Legal Process Outsourcing: The Next Wave
Outsourcing is not a new concept. Many businesses have been using external providers to fulfil highly administrative or poorly served functions of their business for most of our modern business history. What has changed in the past decade however is the type of function that is outsourced, as well as to where and to whom it is entrusted.
Since the late 1990s, outsourcing and off-shoring have experienced a period of phenomenal growth. Today, the provision of third-party services is a global industry with various forms of highly skilled business and legal support located in cost-effective locations around the world. Most are in the key Asian territories of China, India and the Philippines, but increasingly, new businesses are setting up in Eastern Europe, Africa (most notably, Kenya and South Africa) and South America (Brazil).
By Rob Stichbury, Commercial Director at CPA
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Leaders in the Field
According to AT Kearney's annual global services index, India is the current global capital for outsourcing and offshoring, with other Asian destinations dominating the top five. But why is India leading the field for BPO and, most recently, LPO?
The Outsourcing Top 10
1 India
2 China
3 Malaysia
4 Thailand
5 Brazil
6 Indonesia
7 Chile
8 Philippines
9 Bulgaria
10 Mexico
Why India for LPO?
India has been the main destination for BPO for 10 years, thanks to its huge bank of experts, its staff resources (10-20 million people located in five main metropoli) and its widespread use of the English language. It also has a favourable business and tax environment, works to a common law system and importantly has a positive work ethic. The high-level work involved in KPO and LPO is viewed as a leading edge career for many graduates in India.
When we compare the percentage of national workforces with a University degree and the total numbers in the population, it becomes clear why China and India will inevitably hold their dominant roles. India produces 450,000 graduates annually - including some 79,000 law graduates and 5,000 PhDs. China has a higher percentage of graduates in the workplace and nearly double the total number of graduates in work - 43 million versus 23 million for India. But critically, although China has more graduates, language skills and a conflicting legal system has meant that India looks set to maintain its pole position. Until new jurisdictions build up the same level of expertise and resource, its domination in the off-shoring market should continue for the next two decades.
The New Face of Outsourcing
Initially a high proportion of outsourcing work focused on Business Process Outsourcing or BPO, that is simple business processes, such as back office functions, call centres, human resources and IT. Driven by board pressure to reduce overheads, over four million jobs have been moved off-shore over the past 10 years. But this area of business is developing quickly and recent trends suggest there has been a paradigm shift in the way companies outsource. The race for cost savings has given way to the race for top skills. Subsequently, providers are evolving to provide highly skilled professionals, such as doctors, engineers, mathematicians and bio-scientists. Off-shoring more cerebral tasks has many merits. For example, an A&E fracture clinic in the US can benefit from 24/7 assessment of digital x-ray imaging by outsourcing the work to experts in a different time zone.
The need for capacity, combined with intellect and workforce flexibility has led the Knowledge Process Outsourcing (KPO) market to grow rapidly in the past three years to around $3bn+ spending in 2006. Success in this sector has also led to the more recent, but rapidly growing trend of Legal Process Outsourcing (LPO). As with BPO, the minor or less sensitive work of a legal department initially lent itself best to outsourcing - accounting, forensic accounting, legal drafting, legal research, document sifting, forensic analysis of administrative communications and printed material were regarded as acceptable tasks to outsource. However, the high demand for skills in the legal sector has opened the eyes of forward-thinking corporations and law firms to the greater bank of, previously under-used, legal expertise that exists in popular off-shoring destinations. Higher value work is now being outsourced, particularly in the area of intellectual property (IP) where companies and law firms are for example now using off-shore experts to mine patent portfolios.
The race for cost savings has given way to the race for top skills. Subsequently, providers are evolving to provide highly skilled professionals, such as doctors, engineers, mathematicians and bio-scientists.
IP currently accounts for over 45% of the LPO market and is expected to lead the growth in this sector in the nextthree to five years. The service mix already includes basic IP services, such a proofreading and paralegal support, but as low-end IP administrative tasks are outsourced with success, companies are electing to off-shore more complex tasks to trusted suppliers, leveraging the experience and talent offshore to improve processes, and apply the benefits of scale and technology.
