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LEGAL OUTSOURCING INTO INDIA —
A CONCEPT P
APER
PAPER
SATISH MENON*
BUSINESS PROCESS OUTSOURCING
Business Process Outsourcing (BPO) refers to the conscious decision of organizations to contract a significant
amount of their respective non-core business processes to third party service providers. This helps the organization
not only in being able to concentrate quality time on their core businesses but also enables achievement of quality
and cost efficiencies in the handling of non core business processes thereby resulting in an enhanced value for
stakeholders. The traditional forms of BPO envisage the outsourcing of functions such as payroll, accounting, billing
or real estate management, claim processing to third parties.
BPO also depends significantly on Information Technology and are therefore often also known as IT Enabled
Services in India. Notification No.SO 890(E) dated 26.9.2000 issued under Section 10A/ 10B of the Income Tax
Act,1961 notifies the following IT and IT Enabled/ BPO Services for the purpose of the tax holiday envisaged
therein :
— Back Office Operations
— Call Centres
— Content Development or Animation
— Data Processing
— Engineering and Design
— Geographic Information Systems Services
— Human Resource Services
— Insurance Claim Processing
— Legal Databases
— Medical Transcription
— Payroll
— Remote Maintenance
— Revenue Accounting
— Support Centres, and
— Web-site Services
As per the figures available from NASSCOM the Worldwide spending on IT/ IT Enabled BPO services totaled
approximately US$ 712 billion in 2001. IDC projects that by 2006, the potential ITES-BPO market may increase to
US$ 1.2 trillion, with an overall compounded annual growth rate (CAGR) of 11 percent.
While traditionally the key driver for ITES-BPO activities has been cost reduction, companies are increasingly
viewing these services as strategic and essential elements for organic growth.
*
Practising Company Secretary, Bangalore.
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KNOWLEDGE PROCESS OUTSOURCING
Knowledge Process Outsourcing (KPO) as compared to the traditional back office BPO covers the outsourcing
of higher end processes. Legal Outsourcing is a far more sophisticated form of off-shoring.
According to an article in India Daily, knowledge process outsourcing (KPO) will eventually outstrip business
process outsourcing (BPO) in revenue. KPO (an acronym I hadn’t heard before today) covers the outsourcing of
higher-end processes such as research and analysis in industries like data and market research, financial research
and planning, engineering, medical content, animation and design and legal services.
Although very few Indian companies are working in this space now, KPO will be one of the major segments
of the outsourcing business in terms of creation of new jobs and generation of billions of dollars in business.
LEGAL OUTSOURCING
As per NASSCOM’s BPO Newsline one of the Emerging Opportunities in the arena of Legal Outsourcing,
NASSCOM observed that the legal industry across the globe is gradually turning towards outsourcing for gaining
efficiencies and staying profitable in a hotly competitive marketplace. Recognition of the fact that legal companies
need to focus on their core competencies and leave back office processes to the hands of competent outsourcers,
is creating a compelling case for giving out non-core processes. The availability of outsourcing ventures with world
class resources and expertise is also boosting the growth of outsourcing by legal entities.
NASSCOM quotes that the Worldwide ITES-BPO spending for Legal in 2006 is projected at US$ 163 billion.
This gives a tremendous opportunity to the Indian BPO Sector and in particular the legal professionals in India to tap
the opportunity of Legal outsourcing.
OPPORTUNITIES IN LEGAL OUTSOURCING
Legal Transcription Services
Legal Transcription Services involves both the voice dictation transcription as well as the conversion of physical
data into electronic format for electronic storage and retrieval. This service presupposes that the person who is
transcribing the tapes and voice must have in addition to a very good typing skills, an excellent knowledge of
various legal terms used. The work product must be reviewed by qualified legal professionals before being sent
out.
Document Management Services
Document Management Services involve the support and assistance not only in the designing and formulation
of an efficient system for storage and retrieval of files and documents building in appropriate levels of confidentiality,
security and efficiency but also the successful implementation of the system predominantly in the electronic
form.
Knowledge Management Services
Knowledge Management Services involve the capturing, reviewing and analysis of various information that is
available in the WEB including case laws for use of the same within a law firm.
Legal Billing Services
Involves the processing of time sheets and related billing functions for a legal firm.
Legal Translation Services
Language Translation Services involve the translation of summons and complaint or the transcription of an
evidentiary tape or a document in a foreign language, to be used in litigation.
Data Entry Services
Data entry services involves the taking over by the service provider of the clients hard copy data of depositions,
hearings, arbitrations, meetings, and other events etc. that need to be documented for the purpose of data
entry.
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Secretarial and Paralegal Services
These services involve the processing of claims, data entry, proofreading services, document review, deposition
digesting, etc.
Support Services in complying with the Sarbanes Oxley Act, 2002
Involves support to companies listed in USA in the formulation and implementation of Disclosure Controls and
Procedures and Internal Control Over Financial Reporting. One of the most significant corporate governance
provisions contained in the Sarbanes-Oxley Act of 2002 (“SOX”) is the requirement imposed on the management
of public company to evaluate the effectiveness of the company’s internal controls and procedures over financial
reporting and the related requirement for auditors to attest to management’s evaluation.
Major public companies, i.e., accelerated filers, have already begun to comply with these requirements for
their first fiscal year ending on or after November 15, 2004. Various public company issuers have outsourced
financial and accounting business process functions (e.g., accounts receivable, accounts payable, cash treasury,
fixed asset accounting) to third-party service organizations or outsourcing suppliers. Some of these arrangements
could involve off shoring certain activities to operational sites outside the U.S.
