The portfolio approach to offshore location selection differs from traditional, single-country comparisons in that companies can optimize the risks and benefits from multi-location workforces much like investors optimize risk and return with portfolios of stock.  Increasingly, companies are developing location portfolio strategies that incorporate “hub” countries with large, low-cost skilled workforces and smaller “spoke” locations that support specialized needs.  Balancing a large, scalable operation with niche locations that provide talent (technical, industry, or language) or geographic (regulatory or proximity) needs optimizes the enterprise workforce for a given cost.  The optimal offshore location portfolio varies for each company depending on its current and future markets, risk tolerance, process scalability, company culture, and customer needs.

While many factors that influence location-related risks and opportunities are specific to a given company, some of the most significant have broad applicability.  These include: (a) whether or not the activities are conducted through captive centers or outside vendors, (b) the size of the offshore workforce, (c) the type of activities undertaken offshore, and (d) the sophistication and governance of the offshored processes.

Captives and Vendors

Operating a portfolio of captive offshore locations requires significantly more investment than directing a network of vendors with offshore locations.  Many large, diverse vendors contractually assume some economic, political, and operational risk, and have the scale and procedures to mitigate the risks of any individual country or region.  Companies should nevertheless monitor and evaluate the locations of outsourced workers to manage the risk of concentrating too large a portion of their workforces in any one place.  Location concentration risk includes geopolitical stability, exposure to natural disasters, and communications infrastructure independence (See White & Case probes service transfer to Eastern Europe; BITS Guide to Concentration Risk in Outsourcing Relationships) and can be magnified by the attendant interest, inflation and exchange rate risks.  These risks are far more significant for companies that operate captives because of both the large investments (initial and continuing), and the greater difficulty of transitioning away from captive centers. Other considerations for companies starting captive operations, but less significant for those retaining outsourcing vendors, include the host country business environment, regulations, operating norms, tax incentives (or lack thereof), and the availability of management experience in the region.

Offshore Workforce Size

Traditional offshore location strategies have projected operational economies of scale in countries like India and the Philippines that have large, low cost, well-trained workforces.  Companies have typically planned to grow to a minimum of between 1,000 and 2,500 employees in an offshore location in order to operate efficiently.  As businesses develop more mature global workforce management capabilities, smaller operations in less typical “offshore” locations have become feasible.  Smaller operations are now being justified where niche talents (e.g. language skills or common law training) are available at relatively lower costs.  (See e.g. LPO in New Zealand and Israel).  While scale is still a significant factor in most location decisions, it is less significant where an offshore hub already exists and additional specialized skills are required.

Offshored Activities

Determining the optimal locations for offshore activities also depends on the activities to be outsourced.  The widest range of IT and BPO skills are available in India; other outsourcing locations have strengths in specific skill sets.   The Philippines, for example, is concentrated in the voice and BPO segment.  Companies seeking IBM mainframe skills often look to Brazil where these skills are prominent and to Eastern Europe for low cost Western and Eastern European language skills.  Again, use of these skills in these locations may logically be incorporated into a portfolio of locations with both scalable hubs in low cost locations and smaller spokes in relatively higher cost locations.

Operational Maturity

U.S. companies need robust governance and communications protocols and strong process orientations to operate effectively with distant Asian locations such as India or the Philippines.  Interactions between individuals and teams are naturally complicated by physical distance and differences in times zones (as well as language and cultural differences).  Most India-based outsourcing providers minimize distance complications by creating well defined processes that require fewer and better-defined interactions among team members and managers, and by structuring engagements to include individuals who are comfortable operating as “bridges” between locations.   When business processes and communications are less well defined, team members will require more interaction, and overlapping time zones and shorter distances become more important.  After considering the lower cost of, and time lost for, travel, near shore locations may be more cost-effective for organizations with less robust process, governance, and communication procedures – even when labor rates are higher than at Asian outsourcing locations.

For most companies, the determination of a “best” offshore location will depend heavily on individual company needs and strategies, and should be influenced by the appropriateness of captive centers for the company, the size of the offshore workforce, the type of activities undertaken offshore, and the sophistication and governance procedures for offshored processes.  Companies with medium and large offshore workforces should also develop location portfolio strategies to improve operational efficiency while simultaneously mitigating and managing the risks inherent in global operations.

