India, Outsourcing

Outsourcing: What Indian Firms Have Planned for the Future of Biglaw

outsourcing biglaw aba tsunami.gifToday we sat down with Gururaj Potnis, director of Manthan Legal, who was in New York to attend a legal conference. Manthan is an Indian company that describes itself as a “leader of offshore Legal Process Outsourcing.” According to Potnis, Manthan has roughly 280 lawyers — 140 senior attorneys, and 140 more junior colleagues who do paralegal-type work — and they stand ready to help law firms cut costs (and increase profits).
Potnis thinks a “tectonic shift” is taking place in the legal industry, and he believes his company is well-positioned to take advantage of the new market. According to him, he’s got law firm clients on his side: “For the first time, the large law firms are being asked by their customers: ‘Are you efficient?'” The market change that we are now seeing “is 99% being driven by customers.”
Manthan Legal is positioned differently from its Indian competitors in legal outsourcing. It works primarily for law firms rather than in-house counsel:

Right now, 90% of the [outsourcing] industry is being driven by corporate counsel [i.e., in-house lawyers]. At some point in time, they’ve been exposed to the concept of having to get the maximum amount of work from the minimum budget….

[I]n the short term, the corporate counsel will drive [the outsourcing trend]. But in the long term, the law firms will have to develop an alternate billing model.

And under these alternative billing models, outsourcing may have an important role to play.
What can outsourcing firms offer? Junior associates might not like it, but managing partners will have to start paying attention. More after the jump.

Manthan Legal logo.JPGPotnis speaks with the confidence of someone who knows where things are heading. He talks forcefully about the need for law firms to acknowledge the clear cost savings that Indian companies can provide.
Potnis took issue with our suggestion that the legal profession is undergoing a painful contraction right now. According to Potnis, while the top 100 or so firms may be shrinking, the legal industry as a whole is not:

[I’m not sure I agree] when you say that the legal industry itself is shrinking. No. There’s a shift … and it’s not an incremental adjustment. We’re talking about having to let go of the old way of thinking and come up with a new way.

There is such a powerful value proposition [for American law firms]. Some law firms are just wanting to be blind. There is a tremendous value potential. But people do not want to take an open view….

Today I wonder what other excuses law firms will come up with to deny the value proposition.

But not all people and firms. Potnis cites some law firms that are on the cutting edge of the outsourcing model, including Clifford Chance, which has moved back office operations to India, and Baker & McKenzie, which is getting a lot of work done in the Philippines.
(Clifford Chance has undergone multiple rounds of attorney layoffs, in both New York and London. Baker McKenzie was the first Vault 50 firm to cut associate salaries. They may be more open to value propositions than other firms.)
According to Potnis, 80% of Manthan’s clients are law firms with 100 or fewer lawyers. But the company does have two Am Law top 50 firms as clients (though he wouldn’t say which ones).
Potnis claims Manthan is able to offer significant cost savings to its law firm clients:

Consider a single plaintiff case, like a title VII case. The process is pretty well defined. You review documents, analyze depositions, produce a statement of facts, a memorandum of law … 80% of that work is junior associate level work. Then, once you have a a first draft, that’s when you bring in a senior partner for their expertise.

