Ben Frumin charts the development of India's legal process outsourcing industry and assesses the opportunities and risks it poses to global businesses and law firms.

In early 2006, a medium-sized US law firm sent a digital audio file to an Indian company for transcribing. The project was completed successfully and the law firm was happy with the work.

Almost a year later, the same Indian company – a legal process outsourcing (LPO) firm called LawScribe – was contacted again by the US law firm, this time in relation to a document review project. LawScribe won the contract, which entailed the review of more than half a million documents. A team of about 15 Indian lawyers, working from the company's office in Gurgaon, a satellite city of New Delhi, finished the project in just three months.

“The law firm estimated that up against using contract attorneys in the US, or potentially doing the project in house, they saved US$250,000,” says Mark Ross, LawScribe's director of business development and a former partner at Underwood Solicitors. “That's a conservative estimate.”

But what about the quality of the work? Were the US lawyers satisfied?

“They're still our clients,” says Ross.

Arrangements like this are becoming increasingly common as India's LPO sector mushrooms. Indeed, the industry, which was valued at US$146 million at the end of 2006, is expected to grow to US$640 million by the end of 2010. Manpower in the sector is expected to quadruple from 7,500 to 32,000 over the same period.

Alok Aggarwal, chairman of service provider Evalueserve, believes that Indian LPO save US companies US$300 million in 2007. And Sanjay Bhatia, head of operations at SDD Global Solutions, an LPO founded by New York law firm Smith Dornan Dehn, is confident this figure will grow significantly: “Western companies and individuals now spend US$250 billion per year on legal fees,” he says. “We figure the vast majority of the work can be done in India for half the cost, so we are actually looking at a legal outsourcing industry worth up to $100 billion or more.”

Manisha Singh Nair, a director of IP-focused LPO Clairvolex, says that legal process outsourcing is “a sunrise industry all set to become the next big sector.” She believes there could be a demand for nearly 80,000 LPO employees within seven or eight years.

“India is the outsourcing market of choice for the US and UK,” says Rob Stichbury, business development director at legal process outsourcing firm CPA.

A decade in the making

There are several reasons for India's emergence as the world's primary LPO market: Widespread use of the English language, a legal system based on common law, a plentiful supply of well-educated graduates (not to mention graduates in other fields of technical expertise like engineering, chemistry and biology) and, of course, the potential for huge cost savings. “No other country has the scale, skills availability and legal system equivalent to India today,” says Stichbury.

While legal process outsourcing has been a reality in India for more than a decade, it seems to have taken off only recently. “Over the last couple of years, leading law firms have begun to wake up to the reality that we live and operate in a global marketplace,” says Ross. “The legal profession is now starting to take advantage of the labor arbitrage that has been exploited by other industries for well over a decade,” he adds.

But above all, the growth of the LPO sector has been driven by the demands of global businesses. Had corporate clients not become increasingly conscious of their legal fees, Ross postulates, law firms would have been “perfectly happy maintaining the status quo of their current hierarchical structures,” which he describes as pyramids based on their ability to leverage junior associates at inflated hourly rates.

“A combination of market conditions, such as a shortage of skilled labour and rising costs in the West, has driven corporations to reduce legal costs,” says Stichbury. And as businesses have succeeded in reining in their legal spending, the outsourcing sector in India has been the principal beneficiary.

As a result, there are now more than 100 LPOs in India, although Stichbury estimates that 80% of the market is served by about 10 of these companies. Major players include Aphelion, CPA, Evalueserve, Infosys, Intergreon, LawScribe, Mindcrest, Pangea3, QuisLex, SDD Global and others, but according to Stichbury, “no dominant player has yet emerged.”

Client sensitivities

Clients are typically western legal publishers, law firms and corporations – each with unique requirements. Many of them are skittish about publicizing the fact that they outsource work. “They fear backlash from people in their home country who are concerned with the effect that offshoring will have on the job market,” says Bhatia, noting that among the better known clients of SDD Global Solutions are Twentienth Century Fox, Calvin Klein, John Wiley & Sons, and Elsevier. “But you will find that most providers of offshore legal services keep their client lists very private.”

“Initial outsourcing clients were legal departments of large corporations,” continues Bhatia. “Such clients are now driving large law firms – the last to outsource work that will cut into their own billing – in the offshoring direction as well.

“A large American corporation that my firm had discussions with, when asked how its outside counsel would react to certain legal work being offshored to us, was unequivocal in its reply: 'Our outside counsel will do what we tell them to'.”

But not all LPO clients are big corporations and law firms. Cyrus M Rab, for instance, is an American lawyer who runs his own office in Chicago. He outsourced work on a research memo to an LPO in Kochi.

“I gave them a set of research parameters and they provided me with a memo on the matter within a few days,” he says. “I had follow-up questions, and they were answered very quickly. I was able to get the information I needed.”

Jacks of all trades

The work farmed out to LPOs ranges from small projects like Rab's to months-long document reviews, transcriptions, litigation support, electronic data discovery, court briefs, patent applications, proofreading and the auditing of legal fees. “We pretty much do anything that is thrown at us,” says Tariq Akbar, CEO of LegalEase Solutions.

