Evolving Legal Service Ecosystem: The Growth of LPO

After decades of stasis, the legal industry in the United States and other traditional common law system countries is in the midst of an evolution. The entire ecosystem of legal service- its market, agencies and partners are all going through a significant change. As buyers of legal service, the relation of the client with his attorney is under pressure because of the rising legal cost that the client has to bear. In a circumstance like this, the client demands greater value for every dollar that he spent, thus providing a perfect ecosystem for the growth of legal process outsourcing within the country and to other service provider countries like India, China and Philippines.

It is only a handful of traditional law firms that have been able to adapt and adjust with this situation resulting in increased share of profit per equity partner. For most others, it is a new era of competition, both with other law firms and the new players that have entered the market in response to the corporate buyers. In an environment, like this, the Senior Law Firm Partners and General Counsels (GC) in Corporate America face a big challenge. Their budgets are showing little or no growth as corporations and Law Firms take the cost line management very strictly. In the meantime, the rates of the Law Firms are rising on an annual average rate of 5 to 6 per cent. (LawMarketing, Nov 18 2007). A recent report by RSG Consulting showed that the key areas of concern among the clients are: rising fees of the attorneys and the heavy price of buying legal advice.

Keeping the client's demand in view, the Law Partners and General Counsels no longer turn to in-house hires or traditional firms for works like document review or contract administration. When the clients want cost efficiency without compromising for the quality of their work and prefer to outsource their work to offshore entities. India is particularly a favorite spot serving their purpose, as the lawyers are trained in common law system, speak English, deliver quality work product and are cost effective as compared to their U.S counterparts. This shift has also resulted in a move away from the traditional system of pricing on a time-spent basis to product pricing on a per-unit-basis. It also results in a change from dollar- per-hour to dollars-per-contract.

There is a paradigm shift in the traditional manner of segmenting legal work by these Law Partners and Corporate. The ongoing process of distributing high end and low end work to a cost effective and efficient provider available in low cost countries like India has certainly strengthened the ecosystem. A client may pay a full rate to the firm but the question is, is he happy paying $300 per hour to a first-year associate, when he can get that same quality of work in paying just a fraction of it. For example, in a M&A case, this unbundling of the law pyramid will make GCs move to new-model firms to manage the process and brief the key documents (in place of senior associates) and offshore entities to do the diligence review (in place of junior associates and paralegals). At each level, the cost efficiency will be significant.

These changes brought in by the Law Firms and Corporate for running their legal process as cost effectively as the rest of the processes in their business has in fact strengthened the entire ecosystem, including changes in overall industry outlook towards strategizing budgeting and execution of legal work. As the Corporate become more sophisticated, the law firms are forced to change their approach and the new entrants, both for the high-end (new model firms) and low end (outsourcing), stand strong in this changed ecosystem for legal service, thus giving more impetus to the growth of Legal Process Outsourcing.

Cyber Security Zone and LPO

The outsourcing regime rests on data protection and client confidentiality and to that extent, it is sensitive to any breach that might prove fatal to the entire business. Some of the recent happenings of data theft have pointed to the vulnerability of these areas. Data Protection and Client Confidentiality are crucial to any outsourcing business and more so in case of legal outsourcing. The success of any client-attorney relationship depend on the attorney's ability to assure the confidentiality of the client's data with high stakes and any breach thereof can be a matter of ethical and professional liabilitiess that an Attorney carries along with the brief. These are serious concern for LPO as well.

The first step towards achieving cyber security is to sensitize employees to the layers of responsibility. "Developing a culture of privacy and data protection," says Salman Waris, operations manager, Legal Circle, "is more important. People should be educated about what they are handling...and what the repercussions could be." In recent past, a case of theft and breach of sensitive data was reported by Titus & Co., a law firm of Delhi. The Delhi High Court even passed an injunction in this case against four lawyers that includes a Nigerian national from using the data and confidential information stolen from their previous employer, Titus & Co. This was probably the first case of cyber crime and data theft and it showed the liability of legal profession in India. Since then there has been concern within the industry propelling higher security checks and systems. In another such incident of cyber crime a software company in Gurgaon filed a case against one of its employees, for transferring sensitive data of the company to his personal mail ID and later using it to the benefit of a rival company.

