The idea whose time has come Outsourcing in the Law Firm Environment

The content of this document is confidential and all the intellectual property rights related to the document vests with the author. Copying of the content in any form must be done with the prior written consent of the author.

2005, Manav Sethi (sethimanav@gmail.com)

-1-

Introduction: Who is the biggest exporter of German-made washing machines to the United States? Not Miele or Bosch-Siemens, or any other German manufacturer. It is the American appliance maker, Whirlpool, the company proudly reports. True globalization results in blurring of the lines dividing the geographical topologies and also compels the entities doing business in such areas to look for resources available elsewhere that impact the very tenet of such business. The idea is to achieve a low cost leadership while keeping product differentiation in place after analyzing the cost activities in the entire value chain. The success in offshoring Business Process operations with respect to reducing costs and often improving quality has encouraged many firms to start offshoring their highend knowledge work as well. Their underlying expectation is that offshoring high-end processes will result in additional cost savings and operational efficiencies, coupled with access to very good talent in the low-wage offshore countries. This paper analyzes the evolving Legal Process Outsourcing (LPO) market, the opportunities it offers, the associated challenges, and the key drivers According to the estimates, the KPO (Knowledge Process Outsourcing) market, which comprises LPO, is expected to grow from USD 1.2 billion in FY1 2003 to USD 16 billion in FY 2010. The sectors that are expected to shine within the KPO industry include data search, integration and management services, financial and insurance research, biotech and pharmaceutical research and computer-aided simulation and engineering design. In terms of challenges, this paper analyzes the impact of key parameters such as quality, confidentiality and project management expertise in the LPO industry.

2005, Manav Sethi (sethimanav@gmail.com)

-2-

Flashback: In the 1970s many large law firms in US "vended out" or "subcontracted" photocopying because of the complexity of reproductive equipment and the lack of skilled personnel needed to maintain the machines.1 Beginning in the 1980s small and mid-sized firms began to hire "facilities management" companies to run mail room and facsimile operations in addition to providing copying services. Firms that used these services expected to lower their costs and thus the costs to clients and to maximize the use of firm resources on legal work by eliminating the problems associated with managing support personnel and the maintenance of complex equipment.2 The practice of outsourcing professional support services in US developed from the federal government's attempt to privatize these types of services. During the Reagan administration the government attempted to increase contracts with the private sector for services traditionally provided by government agencies. Although contracting for tangible goods (i.e., weaponry and supplies) is a practice that dates to the founding of the country, the privatization trend started in the 1980s represented a radical departure from previous management practices. In 1983, the Office of Management and Budget issued a revised set of guidelines governing contracting with private sector contractors. These new guidelines included outlines for the first attempts at contracting with private vendors for complex library services. Out of these and similar guidelines the term "outsourcing" was coined for use of competitive bidding to select private vendors to provide services in order to reduce operating costs.3 Outsourcing in both the federal government and law firms of US has been promoted as the best solution for the elimination of excess costs incurred by the continuation of spending practices left over from periods of greater prosperity. During the 1980s large law firms experienced unprecedented growth and expansion. During this time, the salaries of partners and associates rose dramatically and lavish spending became the
1

Anne Woodsworth & James F. Williams, II, MANAGING THE ECONOMNICS OF OWNING, LEASING AND CONTRACTING OUT INFORMATION SERVICES (1993) at 12. 2 Monty Kaufman, Outsourcing Your Support Needs, PRAC. LAW., Dec 1994 at 35. 3 Woodsworth & Williams 2005, Manav Sethi (sethimanav@gmail.com) -3-

hallmark of big firm culture. And now after having reached the right size, the paradigm is shifting towards profitability as the opportunities to grow are challenging. During the first half of the 1990s the term "outsourcing" developed along with an expansion of the support service industry. The use of outsourcing has spread to law firms of all sizes allowing all firms to respond to client pressures to reduce costs. Firms were reluctant to bring in-house sophisticated electronic and computer systems, choosing instead to outsource these needs. And as Detroit is to Automobiles, India is (turning out) to Outsourcing. Michael E. Porter, the Roland E. Christensen professor of business administration at the Harvard Business School, wrote the landmark 1980 work, Competitive Strategy: Techniques for Analyzing Industries & Competitors and reconciled historical views on competitiveness and defined the concepts of unique positioning in its successor, The Competitive Advantage of Nations, Indias vast pool of English speaking low cost talent coupled with similar legal infrastructure is providing the law firms in both US and UK such conduit for profitability.

