When Outsourcing Spreads Wings for Litigation Works

December 26th, 2008

Even as law firms are betting high on the litany of litigation work from the treasury department’s troubled assets relief program (TARP), industry and business watchers are keeping an eye on the legal process outsourcing (LPO) sector. While the United States dominates the $250-billion legal market, generating 80% of the work, the UK generates about 12% of it. Of the $80-million legal work that is outsourced, India seems to have grabbed the majority of it. Traditionally, significant legal work generated in the US has been outsourced within the country itself to regionally renowned staffing firms and project management companies that have the legal capability. In 2005, Nasscom and McKinsey jointly reported that five areas—legal, analytics, research, finance and accounting and animation—would dominate the next generation of outsourcing. It was during this time, Abhi Shah, currently CEO of ClutchGroup, a global legal solutions provider, was pursuing his MBA at the Harvard Business School. Chancing upon the opportunity, Abhi assisted Jerry Rao, former CEO and managing director of BPO major MphasiS, in the company’s sale to EDS in 2005. The LPO opportunity became evident to Abhi and he devoted part of his time at Harvard working on a business plan to build a legal process outsourcing firm, executing it in parallel, sizing the market, raising money and building a reputed board and team.

In its early days, the company (ClutchGroup) made a strategic acquisition in the US that gave it approximately 100 lawyers who have good clientele in Washington DC and New York and are grounded in document review work (work that law firms in the US reportedly prefer to outsource within the US itself).

According to Brown and Wilson’s 2008 Black Book of Outsourcing, which has been annually ranking outsourcing firms since 2005, ranked ClutchGroup among top twenty LPOs, primarily because of the favourable ranking by vendors wherein they ranked the company number one on eight.

Outsourcing is the brainchild of India. “Outsourcing principles such as moving from an individual mindset to a process mindset and from a skill set focus to a replicating ability are all applicable to LPOs as well. There are caveats though. Legal processes, for example, do not necessarily need the same kind of technological or automated output as banks,” says Dinesh Sawant, chief operating officer of ClutchGroup.

“Thus a number of potential law firms and corporate clients in the US have been educating themselves on the LPO model and how to benefit from it. However, the financial meltdown and the regulatory avalanche which is impending is going to hasten the time they take to make the leap,” says Lynee Gore, vice-president of legal services, ClutchGroup.

Gore adds, “Additionally, half the financial institutes that earlier existed are not there any more. Legal transaction work such as mergers and acquisitions coming from them to law firms has come to a standstill in the US. The size-mix dynamic of work done by legal firms is bound to change.”

“Though document review has become less paper intensive with the advent of the Internet in the last few years, the amount of work generated has increased manifold. One email sent to a distribution of 45 to 50 people for example can increase by many hours the review work, which needs to be done. Obviously this would result in an increase in fees which the companies are keen to par down and where outsourcing becomes relevant”, elucidates Gore.

“Reviewing more than 500 contracts for a large US bank for example has become a common expectation”, says Sawant of ClutchGroup.

“Although our hierarchy is fairly flat, we have check points at every level. In India and in the US, approximately 300 lawyers are designated at a project manger, assistant project manager, senior associate and associate level and all execute projects or annuity type work for clients. However, our project managers compulsorily are US-licensed attorneys so they can ensure that the final outcome is put forth in a manner that US clients know and trust. We also have legal VPs who focus on specific sectors,” says Gore. “Data and technology security is a big concern for clients in the US. We have cordoned off areas in our office to maintain client confidentiality on projects. Corporate clients and law firms visit our India premises often to feel reassured,” he added.

Gore represents the expectations the US firms and corporations would have from LPOs in India. On moving to India she found herself immersed in the challenges of familiarising herself with the cultural language of the country, accelerating the training programs, coming to speed with legal areas in India while guiding lawyers on methodologies used in the US to review contracts, mergers and acquisitions related documents, conduct research and compliance work such as analysing files related to money laundering cases, Sarbanes Oxley compliance as outlined by US regulatory bodies such as securities and exchange commission and the department of justice.

Other challenges faced by LPOs include, gaining confidence of the US clients that legal outsourcing in India can execute contractual and document review type work at an equal standard done in the US. There are clients who demand that the work, even though it is outsourced, should continue to be done in the US. There, the outsourced work usually goes to smart young contract lawyers who are not from the top tier law schools but have mounted up huge education loans as a result of three years in law school which could cost them approximately $30,000 to $40,000 per year and which they need to payback. Doing contract work gives them flexibility as to the amount of work they take on.

With the legal market expected to touch $4-billion mark in next five years, the nature and complexity of work being done by LPOs in the market necessitates stricter controls. Sawant’s solutions for staying viable in the future are simple and actionable, “Conserve cost till you are generating revenue, tap into the fast changing US market, increase the breadth of clients and do more for clients on every engagement without compromising on quality”.

Casualties will happen as the LPO space evolves. The next 12 to 18 months will reveal the top five providers in the LPO space, Sawant opines. As per a Nasscom report, there are only 40% survivals among the 130 LPOs that existed a year ago. Just within the last four months, four LPOs have folded in Bangalore.

ClutchGroup has managed to swim through the rough tide and validates its market reputation by saying in the last four months the company added 50 employees who primarily applied through the website.

According to Shankar Narayan, CFO of ClutchGroup, “Most respectable LPOs would today be in the $10 to 15 million range. In order to make the jump to the $100 million range in the coming years, both organic and inorganic growth is needed”. This is what keeps Shah going, providing some of the finest talent in the field a platform to succeed in their respective fields while also taking the company to the $100-million mark.