Offshoring of Legal Processes to India

Although the offshoring of IT services and other low-end business processes to lower-wage countries
has been a fact of life over the past 15 years, the offshoring of legal services is still in its nascent
stages. In fact, research conducted by Evalueserve shows that only 1,300 professionals are currently
providing legal services to the US from India, however, this number is expected to grow to 5,200 by
December 2010 and to 16,000 by December 2015. Evalueserve contends that the Indian companies
providing such services will generate approximately $56 million in revenue during July 2005 – June
2006, $300 million in July 2010 – June 2011, and $960 million in July 2015 – June 2016. However,
it is worth noting that during the same period, the legal services industry in the US is likely to expand
from 975,000 legal and paralegal professionals in 2005 to 1.125 million professionals in 2010 and 1.3
million in 2015. Correspondingly, the revenue generated by this industry is likely to grow from $270
billion in 2005 to $360 billion by 2010 and to $480 billion by 2015. So despite the seemingly large
growth in offshoring of legal services, in actuality, only 1.2% of the legal and paralegal jobs would be
offshored to India by 2015 and constituting only 0.2% of total revenue!

1. Background

According to the US Census Bureau, the legal services industry in the US generated approximately $184 billion in revenue in 2002. This Census Bureau figure includes revenue generated from law- firms, solo practitioners, title and abstract companies and other various organizations that provide assorted legal services however does NOT include revenue corresponding to lawyers, paralegals and related professionals employed in various levels of the government, academia, various corporations and other non-governmental organizations (NGOs). Also, according to the US Bureau of Labor Statistics (BLS) 695,000 lawyers and 200,000 paralegals (also known as legal assistants) held jobs in
2002 and, of these, 75% lawyers and 70% paralegals worked in the first group (law-firms, title and
abstract companies and with solo practitioners) whereas, the remaining worked in various government
offices, corporations and NGOs.

Evalueserve estimates that in 2005, the revenue of the US legal services industry will be
approximately $225 billion using the US Census Bureau definition, up to approximately $270 billion
if we include lawyers and paralegals in all organizations. Furthermore, according to our estimates,
approximately 760,000 lawyers and 215,000 paralegals are employed in 2005 in all organizations
within the US. supported by another 225,000 professionals that include secretaries, receptionists,
agents, office administrators, IT professionals, HR professionals, and accounting. These
professionals work in various industry verticals such as – but not limited to – taxation, accounting,
telecom, biotech and pharmaceuticals. Since this article does not consider the offshoring of such
ancillary services – even within the legal industry – these services will not be discussed any further in
this article.

Currently, many US organizations have in-house legal departments that consist of senior lawyers,
associates, paralegals and related staff. However, many small and medium-sized enterprises do not
have any such departments and for various reasons (that include cost, quality and efficiency), even many large firms outsource legal work to external, US-based law-firms. However, since both the price of, and the demand for, legal services has been rising rapidly and since this trend is likely to continue and since the corresponding budgets may not even grow at the rate of inflation, more and more organizations, including some law-firms, are beginning to adopt one or more of the following mechanisms to reduce costs without jeopardizing quality:

1. Utilizing procurement departments for legal services – As procurement departments have
become what can be more aptly described as strategic sourcing departments with trained
contract development professionals, many firms are asking their procurement teams to
evaluate alternatives for legal services and assisting with strategic planning, supplier
evaluation and economic forecasting, reviews of their legal spending, and issuing RFPs
(Request For Proposals). Examples of companies that are using their strategic sourcing
departments to optimize legal costs include United Technologies Corporation, Oracle
Corporation, Bayer AG, JP Morgan Chase & Company, Merrill Lynch & Company,
Motorola Inc., Pfizer Inc., Tyco International Ltd., and Wyeth.

2. Increasingly using Information Technology applications to improve the efficiency of their
internal legal departments and external law-firms and to reduce their administrative
overheads. These IT applications include (a) e-billing to spot, flag and dispute charges that may have otherwise gone unnoticed, (b) use of extranets and a central repository of all work- product that can be searched electronically, and (c) e-filing of patent and trademark applications in order to improve efficiency and reduce cost.

3. Using paralegals to perform some of the same functions once reserved for lawyers . Clearly,
paralegals are expressly prohibited from carrying out functions that are considered
“practicing law” or setting legal fees, giving legal advice, and presenting cases in courts.
However, paralegals are identifying appropriate applicable laws and analyzing judicial
decisions, researching legal articles and providing synthesized reports and files to their
attorneys who can more efficiently perform higher value-added work. Moreover, such
paralegals are also performing more of the vital functions including drafting of contracts,
mortgages, divorce agreements, trust agreements, tax returns and planning estates.

