Legal Outsourcing: Another Billion Dollar Industry

Surging business

Virtually unheard 10 years ago, the term “outsourcing” has emerged as a phenomenon in the business of the present day world. It has become the backbone of Indian service sectors. In the last fiscal India earned $6.7 billion by providing services in software, technology and manufacturing outsourcing.

Now the BPO companies have turned their eyes on legal outsourcing. According to a study by the US-based Forester Research, the current annual value of legal outsourcing which is worth $80 million can rise up to $4 billion and can produce 79,000 jobs in India by 2015. National Association of Software and Service Companies (NASSCOM) also projected that Legal Processing Outsourcing providers (LPOs) in India will soon rise up to $3-4 billion. This heralds the opening of new vistas for law professionals whose number is increasing incessantly.

According to Forrester Research report, “The benefit of the outsourcing companies in the US would translate into a cost saving of about 10-12 per cent. The potential of the Indian resources to absorb the increasing demand in legal outsourcing is because India enjoys the economic advantages of the wage difference and less perks and overheads.”

Nature of work

In the beginning the works which are being outsourced to India are “of secretarial nature and includes patent drafting, legal research, contract review and monitoring,” says Mr. Ravi Shankar S. of 21 st Century Law Firm. But it is set to expand with the enlarging knowledge of Indians regarding the foreign laws. Experts are hoping to receive high-end sophisticated contracts, which require a strong legal base of international standards.

Challenge ahead

The most important challenge to the newly-born sector is the need for Indian lawyers to pass US Bar exams, conflict of interest rules and data security. According to Mr. Ravi Shankar, “As far as qualifications of Indian lawyers regarding handling of foreign legal jobs are concerned, it should be pointed out that the nature of jobs at the lower level is almost the same. So no special qualification is needed to handle them.”

But notwithstanding the optimism prevalent in the legal business, there are a plenty of hurdles which can hamper the growth of this sector. For example the Indian Advocates Act, which deals with the professional conduct of lawyers, does not support work for other countries. Even, in specific laws governing companies and trade in securities, which hugely differ from one country to another, may constrain LPOs to paralegal and secretarial work.

But on the bright side, certain branches of law, which are of a global nature, like Intellectual Property laws (patents and trademarks) can give Legal Process Outsourcing Providers (LPOs) a fillip in their endeavour.

An Indian lawyer can be as good as his American counterpart in US Federal laws if properly trained in US law. What is required of an attorney, either Indian or American, is not that he should be aware of all laws and regulations but that he should be ready to acquire that knowledge.

Rush to grab the opportunity

It is the effect of this optimism that not only established BPO companies but also several legal firms have thrown themselves open to this lucrative opportunity. In fact, American conglomerate, General Electric, was one of the first to set up its captive BPO Gecis in India, which included LPO. Other technology companies, too, farmed out work to their Indian captive units.

Khaitan & Co, a leading law firm from Kolkata has already started an LPO by floating a new company ‘Neoworth’ and engaged 10 US-enrolled lawyers.

There is a strong political opposition in the US against outsourcing as it may affect the livelihood of US attorneys and may also serve as a roadblock. Despite of that feeling, legal firms are more than willing to outsource their jobs to India. That’s because like other BPO activities, Indian lawyers come cheap. An associate lawyer in the US comes with a $225 per hour tag in the first year. By the eighth year, it goes up to $450 an hour. In India, the rates are barely 10 per cent to 15 per cent of that. Moreover, with the time lag between India and the US and the UK, the turnaround time is 24 hours.

Outsourcing vs. Captive Operations – Which Model is the Best Fit For Your Business?

While feasibility of using offshore/nearshore resources for the delivery of certain activities or business processes has been already established, long term strategic feasibility and appropriateness of various engagement models are still under scrutiny.

The most common approaches nowadays are either working with a third-party outsourcing provider or establishing captive operations in lower cost locations. Engagement models can be differentiated based upon customer organization’s need for management control, costs of operation, risks and other factors.

Third-party Outsourcing

Third-party outsourcing is classic client-vendor relationship governed by contractual obligations and service level agreements. It is mostly driven by tactical reasons such as short-term cost savings and staffing flexibility. Non-core or non-critical activities are typical candidates for outsourcing.