Section 404 of SOX requires the Securities and Exchange Commission (SEC) to prescribe rules requiring each
annual report of a public company issuer to make an internal control report containing:
(1) a statement of management’s responsibility for establishing and maintaining an adequate internal control
structure and procedures for financial reporting; and
(2) an assessment by management at the end of the company’s most recent fiscal year of the effectiveness of
the company’s internal control structure and procedures for financial reporting.
Section 404 of SOX also requires every registered public accounting firm that prepares or issues an audit report
on a company’s annual financial statement to attest to, and report on, the assessment made by management. The
accounting firm must make this attestation in accordance with standards issued or adopted by the Public Company
Accounting Oversight Board (PCAOB).
The SEC rules implementing Section 404 of SOX provides that controls subject to assessment by management
include, but are not limited to:
1. controls over initiating, recording, processing, and reconciling account balances; classes of transactions
and disclosure and related assertions included in the financial statements;
2. controls related to the initiation and processing of non-routine and non-systematic transactions;
3. controls related to the selection and application of appropriate accounting policies;
4. controls related to the prevention, identification, and detection of fraud.
There may be cost-savings and other benefits for a public company issuer by outsourcing and/or offshoring
financing and accounting business process functions to outsourcing suppliers.
An outsourcing supplier might also do several things to assist the public company auditor, e.g., engage its own
auditor to review and report on the systems it uses to process the company’s transactions or engage an auditor to
test the effectiveness of the controls applied to the company’s transaction to enable the auditor to evaluate
controls of the supplier.
Compliance Management Services
Involves help and support in the formulation and implementation of a robust and a structured Compliance
Management System meeting World Class Standards which includes the formulation and successful implementation
of the following :
Legal Process Management
Legal processes are Standard Operating Procedures (SOPs) which help and guide organizations comply with all
applicable laws and regulations while pursuing business objectives.
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These SOPs are detailed and precise road maps, which capture every little step that needs to be followed and
every little information that needs to be kept in mind when complying with applicable laws.
Legal Process Management concerns with the systematic :
1. Preparation and formulation of SOPs
2. Identification of compliance requirements therein
3. Risk profiling of these compliance requirements
4. Periodical self review of these compliance requirements
5. Ascertainment of areas of non compliance
6. Implementation of appropriate corrective action plans
Compliance Risk Management
Compliance risks are risks associated with non-compliance of any legal obligation under any applicable laws
and regulations to be complied with by an organization in every location from which it operates its business.
Compliance Risk Management concerns with the systematic :
1. Preparation of detailed checklists of obligations
2. Risk profiling of the obligations
3. Periodic self review of these checklists
4. Periodic ascertainment of non compliance of obligations
5. Implementation of corrective action plans
Contract Execution Management
Contract Execution Management concerns with the process of :
1. Systematic drafting of contracts relevant for the business
2. Structured vetting of contracts sent by business associates
3. Risk profiling of clauses in a contract being negotiated
4. Evolving alternative strategies for negotiating contracts
5. Negotiation and execution of contracts with business associates
Contractual Risk Management
Contractual Risk Management concerns with the process of :
1. Taking inventory of all executed contracts
2. Assessment and evaluation of risks in all executed contracts
3. Risk profiling of every clause of every executed contract
4. Preparation of compliance checklists for executed contracts
5. Monitoring implementation under executed contract
6. Initiating risk mitigation strategies under executed contracts
LEGAL OUTSOURCING TO INDIA THROUGH AN OFF SHORE STRATEGY
India is emerging as the preferred offshore destination for organizations across the world, for outsourcing in
general and in particular legal outsourcing, predominantly due to the following factors :
1. Its cost effectiveness, costs being a tenth of what it is in the US as a result of very low salary levels, not very
expensive real estate, etc.
2. Availability of highly educated legal professionals and other skilled workforce with strong work ethics as
well as capabilities to provide high quality work.
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3. Robustness of its IT and other infrastructure including emergence of high bandwidth telecom networks as
well as technological support.
4. India’s unique geographic positioning which enables a 24x7 service as well as a reduction in turnaround
times by leveraging the time zone differences.
5. Significant political patronage in the promotion of BPO and KPO.
6. Applicability of Tax holidays on profits generated from BPO and KPO.
Structure for Legal Outsourcing through an Off Shore Strategy
The following Structures are available for Legal Outsourcing through an Off Shore Strategy :
1. Either as a third Party service provider or as an In house initiative by either the outsourcing Legal firm or
Overseas company
2. In case of an In house initiative ,the strategy could be pursued either through a liaison or a branch office
in India
Key challenges in implementing Legal Outsourcing in India
1. Resolving conflicts , if any, associated with law practice in US/India
2. Obtaining the “ buy in ” of the Clients to this unique process
3. Maintaining the confidentiality of the clients and client’s information
4. Ensuring compliance with the Privacy and Data Protection laws
5. Getting the support and “ buy in ” of the Legal Firm’s or Overseas Company support staff
6. Educating Indian legal professionals in the relevant International laws
7. Training Indian legal professionals in principles and practices of International law
8. Handling security concerns arising out of remote processing
9. Risk profiling of the compliance and contractual obligations
10. Training legal professionals in process and risk management strategies and the preparation of cross functional
SOPs
11. Capturing legal data on a global basis to prepare checklists
12. Capturing contractual data from executed contracts and monitoring it.