2005, Manav Sethi (sethimanav@gmail.com)

-4-

The sunrise in India: Legal hawks of USA and UK are apparently taking comfort from the country's elaborate, British-modeled legal structure, which they want to exploit for including but not delimiting to paralegal work and research support. In the US alone, the potential for such outsourcing orders could be as high as $2 billion annually (details given in this document), most of which could land in India.4 A study shows that the top 200 US law firms spend about $20 billion annually on office operations and documentation, a cost they cut via outsourcing for the sake of operational efficiencies.5 Legal services are thus beginning to join a swelling list of functions-customer contact, transaction services, debt collection, and payroll processing-the West is looking to migrate to the subcontinent. And, similar to the earliest suite of services sent offshore, legal support may mean attractive deals for local suppliers marketing themselves as the world's back office. Randy Altschuler, Co-chief Executive Officer at OfficeTiger, estimates that support services are a substantial cost factor for the top 200 US law firms. For example, Altschuler says these firms typically spend $2.9 million annually on word processing and secretarial jobs alone. The budget for legal recruiting is $350 million and human resources departments can cost $200 million. "Assuming a very conservative outsourcing potential of 10 percent (of the $20 billion spent by US law companies on office operations), the resulting market opportunity is about $2 billion. Intellevate LLC's (its Indian legal support center has proofread its one thousandth issued patent in April 2004) Chief Executive Officer Leon Steinberg opines that India's lower salary base allows the company to have more involved quality control than is affordable in the US. Intellevate's clients get their work done at $20-$40 an hour, significantly less than the $100-$250 an hour that companies charge for similar services in the US, according to Steinberg. The size of the patent drafting and support services market potential is $50 million a year. "Most of that will go to India," says a
4 5

2004 estimates by Office Tiger LLC Study conducted by Office Tiger LLC in 2004 -5-

2005, Manav Sethi (sethimanav@gmail.com)

bullish Steinberg. The recent incentives extended by Indian government to promote such activity in India include a seven year tax holiday and exemption from Indias import and export duties. According to a recent report from Deloitte6, almost all law firms of UK are currently outsourcing some or all of their support functions. IT operations are the most commonly outsourced function, with 61 percent of firms confirming that they already outsource or plan to in the near future. Document management and production is the most common operation outsourced to an offshore location by law firms, with 31 percent of respondents planning or already doing so. The report showed a trend for larger law firms to be either considering or planning to extend their outsourcing to HR, payroll, knowledge management and finance functions. Paul Thompson, professional practices partner at Deloitte, says: Outsourcing and offshoring are still relatively new concepts to the legal sector and there are real opportunities for law firms to gain competitive advantage by considering which of their operations could be appropriately managed this way. As late as year 2004, Microsoft Corporation began using Indian professionals to search for prior art- written information about an invention- in preparation for filing patent applications. Other Fortune 500 companies, such as Oracle Corporation, have considered it. And law firms, which often follow the lead of their clients on new initiatives, are finally catching on. Bickel & Brewer, a 34 lawyer Dallas litigation firm, opened a facility in Hyderabad, India, in 1995. Several hundred Indian employees- both lawyers and non-lawyers- scan, code, index, and abstract documents and the practice turned out to be so successful that the firm spun it off as a standalone company. Londons Allen & Overy is currently outsourcing word processing to 74 Office Tiger employees; a practice that the firm says saves a seven-figure sum.
6

LAW FIRMS SEA CHANGE IN ATTITUDES, Deloitte offshoring and outsourcing research report on legal sector Published26/4/05 and available at http://www.deloitte.com/dtt/press_release/0,1014,sid%253D2834%2526cid%253D81319,00.html The law firms who responded to the survey represent a good cross section of the UKs top 40 firms. They range in size from fewer than 150 to over 1,200 fee earners. In most instances the survey was completed by the COO, CIO or Managing Partner.

2005, Manav Sethi (sethimanav@gmail.com)

-6-

Some reflections of the Indian Sunrise:

Source: WNS India Hildebrandt International, a well-known law firm consulting group, has announced a joint venture to offer law firms administrative outsourcing support through India-based OfficeTiger. Hildebrandt is known for its work with large, old-line law firms. The fact that they are participating in an outsourcing joint venture adds credibility to the business practice.