Let’s say the average cost to the client for a single-plaintiff employment discrimination case is $80,000. If a firm uses Manthan for the bulk of that work, it can offer to take on multiple such cases for a client, for a fixed fee averaging about $70,000 a case. Then the law firm can have Manthan do 80% of the work on these cases — at 15% of the cost. The difference between what the firm pays Manthan and what it charges the client for the corresponding work generates higher profits for the firm.
This model frees up junior associates to focus on more interesting, higher-level work — and to handle a higher volume of cases, since they aren’t doing all the work on each case, soup to nuts. It’s a win-win situation, according to Potnis: the client has saved money, the law firm has increased profits, and the associates are doing more high-level work.
Potnis emphasizes that Manthan isn’t capable of doing such sophisticated legal work. He believes that his most experienced lawyers have the expertise to do work that would be done by third- or fourth-year associates in the United States.
This approach helps minimize Manthan’s potential liability. Since they “don’t give legal advice,” according to Potnis, they don’t take out malpractice insurance. Instead, they take out errors-and-omissions insurance, on a client-by-client basis. The policy and coverage limits reflect the work the client wants Manthan to do; Manthan takes out a large enough policy to make their clients comfortable with their liability protection. If the client has a problem with work performed by Manthan, then Manthan can make the client whole with the help of its E&O insurance.
How much do lawyers at Manthan get paid? Depending on their level of experience, Manthan generally pays annual salaries between $10,000 and $20,000 (but some senior lawyers can make close to $30,000).
Compare that to what a fourth-year associate makes — about $200,000, maybe a little less or a little more (depending on the firm, and whether they’ve frozen or cut salaries).
And Manthan can move the billing model to a 24/7 proposition:

If you look at law as a value-producing system, there is no reason why 16 hours a day it needs to be turned off. It’s a sin not to keep the value producing cycle keep going. Things can be done at any time of the day.

When an associate leaves the office for the night, he or she can turn a project over to the team in India, so they can move the ball forward — say, enter word-processing edits on a document — while the associate sleeps. When the associate returns in the morning, the document is ready and waiting. (Of course, the most important and challenging work will be done by U.S. firms, in U.S. offices, during the day; only more mechanical tasks will be done on an overnight basis in India.)
And Manthan believes it can solve the “under-utilization” problem that many firms are facing in a down market. Through using an outsourcing company, a law firm can reduce expenses by converting its fixed costs into variable costs.
Take secretaries or paralegals. Sometimes they are busy, and sometimes they are idle — but the firm pays them a fixed salary that reflects their being busy all the time, when in fact they are not. Potnis explains:

It’s important that idle time be paid out at the lower rate. You don’t want to pay out very high rates for idle time. Fluctuation will always exist. Sometimes 30% to 35% of the time is idle time.

Through using an outsourcing company, a firm can reduce the number of secretaries and paralegals it has on staff, i.e., as full-time employees. It should keep only those secretaries or paralegals that it can keep 100% utilized, all of the time. For all work over that 100% utilization level — e.g., for projects that require a short-term ramp-up, like a trial or a deal closing — the firm can turn to Manthan (or a similar outsourcing firm) for support. No more paying secretaries and paralegals to play solitaire and solve Sudoku puzzles; they will have enough work to keep them occupied for every hour of every day.
Of course, while all of this might be great news for the profit potential of law firms (and their clients), junior associates might bear the brunt of increased outsourcing by law firms. A lot of the work that Manthan wants to provide is where junior attorneys get their training — and generate the billable hours that make possible their $160,000 starting salaries.
Not surprisingly, Potnis doesn’t think that his firm should have any impact on associate training:

It’s a myth that today’s associates are really learning 100% of the time. They actually learn 10% of the time; 90% of the time they are doing grunt work…. We don’t want to mess up the learning curve; we are here to do the grunt work.

To put it plainly, Potnis isn’t overly concerned about the past, or even the present. He is looking ahead to the future — and believes that smart Biglaw shops will start laying the groundwork now:

The economic downturn is the right time to innovate. It’s the right time to fundamentally change the firm. It’s the right time to start laying the foundations, so when the market starts picking up, you are ready with a new model.

Whether or not junior associates are ready, it appears change is about to wash over them. From Potnis:

This industry is going to change from the top down. It will change from customers choosing a better billing model.

Adherents of the billable hour, consider yourselves warned. The future will be here sooner than you think.
Earlier: Sacha Baron Cohen Uses Outsourcing For The Win
Despite Mumbai Tragedy, Outsourcing Continues
Outsourcing: Here’s the Pitch

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