THE U.S. AS A SPOKE

Interestingly, and somewhat counterintuitively, the U.S. is logically a spoke.  While widely available skills in the U.S. provide scalability, the costs, with apologies to proponents of rural sourcing, are too high to provide meaningful savings. LPO mainstays UnitedLex and Integreon have facilities in Overland, KS and Fargo, ND, respectively, but these are much smaller than their centers in India and used for staging and U.S.-centric client demands. (See, for example, Microsoft Outsources Contracting to Fargo?)  Because many legal outsourcing clients lack well-defined, documented and measured business processes, LPO vendors have had to impose process structure in addition to providing lower cost workforces.  This process staging (reengineering) requires specialized skills and access to process stakeholders.  As a result, it is a logical activity to have at a U.S. “spoke.”

The use of a U.S. spoke can ease the creation of the sophisticated processes necessary for offshoring by using a workforce with culture and language skills closely aligned to that of the clients.  When teams are co-located, they often rely on personal relationships and informal norms to accomplish their work.  The further various components of a workforce are from one another, the more important the processes to manage and coordinate them.  Even teams that are physically separated, but share a similar language, culture and workday (i.e., operate in similar time zones), can often operate with relatively immature processes because of their ability to communicate easily and often.  However, as teams are more fully separated by language (even a common language like Indian English and American English), culture, and location; clearly defined processes become increasingly important.  In early outsourcing, companies often followed a “lift and shift” approach in which work was moved offshore and formal process management was implemented only after the transfer.  This approach has been successful where the vendor already had significant experience with the particular process being transitioned.  However, more commonly, reengineering, outsourcing, and then optimizing the reengineered, outsourced, process has been more successful because vendors can more easily incorporate direct stakeholder input.  The proximity and local familiarity benefits of U.S. staging are one logical reason to have a (small) delivery spoke in the U.S.

Another reason to locate a spoke in the U.S. is to conduct work that cannot be sent offshore for regulatory or client preference reasons.  However, in keeping with the strategic objectives for a spoke, U.S. centers should be carefully limited in size and scope, or their costs can overwhelm the benefits they bring to globally distributed organizations.

PANGEA3 IN THE U.S.

Like their BPO and ITO breathren, LPO companies began offshore and subsequently added domestic capabilities to their process-centric Indian operations.  Initially, the LPO’s main value proposition had been to provide a process-driven, low cost, well-educated workforce from India, but when it became clear that some legal work would not be sent offshore (often for privacy or regulatory reasons), they opened U.S. centers.  Given the value proposition, observers may have expected Pangea3 to select a U.S. location with low costs like Fargo, ND or Kansas City. However a discussion with Sanjay Kamlani about Pangea3’s decision to locate a new facility in Carrollton, TX revealed that the costs associated with wages and real estate are only two of many factors to consider.  According to Kamlani, Pangea3 considered approximately 20 factors including the cost of living and desirability of the community to potentially relocating employees, the proximity to (a) law schools and the availability of legal talent, (b) a metropolitan area from which to draw talent, and (c) an international airport to ease executive travel.  Before settling on metropolitan Dallas, Pangea3 considered cities that meet many of these criteria including Ann Arbor, Michigan. 

While Pangea3 may not use the terms “hub” and “spoke,” the analysis that Kamlani described to identify and select its U.S. center is consistent with a hub and spoke locations methodology.  A “hub” and “spoke” locations methodology makes clear that once the essential process of implementing well-defined processes is accomplished, there are many important factors to determining location, and cost only one of them.

The PMC raises money for cancer research and treatment at the Dana-Farber Cancer Institute. The centerpiece of its fundraising effort is an annual bike-a-thon in which cyclists ride across the Commonwealth of Massachusetts.  Because the PMC charges riders to participate, and uses sponsors to underwrite most of the cost of the ride, it is very efficient with your donations.  Last year’s $33 million gift to the Jimmy Fund of the Dana-Farber Cancer Institute included 100% of every check and credit card donation. 

For 2011 I will again be participating as part of the Red Bridge Strategy PMC team, which includes Cindy Carpenter and me (Jalal Alamgir will be traveling internationally that weekend this year).  As part of its team sponsorship, Red Bridge Strategy has contributed two tickets to the Boston Red Sox game against the New York Yankees on Sat., Aug 6, 2011 in Fenway Park, Boston.  Contribute $100 or more to any combination of the Red Bridge Strategy Team members by midnight, Sunday, June 19^th, and you will be entered into a drawing for the tickets.  The winner will be notified by e-mail by June 24^th.