2005, Manav Sethi (sethimanav@gmail.com)

-7-

Source: November, 2004, http://www.intellevate.com/india/americanlawyer.pdf

TABLE Approximate total spending by the top 200 US law firms: 1. Office operations 2. Word processing and secretarial 3. Information systems 4. Marketing 5. Finance and accounting 6. Library 7. Legal recruiting 8. Human resources 9. Legal research 10. Litigation support 11. Patent & trademark prosecution Total:
Source: Hildebrandt International, OfficeTiger, 2004

$6.2 billion $2.9 billion $2.5 billion $850 million $500 million $500 million $350 million $200 million $620 million $4.9 billion $400 million $19.92 billion

2005, Manav Sethi (sethimanav@gmail.com)

-8-

Fuelling the Indian revolution: For the law firms in US and UK; Challenging opportunities for growth (Focus from growth to profitability): 1. Growth through M&A will decline as the number of independent players reduces and the economics of acquisition become less attractive. 2. Growth through alliances will decline as networks reach an optimum size. 3. Rapid organic growth is limited with the legal services market growing slowly. Why India: 1. India is within the British Commonwealth, there are 54 countries that have similar legal processes. This fits into the whole idea of knowledge process outsourcing. 2. With the time lag between India and the US & the UK, the turnaround time is 24 Hrs 3. An associate lawyer in the US comes with a $225 per hour tag in the first year which goes upto $450 an hour by the eighth year. Not to forget, paper presentations on opening up legal and auditing firms in India are making rounds within the government. Its a reality which is just taking its time to shape up. The limiting factors: 1. Lawyers cannot represent two businesses on opposing sides of a legal dispute unless both sides waive the conflict of interest prohibition. 2. Cultural barriers 3. Attorney-Client privilege. 4. NASSCOM is at present working on data-protection legislation in India.

2005, Manav Sethi (sethimanav@gmail.com)

-9-

What to outsource: 1. Online research 2. Reviewing and reporting documents 3. Drafting 4. Litigation support 5. Corporate due diligence support 6. Mortgage processing 7. Intellectual property researching, drafting and applications of patents. 8. Reprographics & record management 9. Accounting (Contract assistance is available for specific projects or regular tasks such as general ledger maintenance, invoicing, accounts payable and/or receivable maintenance and other related functions. By outsourcing any or all of these functions, the need for accounting employees can be reduced or eliminated.) 10. Conveyencing (Title Search et al) 11. Taxation consulting 12. Immigration services

HIGH COST OF LITIGATION An excerpt from an ABA article reads that ~the award of fees and costs will not be reversed on appeal provided that the amount of the legal fees and cost are reasonable.~ When fees are not found reasonable, they are taken out, making the case an unproductive case for the law firm. The article continues ~... courts and attorneys are always reminded to keep costs within reasonable bounds.~ Obviously, the courts are aware and concerned about the problem of the high cost in litigation. Law firms are being urged to find ways to control cost to minimize the ever-high-increasing cost of litigation and to reduce the high cost of permanent paralegals in the law firms.

2005, Manav Sethi (sethimanav@gmail.com)

- 10 -

Litigation: 1. Draft and prepare pleadings, including complaints, answers, counter claims, motions and discovery. 2. Assist with trial preparation 3. Research and writing (Motions, trial briefs, appellate and supreme court briefs) Bankruptcy: 1. Draft and Prepare Bankruptcy petitions (CH 7, 11 and 13), Chapter 13 plans Chapter 11 Disclosure Statements and Reorganization plans, and post-petition pleadings. Banking/Transactional Law: 1. Management of closing pipeline - commitment through closing - Services contingent upon specific need(s) of lending institution. 2. Comprehensive review of loan documentation and analysis of financial statements to identify leviable assets. Trusts & Estates: 1. Draft State-wise Inheritance Tax Returns, Federal Estate Tax Returns, wills, guardianship procedures adoption procedures and incompetency proceedings. 2. Assist in administration of estates including informal and formal accountings. Trial Work: 1. Deposition Reviews, summaries and Attendance /Counsel 2. Legal Research 3. Large Document Redaction 4. Automatic Bates Program/Stamping and Preparation/Tracking of Bates Index

2005, Manav Sethi (sethimanav@gmail.com)

- 11 -

Real Estate: Residential 1. Contract through closing - all necessary documentation including binder, payoff, 2. letters, etc. 3. Draft mortgage closing documents including RESA, post closing letters and security instruments. 4. Foreclosures--draft and prepare all necessary pleadings. Completion of matter through receipt of Certificate of Regularity evidencing clear title. 5. Condemnation 6. In Rem tax sale foreclosures - In Personam tax sale foreclosures Commercial 1. Contract through closing - all necessary documentation including binder, payoff, 2. letters, leases, satisfy conditions precedent to closing (environmental and regulatory) 3. Draft mortgage closing documents including post closing letters & security instruments. 4. Foreclosures--draft and prepare all necessary pleadings. Matrimonial: 1. Prepare Case Information Statement. 2. Draft and prepare complaints, answers, motions and post-judgment pleadings. 3. Discovery. Office Management: 1. Consult on personal, procedural systems, file maintenance, billing and time systems. 2. Coaching.