Patent work is increasingly popular among LPO clients. Ross explains that this field is particularly ripe for outsourcing because patent attorneys are expensive, American patents are covered by one set of federal rules (rather than 50 state laws) and there's a large talent pool of well-qualified engineers in India.

Aaron P Lawlor, vice president of project management at Aphelion Legal Solutions, divides his firm's work into two categories: Situations where a client lacks in-house expertise and those where a client's work flow is unpredictable. When it comes to intellectual property work or sophisticated e-discovery management, Lawlor says that in-house expertise may not exist, making outsourcing a necessity. “Certain LPO companies can provide specialized expertise on par or superior to that of domestic law firms and other service providers.”

“Functions like conducting research, drafting and paralegal services can be outsourced,” says Dev Bajpai, director (legal) at ICICI Venture Funds, but he cautions that “functions like supporting the businesses would always be best performed by an in-house counsel.”

Selection and training

The majority of employees at LPOs are Indian-trained lawyers. LegalEase, for example, has 35 staff at its facility in Kochi. All are lawyers. Akbar says many are fresh out of law school while others have five to seven years of experience.

Some LPO employees aren't lawyers at all, but scientists, engineers or graduates in other technical fields who subsequently received legal training. Regardless of a new hire's specialization, the top LPOs all claim to have rigorous selection and training programmes.

At SDD Global, for instance, Bhatia says that new employees “are hired only after a three-hour written aptitude test, a written essay, multiple interviews and a thorough background check.”

Training is ongoing for LegalEase employees, explains Akbar, but each typically goes through at least a month and a half of initial training designed by an American law professor before they started work. At LawScribe, Ross says that all new employees undergo a rigorous induction programme to familiarize them with US legal rules and procedures. This is followed by regular in-house training on the law, ethical considerations and various technologies.

Partly as a result of their focus on training, LPOs are becoming an attractive career option for young Indian lawyers. They also offer international exposure and in many cases a more structured career path than a family-owned law firm would provide.

Cheaper, better and faster?

Lawlor of Aphelion estimates that his company saves clients between 30-70% of the cost of each project. But the sales pitch of LPOs goes beyond simple economics. Many argue that the outsourcing of low-end work frees up corporate managers and law firm partners to focus on more strategic and lucrative business. “In addition to the lower cost structure, outsourcing certain legal functions provides in-house and outside counsel the ability to focus on their areas of expertise,” Lawlor says. “These highly sought after attorneys can spend more time providing the services for which it makes sense to pay up to US$1000 an hour or more.”

There's also an argument from many LPOs that the work they produce is not only cheaper but better than that of US employees. “LPOs like Aphelion can produce superior work because we use full-time employees to perform services that are currently done onshore by temporary staff, who often have less training and less vested interest in the success of their clients,” Lawlor explains.

Several LPOs also claim to be faster than their western counterparts, an advantage Bhatia describes as “extraordinary.”

“A US attorney could send documents for review before he heads home in the evening and have it ready on his desk first thing in the morning,” says Singh Nair of Clairvolex.

“Our legal outsourcing teams add approximately 12 hours to the normal legal services workday,” echoes Bhatia. “As law firm attorneys or in-house counsel in the West head home to sleep, a fresh round of legal work on the day shift in India is just beginning.”

Bhatia's firm is also able to meet the demands of clients that require a large number of lawyers to work on a single project: “We can provide the assistance of a single researcher or an entire platoon of trained professionals thus enabling clients to 'flood the zone' where such an approach is warranted.”

“This is virtually the opposite of the practice of many large western law firms, which, by necessity, must promise their clients, 'lean staffing' to address well-founded fears of compounded hourly fees climbing through the roof.”

Misperceptions abound

But the LPO market is not without its critics. “Despite (or maybe because of) the amazing success stories . . . there remain some naysayers,” says Bhatia.

“There is a perception that Indian lawyers may not be competent enough to handle the work being offshored, that somehow their training as lawyers is deficient,” Bhatia explains. He refutes this belief, noting that the Indian and western legal systems have grown from a common base and that legal education in both places “trains graduates to think, analyze and research.”

Another concern surrounds the level of English among the staff of LPOs in India. There's a “common misconception that Indians can't speak or write English or that they use only very broken English,” adds Bhatia. But in truth, English is widely used in India and is the medium of instruction in many institutes of higher learning.”

“There are differences in the style of written English,” concedes Ross at LawScribe. “This is by no means insurmountable and can be addressed through . . . appropriate training. However, it is crucial to recognize that these differences exist.”

Another misperception is liked to the biggest benefit of outsourcing – low costs. Some worry that low costs translate to low quality. “This is far from true,” says Bhatia. “The low costs arise from the low cost of living and the low cost of property in India. So clients aren't paying for real estate and exorbitant overheads, only for the service provided.”