General Electric was one of the first companies to realise the potential of IP outsourcing, starting the trend back in 2001 by opening its own office in India. This was later spun out from a captive, only providing services to one company, to an independent third-party player now called Genpact. More recently, one major global technology company doubled patent filings without increasing costs or compromising the quality of its IP by outsourcing to India. And today, over 100 US-based entertainment and broadcasting companies choose India for high-end legal research and substantial volumes of litigation work.
The quality of graduates in jurisdictions such as India equates to an immense pool of available LPO technical talent. The competitive wage rates make it practical to pay staff to spend extra time on projects, ensuring thorough and wellanalysed results. This is particularly true of tasks such as prior art searching.
LPO for the IP Industry
So does LPO work and is it suitable for the IP industry? The simple answer is yes. In our fast-paced industries, businesses need to strive for continual innovation in order to ensure competitive advantage. Without back-end support, such progress would not be possible. The hunt for competitive advantage translates into greater legal, particularly IP activity. That's not just in the number of patents that companies seek to register and protect, but Companies are electing to off-shore more complex tasks to trusted suppliers, leveraging the experience and talent off-shore to improve processes, and apply the benefits of scale and technology. also in the trend to actively 'farm' patent estates. Without external help managing the administrative side of the IP work, few corporations would be able to keep up with or afford to properly develop their IP portfolios.
An increased emphasis on merger and acquisition (M&A) activity since 2004 has also spurred the need for more flexible resources. IP due diligence is fundamentally important in all M&A activity, and increasingly in private equity and venture capital deals. This has big implications for IP departments as it also generates large volumes of work in tight timeframes, distracting staff from otherwise core activities. If forced to manage the work internally, companies are faced with increasing costs, backlogs and delays in work and compromises in the quality of the work being produced.
The rising cost of office space, the scarcity of skilled staffing in the developed world and the challenge to manage the peaks in work-load all put pressure on a company's bottom line. LPO has enabled companies to increase productivity and capacity, to achieve scale and bandwidth to operations. It also satisfies board pressure to leverage IP and keep costs down, while still maintaining (or even improving) quality of work.
'We all know that outsourcing is not just about cost take-out anymore. Done right, outsourcing will make your organisation more nimble, more agile. and more competitive.' Kevin Campbell
The growth in worldwide patenting activity over the past decade has also meant that national patent and trademark offices are struggling to keep up with the speed of innovation. In 2005, (the most recent data available), the European Patent Office (EPO) had 119,800 patent searches pending, and this figure is due to grow by 24% each year. Similarly, in 2006, the US Patent Office (USPTO) revealed details of a backlog exceeding 700,000 patent applications and the situation looked all too familiar at the Japanese Patent Office (JPO) in 2005, when its backlog hit 790,000. At that point the JPO took action and outsourced 25% of its prior art searches to help get back on top of the escalating workload. The move to outsource and increase capacity at the JPO was welcomed by industry too, since application delays can mean that precious patent licensing opportunities are lost.
In such an aggressive environment, outsourcing is no longer a choice - the question is not whether a business should outsource, but instead, how best to do it: 'We all know that outsourcing is not just about cost take-out anymore. Done right, outsourcing will make your organisation more nimble, more agile, and more competitive'. Kevin Campbell, 2007, Group Chief Executive - Outsourcing, Accenture
Forrester Research
Forrester Research estimates that by 2015, as many as 3.3 million US jobs and $136 billion in wages will move overseas. By 2020, it believes that the global outsourcing industry will reach $1 trillion - that's the equivalent of the GDP of Spain or Mexico.
LPO is expected to lead the field in the next three-five years. It is already estimated to be worth $146m million annually (ValueNotes, July 2007), but this is just the beginning. Industry sources predict that this will grow to $600 million by 2010. This means that there is no shortage of off-shore opportunities and that there will be LPO solutions to suit every need.
So what does this mean for your business? The outsourcing market is moving quickly and is learning from its mistakes, with LPO benefiting from the important lessons learned in BPO. The cumulative rise in resources and profit indicates that companies believe in outsourcing, but also that it works. So this is something you shouldn't ignore, but seriously consider as a viable route to expanding your business and increasing profitability.
Setting up an outsourcing programme takes time, but compared to hiring a new department or multiple numbers of specialist legal staff, the process is quicker and much easier to manage.
It's also much more economical and makes you more agile in the market, enabling you to upscale or downscale as required. For the IP world it holds real advantages as volumes increase and skilled professionals become harder to source.
