The $600-million legal process outsourcing (LPO) industry in India is set to see some exciting times. Consolidation will soon become the order of the day as serious players look to increase size by seizing opportunities at hand. The industry at the moment is dotted with myriad players, many of them largely small in size.
?These are the ones who typically have a small team of lawyers, say, under 20 or 50, catering to a few clients,? says Pankaj Parmani, founder and director, KPO Consultants, a firm that specialises in recruitment and consultancy in the LPO domain. ?The ones with some substance are merely a handful,? he points. It is these companies, typically with a team of lawyers who number over a 100, that will look to scale up by acquiring those that are small, he adds.
The process in a sense has already begun with distress calls being made by small players on the verge of bankruptcy. These firms are finding it difficult to survive in these times of cost cutting and muted legal spends, say industry insiders, so anybody willing to acquire them is welcome. ?We are already seeing the small, boutique outfits that service a few clients disappear,? says Sanjay Kamlani, co-founder and co-chief executive officer of standalone LPO Pangea 3. ?Some of them have approached us to be acquired,? he says.
Pangea 3 is not the only one to be approached by small players wanting to be merged or acquired. Industry sources opine that other standalone LPOs are also getting distress calls from small entities. The bigger players however are choosing to wait and watch. ?I don?t think anybody is in a tearing hurry,? says an industry insider.
But the wait and watch mode is not likely to last long as opportunity beckons. LPO arms of IT majors such as Infosys and HCL are also vying for a leadership position in the space. These units are not huge at the moment, but are part of the individual company?s larger BPO operations that includes allied service lines as well. But that is reason enough, say experts, for these companies to want to consider acquisitions at some stage in the future. ?The LPO space offers potential for growth. These companies realise this,? says Parmani. This point is corroborated by V Balakrishnan, chief financial officer, Infosys Technologies, ?We are looking at high-revenue activities in the outsourcing space. LPO is one of them. It is a serious initiative for us. But there are challenges in terms of scaling up. One is finding the right fit in terms of an acquisition for your business. The other is getting the right talent.? Says S Rajgopal Swaminathan, head, KPO, HCL BPO, ?At this stage we are content with an organic model of growth.?
But the inorganic growth at hand, say experts, will be difficult to resist for those looking for a serious play in the business in the coming months. According to Lokendra Tomar, chief operating officer, APAC, Integreon, a player that offers both KPO and LPO services, the LPO industry in India is projected to cross over a billion dollars by 2011. ?It is growing at a compounded annual growth rate of 40%,? he says.
This rate of growth also makes India an exciting LPO destination next only to the Philippines, Israel, South Africa and Latin America, which are emerging LPO markets in the world. ?The Philippines was a former US colony. Israel has been a traditional ally of the US. There are US-educated lawyers in these countries, which makes companies want to look at these markets when setting up shop,? says the chief executive of an LPO based in Gurgaon, Haryana.
The reason for this tendency to look at regions that have some proximity to the US is because the latter is the largest legal market in the world. ?Legal spends there are in the region of $250-300 billion,? says Manish Vig, managing director, Kochhar LexServe, an LPO promoted by the Kochhar group, formed by lawyer Rohit Kochhar, winner of the recent Rajiv Gandhi National Award for best young entrepreneur of the year. ?It is always an asset therefore when people are familiar with US laws.?
Though India doesn?t exactly score on the parameter of familiarity with the US laws, it offers a distinct cost advantage with legal talent that is fluent in English. ?Labour arbitrage is there. The average rate per hour in the US is $200, in India it is $35 per hour,? says Tomar of Integreon.
This is a key reason for the flow of work from the US to India being strong. LPO clients typically are foreign companies with hardly any Indian customers on their rolls. ?Indian compa- nies are yet to wake up to the idea of outsourcing their legal work,? says Rohan Dalal, managing director, India, Mindcrest, a standalone LPO that has offices in Mumbai, Pune and Chicago. Above all, the legal work of Indian companies does not compare with the quantum of work that US, even UK companies have. ?It?s huge. Many a times spanning different markets,? says Dalal. ?You have to be thorough in what you do then.?
This need to be thorough implies that efficiency levels have to be high at LPOs given the pressure to acquire and retain business. Competitive pressures can also tell on margins with players quite often undercutting each other to acquire or retain business. ?Net margins, on an average, are in the region of about 15-30% depending on the service line and cost structure,? says Kamlani of Pangea3. Services offered by LPOs include document review, litigation support, electronic discovery, contract and IP management, legal research etc. But the areas of document review, litigation support and contract management are key ones for LPOs, though Dalal of Mindcrest believes that players will eventually move to their areas of expertise as the industry matures. ?Players will find their niche in my view,? he adds.