Pangea3’s recent opening of a delivery center in Carrollton, TX, near Dallas, highlights the speed with which the legal process outsourcing (LPO) industry is incorporating the general evolution of the BPO industry. Initially, offshoring was exclusively to low cost countries to take advantage of labor arbitrage, and thereby, lower the overall costs of business processes. Since then, offshorers, both outsourcers and companies with captive centers, have begun implementing portfolios of offshoring locations using the so-called “hub and spoke” system. “Hubs” of offshore work are generally located in scalable countries, like India and the Philippines, where there large numbers of low cost, skilled workers. “Spokes” tend to be smaller centers that are used to meet particular skill, geographic, or regulatory needs. Examples of spokes include the use of medium cost locations like Poland for European language skills or the location of a data center that can meet particular E.U. regulations; and Israel to get medium cost yet highly sophisticated legal skills. (Sales offices, even when they house a few delivery people are not considered “centers,” and therefore not included in this analysis.)
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.