Captive LPOs for Companies with Significant Offshore Operations

A recurrent question in the legal process outsourcing LPO industry has been whether or not corporations should build their own offshore subsidiaries (or “captives” in industry parlance) to conduct legal process work.  The captive option is particularly attractive for legal work because of the greater control and confidentiality it can afford, but for most companies, building an offshore subsidiary in India solely to conduct legal work simply isn’t feasible.  However, corporations that already have significant offshore operations providing information technology or Business Process Outsourcing (BPO) services may be in a position to benefit from captive offshore legal operations. The key factors to consider are the volume of legal process work, whether it can be organized into a consistent workflow, and instituting the appropriate management for the offshore operation and coordination across company locations.

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.

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