If you would prefer not to contribute using the internet, you can send me a check made out to “The Pan-Mass Challenge,” and I will forward your donation.  Please contact me for my address.

Thanks in advance for your support.

Matthew Sullivan

Matt Sullivan PMC Information & Donation

Scale

The largest single factor in deciding to build a captive organization is scale.  The impetus for offshoring is still invariably cost reduction, and companies benefit from the lower prevailing wages found offshore only when there are enough workers laboring at reduced wages to offset the additional overhead costs.  Additional costs are largely due to transition and somewhat bigger management responsibilities – both to manage the staff in the offshore geography and to receive the off-shore output in the “home” office.  Even large legal departments with aggressive plans for offshoring typically seek to offshore tens of staff members, which is usually not enough to justify a standalone captive unit.  However, for companies that already have substantial offshore operations, the incremental cost of an offshore legal team can often be justified.  In addition to infrastructure scale, adding legal staff to a BPO or IT captive leverages the company’s country operations management that provides for the administration of facilities, staffing, technology, and profitability.  

Consistent Volume

The second major consideration is whether the flow of legal process work can be organized or managed to a more or less consistent volume. Because the majority of offshored legal work is litigation document review, which is necessarily project-based, most organizations will not have the continuous flow of work needed to justify permanent offshore staff.  Other project-based legal activities such as transactional due diligence or government investigation reviews and analysis have similar “consistency of workflow” problems. By combining litigation document review, due diligence, government investigations and other regulatory reviews, some larger companies could provide a more consistent work flow, but may still end up with a volume that is too low for an offshore legal team.  When companies move to offshore legal services that require some legal expertise combined with process or technology skills, such as contract management or intellectual property work, then they may be able  to provide a consistent workflow at a high enough volume so that it makes sense to add a legal process team to an existing IT or BPO captive operation. 

Management

Aside from scale and consistent volume, the other major consideration for a captive legal unit is management.  Companies considering offshore legal operations should evaluate their ability to manage those units from the perspectives of both control and supervision.  I outlined the classic control considerations last year when UnitedLex took over BT’s (British Telecom) captive unit:

Businesses, or parts of businesses, that are particularly concerned about security or confidentiality often favor outsourcing to captives instead of vendors because of the perceived greater control.  Clearly, for most businesses, legal work is an area where security and confidentiality are paramount.  Alternatively, vendors are assumed to offer the benefits of increased client focus and higher quality levels because they face continuous competition for their clients.  Vendors are also assumed to develop, and/or more quickly adopt, best practices than captive operations, which is particularly important in legal services where off-shoring models continue to evolve. 

Companies considering adding a legal process team to their IT or BPO captive operation should consider the management expertise required to provide the training, and quality assurance for the legal processes that will be delivered by a captive.  The type of legal work to be offshored and the degree to which it is specialized can be used to determine where on the spectrum of “subject matter expertise” and “legal management” its needs fall.  Depending on the range of legal, quasi-legal and legal-department-supervised services conducted by the captive, potentially including the responsibilities of the legal, regulatory, and compliance departments, managers may need a wide range, or deep, specific expertise of sophisticated legal concepts. 

Some companies may find that it makes sense to use a blended approach with both LPO vendors and an in-house team at a captive operation. A corporation may choose to use an LPO vendor (or two) for document review so it doesn’t have to maintain offshore expertise in managing, training, and supervising litigation but use captive resources for contract lifecycle management and to issue spot contracts and approve changes within predefined ranges, while still allowing the legal department to directly manage corporate contracts using offshore associates.  Using a mix of vendors and captives also gives a corporation the flexibility to gradually migrate operations in-house while using vendors in the interim to get the benefits of off-shoring.  Experience also suggests that corporations may choose to shift work back to vendors as its needs and priorities shift.  Another benefit of using a mix of captives and vendors is that the competition keeps a nimble and efficient atmosphere in a captive while keeping vendors interested in continuing opportunities to grow their businesses.

Companies with existing large BPO/ITO operations may have a good business case to add legal process work to their captives, on the basis of the incremental scale and offshore management required.  However, a sophisticated analysis should compare the viable captive option to the benefits available from LPO vendors. While some legal services are a logical extension of BPO, the more specialized the training and management required, the more value an LPO vendor can potentially provide.  Even for large corporations with significant volumes of legal and quasi-legal process work, the business case for a captive legal services team should be carefully evaluated.

