Focus: Legal Process Outsourcing - Distance earning
21 November 2011 | Updated: 21 November 2011 9:32 am | By Joshua Freedman
21 November 2011
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LPO is booming, but as a new report highlights, there is more to consider when going outside than cost savings
Managing partners talk about the primacy of culture and quality over costs when entering into alternative sourcing arrangements such asoutsourcing, offshoring and nearshoring, but one look at figures exclusively provided to The Lawyer by management consultancy OMC Partners might make them reconsider that policy.
There is a number of factors influencing firms’ decisions over where to locate and no hard-and-fast answer to the issue, but the data shows that firms can make large savings by using legal, paralegal and business services capacity in locations away from London, and can cut costs dramatically by using offshore locations such as India and the Philippines.
Take the Philippines. A paralegal or legal employee at graduate level, whether at a law firm or an in-house legal department in Greater London or the City, will earn between £30,000 and £45,000 per year, compared with an apparently miniscule £5,000-£8,000 earned by staff at the equivalent level in the Phillipines, according to OMC’s data.
Legal alternative sourcing salaries tend to be towards the lower end of these ranges, meaning the average paralegal or graduate salary in the Philippines is £5,500, representing a cost saving in this area of over 80 per cent for a London firm used to paying the full £30,000-£45,000.
Similar savings appear attainable higher up the chain too. A newly qualified (NQ) lawyer in London will earn £45,000-£65,000 compared with £7,000-£10,000 in the Phillipines, or £8,000 for legal process outsourcing (LPO) lawyers, enabling a saving of close to 90 per cent. Lawyers with three years’ post-qualification experience (PQE) earn between £10,000 and £15,000 in the Philippines, and £12,000 in an LPO context, compared with £75,000-£86,000 in London. Five years’ PQE solicitors in the offshore location earn £15,000-£25,000, or £20,000 in alternative sourcing, enabling a saving of 75 per cent.
India gives a similar picture. Paralegal and graduate salaries are marginally higher than in the Philippines, with annual earnings ranging from £5,000 to £10,000, or £8,000 in alternative sourcing, which still represents a massive saving on the £30,000-£45,000 spent on salaries in the City. Savings are on a par in the higher end of the market, with salaries for NQs, three-year PQEs and five-year PQEs all a tad higher than in the Philippines, but still well below City rates.
The rest of the British Isles can provide significant savings opportunities too. Legal alternative sourcing salaries in Wales, for instance, are £18,000-£20,000, while NQs, three-year PQEs and five-year PQEs are paid £20,000, £28,000 and £35,000 respectively.
So-called ’northshoring’, by which firms shift work from the South to the North to save cash, makes business sense given the salaries in the respective locations. Paralegals and graduates in Northern England demand as little as £18,000 per year in alternative sourcing jobs, a figure on a par with Northern Ireland rates, representing a 60 per cent saving on a salary of up to £45,000 paid in the City.
The case for outsourcing
White & Case is one example of a firm that has capitalised on these opportunities for making efficiencies, although it has only under-
taken business, not legal, process outsourcing.
It outsourced its back-office operations to India a decade ago and within five years opened a centre in the Philippines that now covers functions including billing support, financial analysis, conflict support, after-hours reception services and business development.
But White & Case global chief operations officer Greg Dolan insists that cost was not the only factor the firm considered when taking the plunge.
“There’s an obvious cost advantage,” admits Dolan, adding that costs were roughly 10 per cent of the equivalent in the firm’s main office locations, not to mention tax incentives (Government payroll taxes are 1 per cent of a salary in the Philippines, compared with 13.8 per cent in England and Wales).
But the process was also a matter of making the firm’s workflow more efficient rather than just saving money directly, according to Dolan, who says overheads, salary costs and process flow were equally weighted factors.
“It enables us to redesign our process flows and make them more efficient,” he explains.
He also insists that the decision to opt for Manila was based on the fact that the firm already had a strong footprint in the region, boasting a sizeable Asian presence, meaning access to the Philippines was a minor issue, unlike with India.
