India: the real cost savings

There is an article out this morning via ALB Legal News, a news site out of Australia that we monitor, that covers the legal markets in Australia, Hong Kong, Singapore, China, along with parts of Japan, Taiwan and Korea.  They often give us access to their job sites which we post on our Europe, Persian Gulf and Asia job lists.

Today’s article is about India legal outsourcing (LPO) and it’s use as a means to slice operating costs to keep clients happy in the saddest of economic times.

The full article can be accessed by clicking here. 

The article raises doubts as to whether law firms engaged in LPO will actually see any tangible savings much less be able to pass these on to their clients.

But the key section to us is as follows: “The largest exponents of LPO have, and always will be, multi-national corporations (MNCs).  Indeed, a cursory glance at some of the major LPO players seems to indicate as much.  SDD Global Solutions, the affiliate arm of New York-based law firm SmithDehn is one such firm. According to SDD president and chairman, Russell Smith, the majority of its work comes from in-house legal teams rather than referral from the monolithic UK and US law firms”.

This comports with the trip recently made by Alex Hania of our staff.  He met with, saw or was given reference 70+ U.S. companies doing direct LPO business in India.  Allstate, American Express, Cisco, Dupont, Dow, General Electric, General Motors, FMC Technologies, Microsoft, Monsanto, Morgan Stanley, Philips (the Dutch electronics compamny), etc. are all doing LPO business there.

That’s the real cost savings: corporate direct to India, not via the law firms.  It’s been the reason for the success of e-discovery companies marketing direct to U.S. corporate in-house legal departments. 

The granddaddy is General Electric.  Companies followed the lead of GE  which in 2001 pioneered the cost-saving strategy of offshoring work to India. GE began by hiring Indian lawyers and paralegals to work for two units, GE Plastics and GE Consumer Finance, performing such tasks as drafting outsourcing agreements and confidentiality contracts. After two years, the company said it had saved almost $2 million in legal fees.  As word spread, more corporations warmed to the idea of reducing legal bills through offshoring. This also led led law firms to set up subsidiaries that acted, for example, as patent service providers.

[Note: according to the information provided to Alex, the average Indian lawyer earns about $10,000 a year.  Indian contract attorneys earn about $5-7 per hour and the charge out rates to clients for average LPO work is $30 per hour.  However, several U.S. attorney project managers told Alex that on higher-level work jobs done in-house in the U.S. for $300 to $500 an hour can be done by Indian lawyers/LPOs for $100 to $200 an hour].

And as we previously reported, “sticker shock” alone is enough to make corporate in-house lawyers pay attention.  According to a Fulbright & Jaworski client study over the summer, nearly 90 percent of U.S.
corporations are engaged in some type of litigation, with the average company balancing 37 lawsuits at any given time. For companies with revenues more than $100 million, corporate counsel cited soaring EDD costs as their number one concern. In fact, some expressed more concern about litigation expenses than whether or not they actually won the case.

About 10 percent of respondents reported that legal spending accounts for approximately 5 percent of the company’s gross annual revenues. For companies generating more than $1 billion a year, this translates to more than $50 million in legal fees. Precise costs are admittedly difficult to quantify, but with EDD taking an increasing bite out of the bottom line, corporate America is looking for alternatives, and turning increasingly to India.  The review part of the process — the process we know best as contract attorneys — is a key area where outsourcing is the attractive, cost-saving option.

And as we have reported, India isn’t the only country attracting offshore legal work.  There are extensive LPO operations building in Australia, Canada, New Zealand, and the Philippines.
Those are the two gorillas in the room working against contract attorneys: cost-driven clients and cost-driven law firms.  With the state of the market right now and the domestic “push down” of hourly rates (we’ve been flooded with your emails about recent law firm/agency quotes) Posse List members are faced with a “take it or leave” sitaution which — we pray —gets better in 2009.