Businesses should look at their current set up, check their financial position, make sure they understand the outsourcing business and choose a provider with strong sector experience and a reputation for reliability.
Industry experts are certain that LPO activity is nascent and companies and law firms who've not yet capitalised on the next wave of outsourcing might be surprised to hear that their competitors probably have.
Choosing the Right Partner
Ultimately, it is the importance of quality, not cost, that is driving growth in the LPO marketplace. That's why companies looking to off-shore or outsource key tasks, should be looking for an experienced partner that is able to ensure quality of work, as well as manage risk, guarantee data security, export control, interoperability of data and smooth transfer of work.
In the IP industry in particular, there is now also a growing trend towards multi-sourcing and multi-shoring, where corporations and law firms select not to outsource a variety of in-house tasks to one expert supplier or global jurisdiction, but instead select the best (or most innovative) supplier or the best jurisdiction for each task. Better still they find a supplier that has the breadth and scope to provide the appropriate specialist multi discipline expertise and a multi-shore option. IP service providers work on a variety of levels, but aside from CPA, there are only a few companies that can actually provide the global multi faceted approach to LPO that most businesses need.
At the very basic level, businesses should be outsourcing non-core and lower value activities, leaving in-house staff to focus on their core value and added value activities to drive earnings growth. Working on the concept that highly-trained, outsourced IP specialists can lift the burden of managing the IP prosecution process, many law firms are also now choosing to off-shore more key IP tasks. Clifford Chance is just one example of a global law firm that has chosen to partner with an India-based outsourcing company to manage its key financial services. US-based Schwegman, Lundberg, Woessner & Kluth (SLWK) is another, but it chose to establish its own captive IP outsourcing company in 1999 to achieve this.
It's important to pick a long-term partner with top quality processes, a good reputation and the size and ability to innovate and evolve with your business.
There were practical reasons for setting it up in India, explains Steve W Lundberg, founding partner: 'In the late 1990s there was a labour shortage in Minneapolis (home to SLWK's first office) of qualified personnel to do certain functions like proofing and lower level case management.' Tapping into the bank of talent in India allowed the firm to increase capacity, improve cycle time and retain complete control, all without sacrificing quality or security. And, as corporations become more wary of the hourly charge of legal counsel, IP outsourcing also provided SLWK with the opportunity to pass on cost savings to its clients - a benefit that few competitors could provide at the time.
The Pitfalls of Outsourcing
Whether you choose to set up your own company or, more sensibly in today's marketplace, use an already existing and experienced supplier, the same rules apply to outsourcing as they do to any key business task: focus on top quality, implement robust processes, certification, security and risk management practices and apply good governance practices and appropriate technologies. However, outsourcing is by no means a stroll in the park and there have been several high profile failures where the wrong processes have been outsourced to the wrong areas. A good supplier will eliminate these difficulties and the chances are if they are a global service provider, they will be able to select the best talent at the best locations for the required tasks. Companies shouldn't be afraid to scrutinise the security and confidentiality provisions when choosing a supplier. They should also definitely be looking for a proven track record of quality service delivery both on-shore and off-shore, guaranteed service level agreements, highly trained staff, state-of-the-art facilities and a technical infrastructure to support efficient service delivery.
Other criticisms of outsourcing from both management and consumers often focus on a central question: is the performance or quality of the outsourced service on a par with the expected standards of management and consumers? Sceptics often argue that high-value work is too complex or specialised to outsource and that companies experience a loss of control over the quality. Many have experienced the less than customer astute call centre services from BPO outsourcing that have left behind a lingering air of disapproval.
A Gartner survey in 2005 highlighted issues experienced by Dell, JPMorgan and Capital One. Results showed that a mammoth 60% of customers switched services as a direct result of these companies outsourcing. The impact of this failure on business is clear and highlights the importance of outsourcing to the right provider. Working with a company that understands your business and core company values should eradicate the bad experiences. Companies spend much time and capital in terms of marketing and product research - outsourcing is also a significant and important business decision, which cannot be made in haste. There is no substitute for making the correct, in-depth analysis to select the right service area to transition. It's important to pick a long-term partner with top quality processes, a good reputation and the size and ability to innovate and evolve with your business.