In addition to Matthew Sullivan from Red Bridge Strategy, the panelists will include Ronald A. Witmer of Witmer, Karp, Warner & Ryan LLP, and Jeffrey D. Woolf of the Office of the Bar Counsel (MA), and will be chaired by Stephen Seckler of Seckler Legal Coaching.  The discussion will focus on the how billing practices can serve as a marketing tool while simultaneously decreasing the chances of client fee disputes.  For more information, or to register, click here.

Individuals who participate in the program will benefit from direct experience in an emerging part of legal practice.  As a general counsel or a law firm partner, it would be very useful to intimately understand the strengths and weaknesses of the offshore model as it applies to discovery review and the other legal services.  An attorney with LPO secondment experience will also be able to optimize law firm or legal department processes to get the full advantage of outsourcers.  Further benefits include the ability to absorb the best practices from learning about multiple clients, gaining a broad overview of the legal services marketplace, and experiencing work and life in a global context that is becoming increasingly important to the practice of corporate law.  This experience will likely be very attractive to a law firms or corporate legal departments. Obviously, candidates for secondment to Chennai should think hard about whether or not they are adventurous enough to manage some of the vagaries of living in India (which I understand from first-hand experience).  However, for the right person, it would be a great personal and professional learning experience.

Cobra clients will potentially benefit in two ways.  First and foremost, they get additional supervision and management for their engagements from a person with American litigation training and experience.  In addition, as the program continues there will be a continuing stream of individuals with experience in the latest advances in e-discovery applying new and different ideas reviewing their operations.  The various perspectives enable incremental improvements from which clients will benefit.  Clients that second their own employees to Cobra will benefit from having an individual knowledgeable in their processes and priorities manage their deals and reviews while training and supervising their Indian lawyer teams.  Returning secondees will have personal and professional relationships that should improve the quality and efficiency of their future work with Cobra, and may also be in a position to provide insights that will benefit the client’s negotiations with Cobra. 

Cobra benefits by having persons with different perspectives and experiences in the U.S. legal system train and supervise its Indian lawyers. Maybe most significantly, Cobra will create a set of ambassadors who will expand understanding of LPO in the U.S. legal services market, and, ideally, highlight Cobra’s place in it.

The potential pitfalls of such an arrangement are few.  Aside from the standard considerations about hiring a person with the right aptitudes and attitudes, and the industry-specific potential legal conflicts upon return to a legal employer, the major potential pitfall is the ability of the secondee to adapt his or her personal life to the culture and customs of Chennai, India. 

The secondment program, much like Cobra’s Least Cost Pricing Plan that Global Legal discussed in a previous post, benefits Cobra while simultaneously creating additional value for its customers. I’ll be surprised if other LPO vendors don’t make this opportunity available as well.

Neither Matthew Sullivan nor Red Bridge Strategy, Inc. is affiliated with Cobra Legal Solutions LLC.

First, some background on the safe harbor from a U.S. Department of Commerce website:

“The European Commission’s Directive on Data Protection went into effect in October of 1998, and would prohibit the transfer of personal data to non-European Union nations that do not meet the European ‘adequacy’ standard for privacy protection. While the United States and the European Union share the goal of enhancing privacy protection for their citizens, the United States takes a different approach to privacy from that taken by the European Union.

In order to bridge these different privacy approaches and provide a streamlined means for U.S. organizations to comply with the Directive, the U.S. Department of Commerce in consultation with the European Commission developed a ‘Safe Harbor’ framework and this website to provide the information an organization should need to evaluate – and then join – the Safe Harbor.”

The problem, according to the ComputerWorld article, is that:

“The rules and policies of Safe Harbor are as soft as butter and there’s no oversight. The main problem lies with the U.S. Department of Commerce, which administers the Safe Harbor list of companies. Companies put themselves on this list through self-certification, without anybody checking anything.

The department itself is clear on this: ‘In maintaining the list, the Department of Commerce does not assess and makes no representations to the adequacy of any organization’s privacy policy or its adherence to that policy. Furthermore, the Department of Commerce does not guarantee the accuracy of the list and assumes no liability for the erroneous inclusion, misidentification, omission, or deletion of any organization, or any other action related to the maintenance of the list.’