4. Negotiating fixed price contracts, e.g., paying a fixed price for drafting and filing a patent
application or a trademark application, or paying little – if any – overheads such as those for
photocopying and faxing charges, to external law-firms.

5. Offshoring legal processes that conform to US export controls of course, without the
offshoring firms giving any legal advice or constituting the practice of law in the US.

The next section discusses the types of legal processes that will be offshored by various organizations
currently as well as those that will be offshored in the near future.

2. Legal Services Being Offshored

Between 1990 and 2005, the legal services industry grew at an approximate annual rate of 6.75% and
our forecasts show this industry is likely to grow at 6% per year for the next decade, 2006 – 2015.
Within the broad field of legal services, revenue growth is expected to be particularly strong in areas
related to the aging and elderly, antitrust, environment, global trade and Intellectual Property.

Although the offshoring of IT services, software code and call centers and other low-end business
processes to lower-wage countries has now been underway for the last 15 years, the offshoring of
legal services is still in its nascent stages. In fact, research conducted by Evalueserve shows that only
1,300 professionals are currently providing legal services to the US from India, however, this number
is expected to grow to 5,200 by 2010 and to 16,000 by 2015. Evalueserve contends that the Indian
companies providing such services will generate approximately $56 million in revenue in 2005, $300
million in 2010, and $960 million in 2015. However, it is worth noting that during the same period, the legal services industry in the US is likely to expand from 975,000 legal and paralegal
professionals in 2005 to 1.125 million professionals in 2010 and 1.3 million in 2015.
Correspondingly, the revenue generated by this industry is likely to grow from $270 billion in 2005 to
$360 billion by 2010 and to $480 billion by 2015. So despite the seemingly large growth in
offshoring of legal services, in actuality, only 1.2% of the legal and paralegal jobs would be offshored
to India by 2015 and constituting only 0.2% of total revenue!

The services that will be offshored within the broad area of legal and paralegal services include:

1. Electronic Document Management services: These include word processing, creative design,
legal transcription, legal coding, data digitization, key word and XML tagging, and archiving
services. We estimate that 750 Indian professionals are providing these services today at rates
of $11 to $13 per hour.

2. Research services: These include statutory and case law research. Since much legal research
can be done using electronic databases, trained lawyers in India can sift through volumes of
data and provide focused results to US attorneys. We estimate that 100 Indian researchers
were providing these services today priced at $24 to $26 per hour.

3. Due diligence services: For most mergers and acquisitions, lawyers must examine large
amounts of data to verify the legal and financial status of the company that is being acquired.
Since most of this information is now available in electronic form, Indian lawyers and
researchers can set up a “virtual data room” and do the preliminary due-diligence for their US
clients. This research can involve, for example, confirming thousands of supplier agreements
as to whether they will remain valid after a “change of control” or whether each might lapse
after a certain period of time. Due diligence may also include checking of company books,
board resolutions and shareholder resolutions and to ensure that there are no surprises for the
acquiring company. We estimate that 50 Indian researchers were providing these services
during December 2005 at a price of $24 to $26 per hour.

4. Contract Drafting and Proof Reading of Contracts: US organizations require a large number
of contracts and agreements to be drafted, which include employee contracts, Non-Disclosure
Agreements, licensing agreements, supplier agreements, lease agreements, vendor
agreements, and distributor agreements. Since each agreement typically follows a standard
template, Indian lawyers can produce the initial drafts of such an agreements, which can be
then reviewed and modified by an attorney in the US. Furthermore, Indian lawyers can be
used for proofreading or “red-lining” documents and ensuring these documents follow the
guidelines provided by their client. For example, the Indian lawyers may check whether a
given NDA has a time limit,” after which the confidentiality of information need not be
maintained. We estimate approximately 50 Indian researchers were providing these services
in December 2005 at $24 to $26 per hour.

5. Document Discovery in Litigation: In most litigation cases, lawyers and paralegals have to
pore over large amounts of data as a part of “document discovery”. This process is often time
consuming and usually has a critical deadline. Hence, often the involved lawyers and
paralegals have to put in extreme hours or hire temporary staff to meet the deadline. Since
this work is “rule based” and often is electronic data (i.e. email, electronic documents and
scanned pages), some of this work is now being offshored to India. We estimate
approximately 50 Indian researchers are provide these services today at $24 to $26 per hour.

6. Intellectual Property Services: These services include patent application drafting, prior art
searching, patent proof reading, docketing, patent landscaping and patent valuation services.
Within the last three years, these services have grown quite rapidly in India and more details
about the growth of these services can be found in my article titled, “Offshoring of Patent
Drafting and Prosecution Services,” (IP Today, May 2005). We estimate approximately 300
Indian researchers are providing these services today at $40 to $50 per hour. Finally, many Indian offshore service providers have recently started providing similar services for trademarks.