2005, Manav Sethi (sethimanav@gmail.com)

- 12 -

Municipal Law: 1. OPRA Requests 2. Government Records Council Matters 3. Municipal Code Codifications, Submissions, manuscript reviews

"We conclude that given the appropriate instructions and supervision, paralegals, whether as employees or independent contractors, are valuable and necessary members of any attorney's team in the effective and efficient practice of law" ---In re Opinion 24 of the Committee on the Unauthorized Practice of Law

2005, Manav Sethi (sethimanav@gmail.com)

- 13 -

Market Reflections: IPR research: "Of the 166,000 patents issued by the U.S. Patent Office in calendar year 2001, almost 12 percent have since been subject to a certificate of correction. One or more claims of the patent may be published incorrectly, altering their scope and impacting the patentee's ability to establish infringement."7 Rader argues that companies due diligence on their own patents has become more important because of a recent Federal Appeals Court ruling establishing that certificates of correction do not apply retroactively. This case confirms the need to proofread an issued patent as a necessary step in the prosecution process. 1. Patent retrieval Technology survey, invalidity search, cross-genre retrieval (e.g., associative retrieval between newspapers and patents), cross-language retrieval, integration of content-based and metadata-based retrieval, user modeling/interaction for processional patent searchers 2. Patent classification Categorization based on International Patent Classification and F-term, statistical approaches, machine learning techniques 3. Natural language processing for patent processing Text summarization, readability enhancement for claims, machine translation, natural language generation of claims, term extraction, thesaurus production, ontology construction analysis 4. Data/text mining for patent database, automatic patent map generation 5. Data engineering Document structure models and markup languages for patent documents

According to a recent article in U.S. Industry Today by Michael Rader, a patent attorney with Wolf, Greenfield & Sacks, P.C. in Boston 2005, Manav Sethi (sethimanav@gmail.com) - 14 -

Source: BTI Consulting Group Survey8

New client research reveals hourly rates that corporate clients pay their law firms. What Clients Pay Law Firms: BTI's Billing Rate Reference for the Legal Services Industry 2003 is based on more than 2,600 individual data points obtained directly from interviews with Fortune 1000 corporate counsel. Hourly Rates are examined by: 15 Key States 13 Major Industries 8 Primary Practice Areas

2005, Manav Sethi (sethimanav@gmail.com)

- 15 -

 2005, Manav Sethi (sethimanav@gmail.com)

- 16 -

Source: Legal Week Note: The strategy must not be to delimit the opportunity space to top 50 firms. Volumes will come from next 500 firms depending upon industry verticals and practice areas.

2005, Manav Sethi (sethimanav@gmail.com)

- 17 -

Sample Cash Workflow for Year 01 of operations:

Expense OPEX Total no. of resources Av. Cost per resource (INR/pa) Add: Admin cost (%) Includes: Includes transport, food, facilities management, power cost et al CAPEX Facility (Lease/sq.ft./person/pm) Assumption: 100sq.ft/person Furnishing (Per Sq.ft.), Includes: Flooring, Networking, False Ceiling, Lighting, Ducting, Modular Furniture, Chairs, and Meeting/Conf rooms with furniture. Not Include (/May Include): Tel Instr, EPBAX, Computers/fax/copier/printer Systems (H/W & S/W, per person) EDMS (Enterprise License) Income 50 500000 INR/pa 25000000 USD/pa 568182 Billable Resources Hourly Billings (USD) Least Case Scenario 35 40

15

3750000

85227

No. of days/mth No. of mth No. of hrs/day

22 12 7

70

4200000

95455

1500 35000

7500000 1750000 2500000

170455 39773 56818 1015909 Total Assumption: Capacity Utilization (%) 2587200 60 536411

Total

Net Profit/Loss (USD) Note: 1. 2. 3. 4. Above doesnt include the yearly access charges for access to various databases. One may get already furnished space by paying marginal incremental lease rent and thus the furnishing cost above may not apply. EDMS: Enterprise Document Management System with state-of-art security features. 1USD=44INR

2005, Manav Sethi (sethimanav@gmail.com)

- 18 -