The result of this self-regulation is disastrous. Hundreds of U.S. companies claim they are certified, without meeting the necessary conditions. These problems had already surfaced in 2002 and 2004, when the E.U. commissioned two studies.

In 2008 nothing had improved and the independent research and consultancy company Galexia reached shocking conclusions. Of the 1,597 organizations on the Safe Harbor list, only 348 met all seven principles in the most basic way, Galexia reported.”

Computerworld further reports that an updated version of the report found similar problems and that the most recent version may not be published because of its similarly controversial findings.

Given these questions, I asked my colleague about the Safe Harbor and how it is relevant to the LPO industry. He explained:

“The Safe Harbor framework is meant to bridge the differences on privacy protection between the EU and US in order to permit the unimpeded flow of data from the EU to the US.

In the EU, privacy and the protection of personal data are human rights as legislated by Articles 7 & 8 of the EU Charter of Fundamental Rights, while in the US, privacy is still a fragmented concept that depends on a variety of different agencies and self-regulation.

The framework requires member companies to adhere to seven broad principles, namely, notice, choice, transfer, access, security, data integrity and enforcement.

Without Safe Harbor it would be very difficult for US companies and multinationals to conduct business with their EU-based counterparts.”

When asked if he thought the Safe Harbor certification, by itself, is sufficient for legal clients to be confident that their data is safe, he stated:

“Clients need to always perform their own diligence to attain the desired level of confidence about the safety of their data. While certifications, in general are useful, and a good first step, they are not a substitute to a thorough and targeted audit.

Regarding the Safe Harbor certification, I believe that it is not sufficiently prescriptive. For example, when addressing security and data integrity, it uses the terms “reasonable precautions” and “reasonable steps.” What a vendor deems reasonable may not match the reasonable expectations of a client.”

In response to whether or not the requirements of the Safe Harbor overlap with requirements for ISO/IEC 27001:2005 and/or a SAS70, he said:

“SAS70 and ISO/IEC 27001:2005 have a relatively narrow scope and are primarily concerned with data security. The Safe Harbor framework is much broader and covers a wide array of privacy principles, such as giving a person a choice as to whether their data is captured and for what purpose it is used. Note that security is only one of the seven principles outlined by the framework (http://www.export.gov/safeharbor/eu/eg_main_018476.asp”).

Curious about the many LPO companies that conduct most of their data review operations in India, and not in the United States, I asked how the Safe Harbor is relevant to their operations? He explained,

“The Indian operations of LPO companies, regardless of where they are headquartered, are not covered by the Safe Harbor framework. The US party that is sharing or transferring to Indian entities must abide by the ‘Onwards Transfer’ principle of Safe Harbor as it applies to an entity acting as an “agent”. The principle states:

‘[…] Where an organization wishes to transfer information to a third party that is acting as an agent, as described in the endnote, it may do so if it first either ascertains that the third party subscribes to the Principles or is subject to the Directive or another adequacy finding or enters into a written agreement with such third party requiring that the third party provide at least the same level of privacy protection as is required by the relevant Principles. […]’ http://www.export.gov/safeharbor/eu/eg_main_018475.asp

There is a certain ambiguity however, as to whether the ‘agent’ must reside in the US.”

Focusing on India, I asked if a similar regime exists there. If not, how can clients with European data safely allow Indian-based vendors to work on their data?

The Indian privacy laws are deemed inadequate by the EU data protection authorities, and EU data should not be exported to India, at least a priori. Currently, the only way to export EU data to India is for the data exporter and importer to enter into what is known as the ‘Standard Contractual Clauses of 2001 (2001/497/EC)’ ( http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32001D0497:EN:HTML ) or the subsequent ‘Alternative Set of 2004.’

In simple English, this means that both importer and exporter must enter into a standard contract that is approved by the EU Data Protection authorities. This is only possible because the EU recognizes that the Indian Contract Act 1872 is adequate for the enforcement of the standard contracts. As a bit of trivia, the Contract Act 1872 is not applicable to the Indian state of Jammu and Kashmir.”

The Safe Harbor List contains the names of several prominent U.S.-centric LPO companies including Integreon Managed Solutions, Quislex and UnitedLex, but, as of Dec 2010, does not include Pangea3, or Mindcrest. These are all reputable companies and likely to be following reasonable standards. Nonetheless, given the ComputerWorld warnings, clients and potential clients may wish to evaluate them beyond whether or not they have been included on the U.S. Department of Commerce Safe Harbor list.