Legal outsourcing hype: can India deliver?

• April 2006: New York-based law firm Smith Dornan and Dehn launches its legal service offshoring venture, SDD Global Solutions in Mysore, near Bangalore
• March 2006: Pangea3, a legal outsourcing services provider receives a $4-million second round of funding by the GlenRock Group
• Since 2004, when OfficeTiger launched legal offshoring services, the employee count in the legal division at the Chennai and Colombo centers has grown to over 500 by mid-2006.

Offshoring legal services to India has attracted significant global interest as well as media hype in the recent past. The barely 3-year old industry is growing at an extraordinary pace, almost 60% to 70% p.a. currently. The India-based offshore vendors are growing in number and strength almost every month and so are the names of prospective outsourcers.

Since the launch of our report, Offshoring Legal Services to India in December 2005, we have been surprised by the extent of global interest, as evident in the large number of queries we’ve handled for setting up shop in India or selecting vendors.

Services in Legal outsourcing include secretarial work, legal coding, research, contract drafting /review and IP-related work (prior-art search, patent drafting etc.). Not all of these services require lawyers, however several large and midsized firms prefer to hire lawyers for most of their requirements. IP-related work has a larger employment of engineers/scientists.

What are the sources of manpower?

The relatively easy availability of low-cost legal expertise, coupled with the Indian legal system's congruence with American and British Law is driving substantial legal work to India. The growth has obviously led to a huge demand for lawyers within India. The major vendors in India hire from the leading law schools for the entry level jobs and poach from established Indian law firms for the middle and senior level management staff.

As per ValueNotes report, the Indian legal offshoring industry in 2005 employed 1,800 people and will employ over 24,000 people by 2010. The table below provides a look at the resource pool that India generates each year.

Will the euphoria continue?

However, the above numbers mean little when it comes to the employability of these people. Manpower that is capable of delivering quality services is key to the success of this industry. Almost all the vendors we’ve interacted with say they have to spend significant time and resources in training fresh graduates to deliver as per global standards. Further, just about 10-15% of the law graduates from the top institutes are ready/capable for client delivery.

Currently, the industry is small yet burgeoning hence the vendors are happy to acquire premium talent from a seemingly large resource pool. As the industry matures and competition intensifies, the demand for 'quality' manpower will outstrip the supply. The current attrition rates are relatively low at about 15-25% p.a., but will rise and so will the instances of poaching from competition, not to mention the inevitable salary hikes. Moreover, there will be pressure on margins with growth in competition. All in all, the industry will need to gear up for tougher times ahead. Business growth is unlikely to be a major hurdle but capable manpower may become an impediment to growth.

Currently, in the legal services space, the focus of vendors is on customer acquisition and scale. However, as the industry matures, the battle will be fought over "talent". In this context, players focused on higher value services (like Pangea3, Intellevate, SciTech, NewGalexy) will be better positioned to attract the best people, as compared to those operating at the low end offering services such as transcription, litigation coding and secretarial tasks. Not only will the high-end providers be able to pay better, the quality of work will ultimately be the magnet for the best talent.