The length of time for which LPOs will continue to enjoy these cost advantages, however, is uncertain: An undersupply of lawyers is driving up salaries and rents and property prices in some locations are rising by as much as 50% per year.

Client problems

There are also problems on the client side of legal process outsourcing. Trouble can arise, for example, if a US lawyer utilizing an LPO adopts a “wash-their-hands” approach to a particular outsourced task or function, says Ross.

“It is incumbent upon the US lawyer to supervise and take full responsibility for the legal work that the LPO is undertaking . . . Lawyers and law firms historically have not made the greatest managers and obtaining constructive feedback and ongoing input from the US law firm is often one of the most difficult aspects of maintaining a successful long-term outsourcing relationship.

“Maintaining clients' reasonable expectations is sometimes difficult,” Ross continues. “Often the savings aren't as great as they might have first imagined and there is a higher level of involvement required at their end than they initially hoped. It is therefore crucial to set out clearly what you are capable of doing well and the level of involvement that you require.”

Clients also need to be aware of what Ross describes as “fly-by-night” LPOs. Lawlor views such companies, which often offer services in areas in which they lack expertise, as the “major problem” for the budding industry.

“In the rush to grow and capture profits, there are a lot of ill-equipped startups that may end up giving the larger industry a bad reputations,” Lawlor explains. And with no industry watchdog or regulatory body, the onus is firmly on the clients to protect themselves.

“There has been a huge growth in the number of companies offering legal process outsourcing services from India, and I don't believe for one minute that all of these companies can possibly be implementing the security procedures and confidentiality policies that companies such as LawScribe, Pangea3 and Integreon have in place,” adds Ross.

An overriding concern

Indeed, of the criticisms levelled at the LPO industry, security and confidentiality concerns often top the list. This is not only an issue for clients to worry about, but also for the LPO vendors themselves: A well-publicized breach would be devastating and could destroy international confidence in the industry.

Bajpai at ICICI stresses the significant responsibilities that LPOs must shoulder when they accpet work from clients. “Issues of confidentiality, privacy of data and security would invariably arise. It is for the Indian LPOs to demonstrate that they are credible and trustworthy,” he warns.

“[Security] is a legitimate concern of clients,” concedes Bhatia, “regardless of whether the legal service provider is a western law firm or an offshoring company in India.”

Bhatia says several Us ethics panels have scrutinized LPO work, and have concluded that everything “is perfectly ethical as long as the work is supervised by a licensed Us attorney who is finally accountable for the product.” It is also important that the primary client is aware that one legal service provider is outsourcing its work to another.

To date, reputable LPOs have a good track record of confidentiality that stems from tight quality control procedures and security measures. “Standard security policies include key card/ID entry; monitoring cameras; security guards; phones, handbags and purses forbidden; to name but a few,” says Ross. “Client information can be stored on secure US-based servers if necessary. Employees will sign non-disclosure agreements prior to employment.”

At Evalueserve in Gurgaon, employee computers don't have functional USB ports. All paper in the office is color coded, and employees aren't' allowed to take even bits of paper out of the office.

“So far, frotunately for India, known confidentiality breaches have been none, either in information technology and related research, or in analytics, or in intellectual property or legal research outsourcing,” says Aggarwal at Evalueserve, adding that 93% of his company's clients are happy enough to give repeat business.

“We definitely do whatever we need to [do] to reassure the client,” says Akbar at LegalEase. “It gives them a greater sense of comfort that if they need ta neck to strangle, we're there."

The industry 's investment in tight security seems to be paying off. Bruce Masterson, COO of American Marketing & Publishing, who has used the services of QuisLex for several years, says he has no concerns. “I would dare say that I feel better about having [my confidential data] there than at some US law firms,” Masterson explains, adding that Indian companies like QuisLex have gone to the trouble of instituting tight security rules that some western firms may simply take for granted.

“It's natural for clients to feel a bit apprehensive,” says QuisLex CEO Ram Vasudevan, “but usually they get over it pretty quickly.”

Choose wisely

Nevertheless, dangers do exist and it's important that prospective clients exercise a great deal of care when selecting a vendor.

“Choosing the right one for the right reasons is critical,” says Ananth Nayak, CEO of Exactus Corporation in Mumbai. “Cost should not be the only criteria.”

“Clients should have a window into recruitment and selection of staff and training, “ he says, and they “should invest sufficient time in pilot projects to ensure that processes are clearly mapped, that team compositions are optimal and that documentation is accurate.”

Watertight contracts between a client and an LPO are another important safeguard. These should contain provisions setting out specific recourses in the event of a breach of confidentiality by the LPO or one of its employees. They should also specify performance targets and penalties that apply if these are not met.

Ross suggests that it's also critical to select an LPO with first-rate US or UK lawyers in senior postions: “That is an absolute must.”

“It's important to alert corporations that are buying LPO services of some of the pitfalls that exist in the industry, such as startups that over-promise and under-deliver,” says Lawlor. “There are a lot of smart, experienced lawyers working in the industry, and it's up to us to prevent a few inexperienced LPO providers from souring corporate counsel's interest in LPO services.”