer chances to gain legal experience doing the traditional grunt work assigned to them.
Moreover, LPO work performed overseas will still need careful supervision as well as input from the client side to ensure that their work complies with the ethical and legal norms of the country where the work originates from. In fact, an April 2008 India Business Law Journal pointed out that problems tend to develop due to unrealistic client expectations or LPO clients who take a “wash-their-hands” approach to the work they are having outsourced. Furthermore, the article warns of “fly-by-night” LPO shops who offer legal services in areas that they do not have expertise in or do not have proper security measures in place. These are seen as major problems for the industry as there is no regulatory body or watchdog group to keep an eye on them. In other words, the entire LPO industry may be just one devastating and well publicized security breach away from having international confidence in it destroyed.
4. LPO Vendors and Vendor Selection
Hence, the onus is on the client to protect themselves by initially and carefully selecting a reputable LPO vendor. LPO Vendors such as Los Angeles based Integreon and LawScribe, New York based Pangea3 and global KPO provider Evaluserve all have good track records for confidentiality, quality control and security measures. Standard operating procedures in their operations centers would include key card/ID entry systems; security cameras and guards; computers that lack USB ports; and all phones, handbags and purses banned from the office. Client information can even be stored on secure servers in the client’s home country as an added safety measure.
Furthermore, LPO clients will need to have a thorough understanding of a LPO vendor’s recruitment process and training policies and it should be considered critical that an offshore LPO have USA or UK trained lawyers occupying senior positions and require all employees to sign non-disclosure agreements upon hiring. Contracts between the LPO vendor and the client will need to be clear and contain provisions that outline what happens in the event of a security or confidentiality breach as well as contain the usual performance targets and penalties if targets are not met. In addition, sufficient time will be needed to clearly map out all of the legal processes in pilot projects to ensure that all documentation is accurate and that the team composition for the project is optimal.
Nevertheless, any law firm or corporation that chooses to outsource any legal work overseas will still need to ensure that all computer files are backed up in case any documents are lost due to a natural disaster or for another reason. Moreover, if the work being performed is considered to be of a sensitive nature, a lawyer from the client side will always need to review the work performed and ultimately bear responsibility if any of the work was done incorrectly as they are the ones who will need to answer directly to their own clients or to judges.
Although there is huge potential for growth and cost savings from LPO, there is an obvious limit to what legal work can be outsourced due to the complex ethical and licensure requirements that legal professionals must follow. Lawyers will always need to be admitted to a local jurisdiction’s bar in order to appear in court or to file legal proceedings while lawyers in some practice areas such as patent law will still need to be in their respective countries in order for their work to be effective. Hence, do not expect high level legal type work to be outsourced in the near future and clients still must proceed with caution when choosing to decide which LPO vendor to engage on a project. Nevertheless, LPO is clearly a sunshine outsourcing industry that offers enormous cost savings and thus, has the potential to significantly level the legal playing field.