Cases like these, directly bring the security of the companies under scanner. Physical security is not enough for the outsourcing companies. In addition to physical security, they also need other special infrastructure towards maintaining cyber security, like: web security, LAN/WAN security, security against malicious programs, like virus, secure login and logout of the resource along with tracking. Listed below are the best security practices for LPO and also the best security practice for any outsourcing business:

LPO Best Practice:

• Make quality customer service the highest priority.
• Do not sell outsourcing services as loss-leaders with the expectation of making it up later.
• Responsibility for all our actions when performing the services.
• Resist the urge to over discount.
• Listen to the customers for ways by which the service can be improved..
• Manage the outsourcing deals to optimize customer service, not short-term revenue.
• Take real measures to reduce turnover and keep the workforce happy and interested in the work.
  

Security Best Practices:

• Secure and dedicated infrastructure that meets ISO 27001 standards.
• 24/7 on-campus security staff
• Bio-Metric access controller to enter into the office premises
• Firewalls
• Point-to-point network connectivity using routers that are configured with DES encryption at both ends
• Anti-virus software
• User–ids and passwords to log into the Client systems.
• Disabled floppy, CD drives and USB mass storage devices.
• Security policies are defined (desktop, password, e-mail, and domain).
• Regular reviews of firewall logs
• Periodic network and host vulnerability tests
• Regular internal audits
• Client audit teams are allowed to conduct security audits on the dedicated network provided for their services.
• Information security management and control audits as per ISO 27001:2005 standards.

Before starting its operations, an outsourcing company have to have proper infrastructure for complete protection against data theft. In 2005, the International Organization for Standardization (ISO) and the International Electrotechnical Commission (IEC) formulated certain standard of practice for Information Security Management. ISO/IEC 27001:2005, commonly known as ISO 27001, lists the requirements for the data protection of an outsourcing company.

Georgia Tech Information Security Center (GTISC), a leader in nation's information security research and education released their report on areas of cyber threat that shows data as the primary motive for cyber crime. It also identifies five areas that are cyber-sensitive. They are: Malicious Software, especially those under the guise of networking sites, cyber warfare - targeting U.S economy and infrastructure, software robots- specifically the attack that spread through wireless and peer-to-peer economy, mobile convergence- threat of voice fraud, threats to VOIP and the evolving economy for cyber crime.

Data Protection Law has always been a matter of controversy. General awareness, integrity and a sound security are the only solutions for the biggest threat to the industry, which employs almost half of the total working population of the county.

Ethical Aspects of LPO: The Question of Attorney-Client Privileges and Confidentiality

Outsourcing legal work is not a new concept. Rather, the law firms have been outsourcing their legal work to domestic contractors for years. The only major distinction between using a contract attorney in U.S and that of LPO is that in LPO work is done by the attorneys and paralegals stationed offshore. The whole process of legal outsourcing is to the extent of providing third party or a captive supports and solutions to United States Attorneys and Law Firms in their work. It does not entail any direct legal practice and representing the clients before the courts. In other words the process of LPO is a caterer to the United States legal practitioner work.

The American Bar Association ("ABA") has already addressed the issue of outsourcing in the context of domestic outsourcing and contract attorneys. The recommendations of ABA provide the most significant source of information for understanding the ethical implication of LPO. Even then LPO raises separate ethical issues that attorneys need to be careful of while structuring this unique business relationship.

Unlike with BPO and KPO, LPO is capable of attracting business from U.S law firms and corporate for many reasons. The first and foremost is that LPO can make save substantial amount of money and bring down the administrative costs for its clients. And above all Indian lawyers are paid just a fraction of the remuneration earned by U.S. lawyers. In addition to the cost benefits, the LPO can deliver high quality work, in reduced turn-around-time and can also reduce churn for associate attorney.

Some of the LPO providers initially did not consider confidentiality and data security to be that important for the LPO business. But these are something more than just a simple desire to protect trade secrets. By downplaying these concerns the LPO providers failed to understand the role of ethics and attorney-client privilege that plays a very important role in U.S. legal profession and in its own business interest.

The concern for confidentiality and ethics has made the existing LPO players raise their levels of security and at the same time they need to be more aware of the ethical offshoots associated with legal outsourcing work. The growth of LPO depends to a large extent on its ability to perform and sensitize workers to that layer of responsibility. LPO raises some interesting issues as well and also regarding the ethical responsibility of an US Attorney to the extent of offshoring their work and hiring of LPO service.