Traditional third-party outsourcing comes in two main forms:

  • Project-based outsourcing is considered to be the most appropriate for development of software with well-defined requirements and deliverables. It is suitable for irregular but on-going or one-off projects. On-site presence may be required to facilitate estimating, specification and relationship management. Typical pricing models are Time and Materials (T&M) and Fixed Price.
  • Dedicated development center model caters for software with changing requirements, maintenance and support of large systems, research and development, testing as well as other types of complex ongoing medium- or long-term tasks. In this type of engagement vendor provides necessary facilities and allocates a team that works only on account’s projects and is managed by customer representative. This option is usually preferred when resource requirements are low. The customer is charged fixed monthly fee per full-time employee (FTE).

Captive Operations

When considering how to organize the remote delivery of software development services, captive subsidiary option often does not receive full consideration in comparison to outsourcing. While it is generally accepted to outsource certain non-crucial activities, in certain cases this approach is inappropriate for core functions and critical activities. Decision to take work offshore/nearshore doesn’t necessarily mean that you have to outsource it. Use of remote resources for the delivery of functions close to core business while retaining operational control and benefiting from real cost advantages can be achieved by means of setting up captive facility, thus keeping work within the company.

Captive model means that customer organization makes strategic decision to create its presence in the lower cost location and conduct work there as a part of its own operations. The activities are performed remotely, but they are not outsourced to the vendor. Thus the customer is able to retain full control and mitigate respective risks associated with intellectual property and other sensitive business information.

Organizations that want to establish captive centers have similar goals as those deploying traditional enterprise or shared services operations. In the first place captives are supposed to lower cost through labor arbitrage. But recent research shows that buyers are seeking not only cheaper but skilled labor at offshore/nearshore locations. They want to obtain competitive advantage and gains from process improvements. In order to avoid risks of underutilizing captive capacities, organizations must thoroughly assess their long-term operational requirements and predict service needs that may arise in the future.

The most common approaches to setting up captive operations are the following:

  • Creating captive center from scratch (do-it-yourself captive) can be successful when customer organization has necessary resources, local expertise and market knowledge. Decision to set up own captive center may evolve organically through growth. Organization can either perform extensive due diligence on its own or buy existing company with operations in the chosen location.
  • Build-Operate-Transfer (BOT) approach means partnering with third-party vendor to establish and stabilize center. Vendor is responsible for initial setup, staffing and operations of the captive center during the predefined period of time. At the end of the contract period the ownership is transferred to the customer. Thus organization takes over the turnkey captive center tailored to its specific needs. BOT option best suits organizations that do not have local expertise or extensive resources available. In this type of engagement only logistics associated with setup of the captive center is outsourced. Build-Operate-Transfer optimally combines control element of the pure captive model with flexibility of outsourcing. Essentially it provides maximum control at minimal risk.

Main benefits of having own captive center:

  • Ongoing realization of real cost savings
  • Full operational control and monitoring
  • Full ownership after the transfer
  • Minimization of intellectual property and data security risks
  • Retained knowledge of industry, specific business processes and techniques
  • Improved communications by continual reinforcement and experience
  • Easy replication of parent organization’s processes
  • Captive center can be commercialized at some point in the future

Both outsourcing and captive operations have similar driving forces (cost reductions and competitive pressures in the first place) and particular advantages, but main factors for choosing one or another vary.

Both approaches will deliver benefits in terms of improved focus, optimization of processes, reduction of operational costs, faster time-to-market etc. But companies must thoroughly evaluate each option to identify one that represents the best fit for their specific requirements, business culture and strategic goals.

The approach selected will depend on whether the primary driver is short-term cost savings or whether the company has long-term vision for offshoring/nearshoring and wishes to retain control over processes and intellectual property.