Essentially the Electronic Document Management services within Legal Process Operations are quite
similar to other business processes because these services require some – but not necessarily deep –
knowledge of law in a given jurisdiction. However, the other five services require substantial domain
knowledge and a fairly deep understanding of the law. Furthermore, the some of these services are
very “qualitative” in nature wherein every word and every punctuation mark is crucial and where
culture and trends in a given jurisdiction can also be important.

3. Different Models for Offshoring of Legal Services

With respect to the offshoring of legal services, the following four models seem to be emerging:

1. Captive Centers formed by US Law Firms and Their Subsidiaries: Currently, Indian law does
not allow “foreign” (i.e., non-Indian) law-firms to practice in India. Hence, some law firms in
the US and India are setting up subsidiaries so that they do not practice law in India but
provide legal and paralegal services only for export purposes. For example, Schwegman,
Lundberg Woessner and Kluth – a law firm headquartered in Minneapolis – has two captive
centers for a of its subsidiary, Intellevate, located in Delhi-Gurgaon and Bangalore.
Intellevate currently has over 80 professionals in India involved in prior art searching and
patent proof reading, and they will soon provide other IP related services. Other examples of
this include Fox & Mandal and ALMT Legal, two Indian based law-firms, and Patent Metrix,
an Irvine-California based law firm. Each of these has fewer than 25 professionals providing
legal and paralegal services from India.

2. Joint Ventures by US-based Firms: Rather than opening their own captive centers, several
US-based firms have joint ventures with firms in India. A good example is Cantor-Colbourn
Esq. who has joined hands with Lall and Sethi, Esq. in India. Similarly, a well-known legal
consulting firm in the US, Hilderbrandt International, recently tied up with an Indian services
company, OfficeTiger, to provide such services jointly. However, since statistically most
joint ventures fail – especially in India – one needs to be cautious while treading this path.

3. Third Party Vendors Providing Services to Law-Firms and In-house Corporate Attorneys: Evalueserve is a prime example of a third party provider and currently has over 100
professionals providing legal support services. Evalueserve hires Indian engineers and
lawyers and trains them to become proficient in US law and various USPTO, PCT and WIPO
rules and regulations. Integreon is another company that provides Electronic Document
Management services for the legal services industry and has approximately 80 professionals.
Examples of other Indian companies that have 20 or fewer professionals but that are
providing such services include Manthan Services, Lawwave, Lexadigm, Lexworks, Atlas
Legal Research, Bickel and Brewer, Quislex, Pangea3 and Mindcrest.

4. Captive Centers: General Electric that has more than 50 IP and other legal professionals
working within its center in Bangalore India, who are providing many of the services listed in
Section 2. Although some other large companies are also trying this model, we believe that
this model is unlikely to succeed unless the corresponding center can grow to at least 100
professionals. Captive centers smaller than 100 will be unable to provide good career paths to
its professionals who are likely to quickly leave, especially because the job market in India is
expected to remain “hot” for the next 4-5 years.

4. Reasons for Offshoring Legal and Paralegal Services

Of course, the reduced labor costs, and therefore the increased profit margins for the end-clients, are
the most compelling reasons for these clients to offshore legal services to low-wage countries such as India. Besides the reduced labor costs, there are some other important reasons why many organizations – large, medium and small – offshore some of the work:

1. Improving Quality: Because of substantially lower labor costs in India the Indian legal
professionals can take substantially more time in doing a unit of work, thereby, making the
additional end-deliverable more robust and complete. Since this deliverable is then reviewed
by a US attorney, such a deliverable is likely to have a better quality than a similar one
produced in the US because of the extra attention it has received.. For example, since Indian
companies charge between $40 and $50 per hour for patent drafting as compared to $175 to
$350 per hour in the US, the Indian professionals can spend as much as 100 hours in drafting
a patent application, which is then reviewed by an experienced US attorney, who can act as a
“patent examiner,” before the patent application goes to through the actual examination
process at USPTO.

2. Reducing Response Time: Offshoring also enables organizations to take advantages of
multiple shifts and time zone advantages, which is especially important for contracts, legal
research, electronic document management, document discovery, and in situations with strict
deadlines.