In August 2006, the New York City Bar Association ("NYC Bar") directly addressed the issues involved and hot for LPO. The opinion provides an ideal blueprint for LPO best practices. It describes the major ethical considerations applicable to LPO and requires the service buyer attorneys to supervise the work flowing in from offshore legal outsourcing. The "Attorney Type Work" doctrine would, for all purposes, apply to LPO and to the extent of an extension of Attorney’s legal personality.

Other Bar Associations in the US have also expressed their opinion in favor of offshoring work to LPO. On June 19, 2006, the Los Angeles County Bar Association published its opinion and expressed its concerns on the ethical considerations in outsourcing of legal services. Following this, the opinion of San Diego County Bar Association also shows its support for LPO. On January 18, 2008, Florida Bar expressed their position and concern for the ethical considerations of legal outsourcing business.

Indian LPOs are in the nascent stage and slated to grow. The industry is yet to mature. But ethics and the question of attorney-client confidentiality remain an important concern for the industry, if it has to attract that large chunk of work flowing out of U.S. Ethical implications carry an overt meaning when it comes to noble professions, like legal services. The LPO providers have to keep this in mind before deciding on anything.

Legal Outsourcing- Breaking the Business Barrier

The indiscipline rise in a law firm’s operational and administrative costs in the past few years has logically caused major law firms to outsource their legal and paralegal work offshore. For the simple reason that the compensation desired and expected by a fresh law school graduate is much higher in the United States. With the ever rising operational costs, it is no wonder that law firms find it economically difficult to hire and sustain these fresh and experienced attorneys who are required for high end legal work such as, complex mergers and acquisitions, patent prosecution, contract drafting and litigation, when it has become possible for them to offshore their work to countries like India with massive human and intellectual resource.

The possibility of outsourcing of legal work has turned out to be a boon for these Law Firms and Corporate America, thereby bringing down the ever growing legal and litigation cost. Although, conceptually in a nascent stage and despite the current worldwide recession, legal process outsourcing has become a more viable business option for its existing and prospective buyers and is slated to grow further. The exponential cost increase in performing legal and litigation work has made it more reasonable for the law firms to look up to offshore their work to professional workforce--skilled but relatively cheap—for performing the similar tasks for both simple as well as complex legal work. India has an extraordinary edge there as serious service provider.

Though, many companies have found their business comfort by offshoring the high-end and the low end services, the companies and firms are cautious about the client related confidentiality issues and any possible liability and error damage that they might be held responsible for on account of outsourcing the work and above all that work is being performed offshore. The attorney-client confidentiality plays a very significant role in this entire process. And this has been an obvious concern for the growth of LPO in India as well as other countries. But looking around, increasing number of US law firms are now convinced about the safety and precautionary standards being adopted by these LPO. Lower litigation cost is another wildcard for the growth of LPO.

The LPO industry in India is growing at a remarkable velocity. When other KPO verticals are growing at a rate of 30 to 35 per cent per annum, the growth of legal service is pegged at 40 per cent annually. Just within few years of its takeoff, the LPO industry has moved, innovating new business models and displays matured results. Apart from the traditional business player in the LPO spectrum, the industry also sees a sudden investment interest from the venture capitalists and the established private equity funds:

• Pangea3 has accomplished US$7 million in Series C funding by Sequoia Capital India. The company has declared to use the fund towards development, recruitment and marketing.Mindcrest also received funding from a Chicago based company, Talon Asset Management in December 2006.
• SDD Global Solutions went for a comprehensive endowment agreement with SFP Priority Co. Ltd.
• Clutch Group, the Bangalore-based LPO backed by Jerry Rao, (formerly known as JuriMatrix) has accomplished a funding from Angel funding. The company is on its way of increasing its employee strength as it is getting regular projects.
  
• Unitedlex based in Gurgaon is another LPO which has drawn investments from Helion Ventures. The company is in the hiring mode adding additional work force of almost 500 employees, managers and associates.
• Recently, Sanshadow Consultants, an LPO firm located in Delhi received strong investment from the Band of Angels, a group of successful entrepreneurs who invest in start up or early stage ventures and provides services to overseas market like US and Europe.
• The Mumbai-based LPO firm Inventurus Knowledge Solutions received investments from Rakesh Jhunjhunwala, a leading PE investor in the country to the tune of $5.5 million. The company focuses on IP, litigation support and financial transactions.

The high potentiality of this business has indeed lured important BPO players, like Infosys and Wipro towards LPO. While the legal outsourcing industry is fighting with challenges like rising wage, depreciating dollar value, billions of dollars worth legal business is waiting at the other side.