Establishing nearshore captive center in Ukraine through BOT model

If software development is a core competency of your company and you have long term specialized resource requirements, it makes sense to build your own capability in order to support the full software life-cycle, secure intellectual property and build up specific know-how. Nowadays this process is not as difficult as it used to be. The key to success is finding a trusted partner that already operates in the environment of country. By doing this you will benefit from:

  • Clearly defined setup methodology and timeline
  • Planned step-by-step implementation
  • Responsibility for all logistics associated with establishing a captive center
  • Practical knowledge of establishing IT business and dealing with related legal and contractual issues
  • Deep comprehension of cost and effort components associated with setting up and running a software development center in offshore/nearshore country
  • Hands-on experience in software engineering, generally recognized methodologies, processes and quality assurance that can be adapted to captive center
  • Established HR practices, experience in recruiting qualified IT staff
  • Attention to addressing security and business continuity issues
  • Consulting and support throughout the setup process
  • High level of business commitment and responsiveness
  • Flexible client-specific approach

Using Captive Insurance Companies for Savings

Small companies have been copying a method to control insurance costs and reduce taxes that used to be the domain of large businesses: setting up their own insurance companies to provide coverage when they think that outside insurers are charging too much.

Often, they are starting what is called a “captive insurance company” – an insurer founded to write coverage for the company, companies or founders.

Here’s how captive insurers work.

The parent business (your company) creates a captive so that it has a self-funded option for buying insurance, whereby the parent provides the reserves to back the policies. The captive then either retains that risk or pays re-insures to take it. The price for coverage is set by the parent business; reinsurance costs, if any, are a factor.

In the event of a loss, the business pays claims from its captive, or the re-insurer pays the captive.

Captives are overseen by corporate boards and, to keep costs low, are often based in places where there is favorable tax treatment and less onerous regulation – such as Bermuda and the Cayman Islands, or U.S states like Vermont and South Carolina.

Captives have become very popular risk financing tools that provide maximum flexibility to any risk financing program. And the additional possibility of adding several types of employee benefits is of further strategic value to the owners of captives.

While the employee benefit aspects have not emerged as quickly as had been predicted, there is little doubt that widespread use of captives for employee benefits is just a matter of time. While coverage’s like long term disability and term life insurance typically require Department of Labor approval, other benefit-related coverage’s such as medical stop loss can utilize a captive without the department’s approval.

Additionally, some mid-sized corporate owners also view a captive as an integral part of their asset protection and wealth accumulation plans. The opportunities offered by a captive play a critical role in the strategic planning of many corporations.

A captive insurance company would be an insurance subsidiary that is owned by its parent business (es). There are now nearly 5,000 captive insurers worldwide. Over 80 percent of Fortune 500 Companies take advantage of some sort of captive insurance company arrangement. Now small companies can also.

By sharing a large captive, participants are insured under group policies, which provide for insurance coverage that recognizes superior claims experience in the form of experience-rated refunds of premiums, and other profit-sharing options made available to the insured.

A true captive insurance arrangement is where a parent company or some companies in the same economic family (related parties), pay a subsidiary or another member of the family, established as a licensed type of insurance company, premiums that cover the parent company.

In theory, underwriting profits from the subsidiary are retained by the parent. Single-parent captives allow an organization to cover any risk they wish to fund, and generally eliminate the commission-price component from the premiums. Jurisdictions in the U.S. and in certain parts of the world have adopted a series of laws and regulations that allow small non-life companies, taxed under IRC Section 831(b), or as 831(b) companies.

Try Sharing

There are a number of significant advantages that may be obtained through sharing a large captive with other companies. The most important is that you can significantly decrease the cost of insurance through this arrangement.

The second advantage is that sharing a captive does not require any capital commitment and has very low policy fees. The policy application process is similar to that of any commercial insurance company, is relatively straightforward, and aside from an independent actuarial and underwriting review, bears no additional charges.

By sharing a captive, you only pay a pro rate fee to cover all general and administrative expenses. The cost for administration is very low per insured (historically under 60 basis points annually). By sharing a large captive, loans to its insureds (your company) can be legally made. So you can make a tax deductible contribution, and then take back money tax free. Sharing a large captive requires little or no maintenance by the insured and can be implemented in a fraction of the time required for stand alone captives.

If done correctly, sharing a large captive can yield a small company significant tax and cost savings.

If done incorrectly, the results can be disastrous.

Buyer Beware

Stand alone captives are also likely to draw IRS attention. Another advantage of sharing a captive is that IRS problems are less likely if that path is followed, and they can be entirely eliminated as even a possibility by following the technique of renting a captive, which would involve no ownership interest in the captive on the part of the insured.