Outsourcing doesn't mean you relinquish responsibilities of risk or compromise confidentiality. The key is to outsource, but to be able to manage and track the progress of your outsourced work. Many service providers have procedures and/or robust software systems in place that guarantee the highest levels of client confidentiality and professional delivery. These will also enable real-time workflow delivery, enabling executives to monitor the quality of their services for a fraction of the time that would be spent managing the function in-house.
Troubleshooting
Gill Andrews, senior consultant at Bird & Bird, explains in her 2006 Report, Outsourcing Contracts - Are they worth the paper they're written on? that there are several key business reasons for an outsourcing contract and that a sound business model needs to be in place.
'Primarily, this is to provide an appropriate level of remedy, if things go wrong. If your supplier, or customer, does not perform as promised, your business might suffer. Without a good contract, it can be difficult to claim compensation, or to terminate, for failures of another party.
Many outsourcing disputes are over which party has responsibility to do, and pay for, particular aspects of service. The discipline of drafting a contract forces people to focus on these types of matters.
These matters can of course be agreed by way of non-contractual documents. However, in our experience, this generally produces a less rigorous analysis than where a contract must actually be signed off by key decision makers.
These key reasons are all just as important, a couple of years into the outsourcing relationship, as they were on the day the contract was signed. The challenge therefore is to make sure the outsourcing contract remains fit for purpose, and does what it is meant to do, throughout the entire contract term.'
5 Key Questions to Ask When Choosing a Supplier
1 How much of your business do you plan to outsource?
As a general rule, businesses should be looking to outsource non-core and lower-value activities in order to free up their internal staff to concentrate on highervalue tasks. Putting a trusted supplier in place now will also assist in times of future growth or sudden surges in work; for example, as a result of a merger or acquisition. Not only is outsourcing most cost-effective, the ability to upscale and downscale as required can also make a business much more agile in the marketplace.
2 Can your supplier fulfill all your needs, or do you need to multi-shore to achieve the best results?
IP service providers work on a variety of levels, but few can actually provide the global multi-faceted approach to LPO that most businesses need, hence the growth in multi-sourcing and multi-shoring. However, the need to set up multiple agreements with a range of different partners can be prohibitive. Companies would be wise to select a supplier who is able to provide a broader range of services, thereby providing the appropriate expertise and geographical scope without unnecessary paperwork and management time.
3 Can your chosen supplier ensure quality of work?
Sceptics often argue that high-value work is too complex or specialised to outsource and that companies experience a loss of control over the quality. KPO has come in for much negative criticism in recent years, partly as a result of the poor service provided by some companies in the telecoms industry, and while this is a criticism that is less often aimed at the LPO industry,companies should still vet their potential suppliers before entering into any form of agreement. After all, it is your reputation on the line if they do not provide the quality of service that your clients expect.
4 How established are they in your sector and how trustworthy are their client confidentiality and risk management processes?
Most businesses are all too aware of the need to select an experienced supplier when entering into any form of third-party agreement - and for good reason: their future success is dependent on the service provided by that supplier. The same rules apply to outsourcing agreements: companies need to focus on quality; implement robust risk management and security processes; check that the required certification and accreditation is in place for the service they provide; and apply good governance practices and appropriate technologies to the work they employ them to do.
5 Does the proposed outsourcing contract provide you with a suitable level of service and remedy should problems arise?
Companies should be looking for a track record of quality service delivery both on-shore and off-shore - and they should demand the paperwork to prove it. Guaranteed service level agreements ensure that suppliers provide the staff and infrastructure needed to support the service delivery. Similarly, outsourcing contracts should guarantee an appropriate level of remedy, if things go wrong. Without a good contract, it can be difficult to claim compensation, or terminate the agreement, when your supplier does not live up to their earlier promises.
For more information, visit www.cpaglobal.com/legal_process_outsourcing
About CPA
With clients in over 100 countries, CPA is a leading provider of legal process outsourcing and the world's top intellectual property (IP) management specialist. Founded in 1969, CPA provides lifecycle management services for intellectual property such as patent, design and trademark searching, watching, renewals, and portfolio strategy in over 181 jurisdictions. CPA is also a leader in the growing market for outsourced contract management and litigation support services, helping law firms and corporations to realize value by managing risk, cost and capacity. CPA employs over 1,000 people in 16 offices in 8 countries. www.cpaglobal.com