By Mark Ross, Published in The Lawyers Competitive Edge in January 2010
Driven by the technological forces and the associated communications revolution that have fueled globalization over the last 30 years, outsourcing has emerged as perhaps the key strategic business process essential for the successful modern day organization, large or small. The large-scale outsourcing of manufacturing jobs which started in the 1970s resulted in a paradigm shift for the world’s developed nations in moving towards service as opposed to production economies. With the rapid improvements in telecommunications and information technology, a second wave of outsourcing followed in the 1990s. This development, which moved from blue collar to white collar services, was coined business process outsourcing (BPO). BPO involves the contracting of the operations and responsibilities of a specific business function to a third party service provider. BPO can be further compartmentalized into either “back-office”, such as HR, Finance and Accounting, or “front-office”, meaning client-facing services including help-desk, call centers and the like.
Whether viewed as a specialized subset of BPO or independently, the next step in the evolution of the outsourcing market was knowledge process outsourcing (KPO). KPO represented a new frontier in a new millennium, and referenced the outsourcing of core business functions. Traditionally these are areas that have involved a degree of subjective decision making, language skills and often specific academic credentials. KPO necessitates a relinquishing of control over areas that traditionally clients have been reluctant to let go. It was not until relatively recently, in the early 2000s, that the KPO industry began to take off. Mark Kobayashi-Hillary and Dr Richard Sykes in their book, “Global Services: Moving to a Level Playing Field,” define KPO as:
“Merely a continuation of BPO, though with rather more business complexity. The defining difference is that KPO is usually focused on knowledge-intensive business processes that require significant domain expertise….The offshore team servicing a KPO contract cannot be easily hired overnight as they will be highly educated and trained, and trusted to take decisions on behalf of the client.”
Over the course of the last decade, KPO has grown to encompass several specialist areas including pharmaceutical research and development, market research and analytics, healthcare services and engineering research and development. Unlike traditional BPOs, where relatively low-level skills were required, here knowledge and professional education is the key. According to a Confederation of Indian Industry (CII) study, KPO is estimated to grow by 2010 at CAGR of 46% to $17 billion, of which $12 billion will be outsourced to India. NASSCOM projects that the KPO sector in India may reach $15.5 billion by 2010, up from $1.2 billion currently.
Perhaps unsurprisingly the global legal profession was the last of the professional services to jump on the KPO bandwagon. Business, engineering and market research functions requiring a degree of subjective analytical expertise were routinely outsourced in the early 2000s. The global legal profession is of course one that has historically been characterized (most routinely by its own members) by specialized, jurisdictionally specific, training and practice, with its members applying their domain expertise to solve their clients’ legal problems. Datamonitor estimates that the revenues generated by legal services worldwide stands at a minimum of $370 million, with the U.S. contributing over 60% of this figure.
Over the course of the last 4-5 years the legal profession has slowly begun to take advantage of the labor arbitrage that was exploited by the BPO and KPO pioneers in the earlier part of the decade. The demand for lower cost legal services resulted directly from increasingly cost conscious U.S. and U.K. corporate clients becoming aware that a significant proportion of the day-to-day work undertaken by junior associates, paralegals, secretaries and support staff had the potential to be outsourced. Over the lifecycle of the emergence of the legal process outsourcing (LPO) or Legal KPO industry, the work performed in outsourced locations has evolved from providing low end administrative support including transcription, work processing and other secretarial document production functions, to more substantive, core legal work, including legal research and writing, document review, contract review and patent support services.
Of course technology has played a significant role in the emergence of the Legal KPO industry. Technological advances have had a two-fold affect. First, they enable the performance of increasingly more complex legal tasks at the simple push of a button and in a fraction of the time. Documentation relevant to the litigation process is now stored electronically and is available for storage, transfer and review anywhere in the world. With the increased prevalence of digital dictation, document production centralization and hosted document solutions, it matters little whether your secretary, junior associate or paralegal is ten feet down the corridor or 7000 miles away. Second, through improved connectivity a vast pool of common law trained legal talent from India, South Africa and The Philippines is now available to assist law firms and legal departments in the U.S. and U.K.
In 2007 the research company ValueNotes predicted revenue generated from the LPO industry in India alone to reach $640m by 2010. The LPO and KPO industries however have not been immune to the global economic downturn. These estimates have since been revised downwards substantially. Revenue is estimated at $320m for 2008 and $370m for 2009, and is expected to reach $440m by the end of 2010. Although India is the dominant offshore destination, others such as The Philippines and South Africa cannot be discounted, and perhaps more importantly, these figures do not reflect the substantial legal outsourcing engagements to onshore destinations both in the U.S. and U.K. In addition to slower than originally expected revenue growth, the overall manpower employed by the LPO industry (again, only in reference to India) also witnessed sluggish growth. Forecasts a few years ago of 32,000 employees working within the LPO industry by the end of 2010 now appear wildly optimistic. The revised prediction for 2010 stands at 15,400. However, as the global economy continues along the path to recovery while concurrently LPO becomes an increasingly desirable strategic option for both major corporations and law firms, ValueNotes anticipates that the there will be an upswing from the currently plateaued manpower levels towards a more consistent period of stable growth.
As the Legal KPO (aka LPO) industry matures, scalability and multiple service capability are becoming a prerequisite in order to attract business from major corporations and the U.S. and U.K.s’ leading law firms. A rapidly globalizing legal profession has reached a tipping point where legal outsourcing is now recognized as a viable and efficient option for the delivery of certain types of legal services. An industry that in its formative years was perhaps characterized by the emergence of numerous, boutique providers, is now beginning to scale up and consolidate in order to meet the increasing sophistication of AmLaw 200, UK Top 50 and Global 2000 procurement.
Over the course of the last couple of years, several of the largest U.K. law firms have announced outsourcing initiatives. On review of the dates of these public pronouncements, it is readily apparent that the pace of these declarations is picking up. 2009 may be viewed as the crucial year when major law firms began to acknowledge that their public embracing of outsourcing was clearly viewed by clients as indicative of being forward-thinking, innovative law firms of the future. Global legal giants Simmons & Simmons, Allen & Overy and Osborne Clarke all announced outsourcing engagements with Integreon, while Pinsent Masons and Australian corporate mining behemoth Rio Tinto professed to be entering into LPO contracts with Exigent and CPA Global respectively.
As major law firm and corporate procurement of legal outsourcing services becomes increasingly the norm, provider companies without the scalability to match both the increased demand and sophistication of the buying community will suffer. Purchasers will be inclined to opt for providers who can offer scalability through a global, multi-shore delivery platform. In addition, legal services procurement will seek out providers who can offer a broader suite of multiple service lines, across the legal services spectrum. As the proliferation of electronically stored information grows exponentially, the technological infrastructure to offer an end-to-end solution to the electronic discovery process (collection, processing, hosting and review of electronic data), will become increasingly desirable. Ensuring the security of client confidential information is clearly of paramount importance within the legal outsourcing industry. Legal KPO providers who can assuage some of these data security concerns, by avoiding the necessity to subcontract elements of their service delivery capability, will be better placed to serve the particular needs of the demanding legal professional community. There may remain certain niche areas of demand that boutique (single geographical delivery center) providers can satisfy. However, for larger scale engagements with the leading global law firms or corporations, a fully owned and integrated technological solution spanning a broad range of legal service verticals, provided from multiple locations, and backed by access to a scalable workforce will soon become a prerequisite.