3. US Lawyers and Paralegals can Move Up the Value Chain: Since the work done by Indian
legal professionals is the same as that provided by a US associate with 2-3 years experience,
US lawyers can move up the value-chain and provide a broader array of services to their
clients. For example, if Indian lawyers do most of the drafting then the US lawyers can
provide more litigation services and spend more “face time” with their clients. Similarly, if
the Indian IP professionals perform patent drafting for in-house IP attorneys of a corporation
then these attorneys can spend more time with their R&D professionals and harvest more
inventions that may be worth patenting.

4. Ability to Send Overflow work: 98% of all US law-firms and legal service providers have
less than 20 attorneys, and in fact 76% have less than 4 attorneys. Many such firms are often
faced with “feast or famine” situations and often struggle with too much work or not enough
work. Since they cannot afford to keep a large workforce on their payrolls, they face massive
hardship when they get a large project that needs to be completed in a short period of time.
Such firms usually benefit a great deal by sending overflow work to offshore providers who
can provide a large number of reasonably experienced professionals with the right domain
expertise and at a reasonable cost. This can also help small and mid-sized law-firms level the playing field because it allows them to compete more effectively with larger US-based law- firms.

5. Extending Venture Capital Money: For most startups, the “cost of money” is the highest in
the initial stage, which is also the time when they need to patent their technology. Therefore it
is not surprising that a survey done by Evalueserve of 70 startups in the San Francisco Bay
Area in 2001 revealed that one-third of the startups would not even consider patenting their
technology if the total cost of a patent application exceeded $6,000. Hence, the offshoring of
the patent applications by the startup and its corresponding funding partners will allow the
VC dollars to have more of an impact.

6. Reducing the Law-Associate Churn: Law-associates’ churn occurs when junior lawyers
switch from one law-firm to another or when they open their own law-firm. Since most of
these junior lawyers remain in the same geographical neighborhood as the firm they left, this
churn is much worse than simple attrition because the firm may have actively contributed to
its competitor’s growth, or even created a new competitor. Equally important is the fact that
many law-associates – especially the more experienced ones –have their own clients and their
departure may also cause the corresponding movement of these clients to the firm’s
competitor. Hence, it is not surprising that most law-firms invest a substantial amount of
resources in reducing such churn. Indeed, the offshoring of various legal and paralegal processes can help in lowering this churn because the senior lawyers in the firm would require fewer junior lawyers.

5. Impediments in Offshoring Legal and Paralegal Services

The following are the main impediments associated with the offshoring of legal services:

1. The legal services industry has long had an aversion to risk. This is particularly true within the corporate legal area where stakes are very large. Here the general counsel and other in- house lawyers often only feel comfortable outsourcing work to known US based law-firms. Hence, this industry will be slow to embrace offshoring as a means of reducing cost and improving efficiency.

2. Since the cost of client acquisition in the legal services industry is rather large, many law-firms and solo practitioners try to maximize the number of billing hours from each client. However, when they have to outsource or offshore some of the work, then their ethics require them to reveal this to the client. Hence, sending work offshore clearly reduces the number of billing hours, and some times the law-firms can make up for the lost hours by
being more profitable but at other times they cannot!

3. Sending work offshore also raises the specter of the loss of confidentiality and although more and more research and development work is being done offshore, sending confidential material offshore causes the US lawyers to take pause .

4. Conflict of Interest issues are very important for law-firms, solo practitioners and in-house attorneys. And, most legal services providers in the US are bound by ethics and guidelines that incorporate Conflict of Interest issues. Hence, an appropriate framework needs to be created while working with any offshore provider, and this can slow the process of offshoring. In fact, the closer the work is to litigation (e.g., document discovery or patent
claim mapping), the more important the issues of confidentiality and conflict of interest
become.

5. Approximately 80% of the lawyers and paralegals in the US work for the government,
academia, non-governmental organizations, and law-firms with three or fewer lawyers. Since
the “unit” of work that can offshored by most of these organizations is less than one full-time
person per organization, it will be very costly for offshore service providers to market and
sell their services to this group. In fact, the “real” market for Indian offshore providers is the
larger law-firms with 10 or more lawyers and mid-sized and large corporations. Together
these form about 15% of the total US market and about $40 billion in revenue in 2005.

6. Currently, Indian law does not allow foreign (i.e., non-Indian) law-firms to practice in India.
Since India is a strong emerging market whose GDP has been increasing at 7% a year, and
since its legal system is similar to that of the US, many US-based law-firms are quite eager
to open their own subsidiaries in India. Once this happens, they will have an automatic
incentive to send work offshore in order to reduce costs and improve efficiency.

So, where as much as 10%-12% of Information Technology, banking, finance and insurance services
services may be offshored to India by 2015, the corresponding number in legal services is likely to be
1.2%. Because this percentage is so small, it is quite likely that some of the Indian service providers
mentioned above may not survive beyond the next 2-3 years.