“India was a challenge as it’s so far removed,” he concedes.
He reveals that the firm now feels it has “too many eggs in one basket” and is currently eyeing Southern Poland, the Czech Republic and Hungary for future offshoring bases and hopes for a decision within the next six months.
Herbert Smith, which set up a Belfast operation last year to handle volume dispute resolution work, also insists that its move was based on more than just costs. After all, it plumped for a location with higher costs than the Philippines, for example.
“We chose Belfast because it has a greater quality of workforce. It came out so well on quality,” comments Graeme Johnston, who led the team running the Belfast project and who is now a consultant in the disputes practice. “Everyone’s been educated in the two very good universities in Belfast, mostly in English law systems. In other locations they’re very much tuned toward US law firms at the moment. And there is a degree of proximity.”
Travel from London to Northern Ireland takes an hour and costs between £100 and £450 assuming tickets are bought a week in advance of travel, according to OMC data. London to the Philippines, on the other hand, can take between 16 and 20 hours and can set a firm back up to £4,000 per travel ticket.
“It all adds up,” Johnston remarks.
Nevertheless, OMC says firms tend to rely on long-distance communications methods such as the telephone and videoconferencing, meaning travel in person is rare.
Johnston touches on a key issue when he brings up the question of quality. Offshore locations may have huge banks of lawyers, but are they any good?
OMC data shows that India is home to more than a million lawyers, compared with 43,800 in London, 12,100 in the rest of the South East of England and 12,300 in the North West. The Philippines, meanwhile, with approximately 40,000, has roughly as many lawyers as London. They are all members of recognised professional bodies, even if they lack degrees from the UK universities that Herbert Smith might prefer.
Paralegal numbers are harder to come by as there are no recognised qualifications, but the number of students graduating with law degrees each year gives a good idea. No offshore locations included in OMC’s data match England and Wales for raw numbers of law graduates except India, which boasts a massive 80,000 law graduates compared with 18,000 south of the border in the UK.
India does, however, have the weakest proportion of written English fluency out of all the locations surveyed: around 70 per cent of qualified lawyers there can write English fluently compared with at least 80 per cent in the Philippines and 95 per cent in South Africa (see graph).
Payroll taxes are much lower in a number of locations than in the UK, with the government in the Philippines taking a mere 1 per cent of one’s salary compared with 2 per cent in South Africa, between 4 and 8 per cent in the Republic of Ireland and 13.8 per cent in the UK (see graph).
But the cultures of India and the Philippines are such that employers are expected to provide far more benefits than in the UK. Staff benefits hike HR costs by between 7 and 20 per cent in India and 5 and 15 per cent in the Philippines, compared with 3-7 per cent in South Africa and 3-10 per cent in the UK and Ireland.
India and the Philippines generally have longer working hours: annual hours in both are generally between 1,725 and 1,980 annually, up on 1,540-1,650 in the UK and Ireland. On the downside for firms, legal salary inflation in India is 7-12 per cent, much higher than the 0-3 per cent in England, Wales and Scotland.
Support staff salaries are far lower in India and the Philippines, with office clerks earning £3,000-£5,000 compared with England and Wales’ figures of £12,000-£18,000.
Support staff salaries are actually marginally higher for certain roles in Ireland than in England and Wales: an office clerk’s salary in the Republic starts at around £15,000 compared with £12,000 in England and Wales, excluding London and the South East. The same job in Northern Ireland costs £10,000-£12,000.
Annual rent per square metre for A-grade property in London ranges from £500 to £800, compared with £150-£250 in Northern Ireland, £125-£200 in the Philippines and £100-£450 in India. Rent for an office park space, meanwhile, sets a firm back as little as £80 per sq m annually in the Philippines, down on the £180-£275 in London (see table, below).
But not everything is rosy offshore: inflation in India is 10.6 per cent on average over three years, compared with 6.4 per cent in South Africa, 5 per cent in the Philippines and 3.4 per cent in the UK.
Firms have plenty of options, and the factors to weigh up are vast.
All charts sourced by OMC Partners
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