PANGEA3 LLC

Legal outsourcing is here to stay but what does it mean for law schools and students? That is the focus of two blog articles by Professors Anne Enquist and Laurel Oates of the Seattle University School of Law. By discussing the current legal outsourcing industry, their blog posts raise a few interesting questions about how legal outsourcing will impact the careers of new law school graduates and how legal educators should prepare their students to practice law globally and use outsourcing effectively. Anne’s blog post has been republished in its entirety below:

Learning to live with Outsourcing
by Anne M. Enquist

I agree with Laurel Oates’ earlier post that outsourcing legal work is here to stay. Despite the belief by some that the financial downturn may have lessened the growth of LPOs, quite the opposite seems to be the case. For example, the largest sourcing firm in India, Pangea3, had one Mumbai office with about 100 attorneys when Laurel, Mimi Samuel, and I visited there in January 2007. Pangea3 now has three Mumbai offices and 240 attorneys.

I also agree that cost is a big reason why US and UK law firms and corporations are outsourcing legal work. When we interviewed the principals of Lexadigm, an outsourcing firm outside of Delhi, we asked them about their rates. They said that when they started in 2004 they were charging about $40 an hour. By 2007, they had raised their rates to $60-$100 an hour, depending on the complexity of the work and the turnaround time. But of course even those higher rates are a bargain when compared to what US domestic attorneys charge.

And some US attorneys are saying that they feel ethically obligated to do what is in the best interest of their clients, including saving them money by outsourcing some of their legal work. Time magazine quotes Mark Alexander, a Dallas attorney who makes exactly that point. Alexander said that he would not consider charging a client his $395 rate, or even a junior associate $225 rate, when he can outsource the work to Atlas Legal Research in Irving, Texas, which outsources the work to lawyers in India who do the work for $60 an hour.

But I also want to pick up on Laurel’s final question about what outsourcing might mean for our students, alums, and the practice of law. Our students will have to compete for work and jobs in this changing market. They cannot assume that when they graduate they will be able to make a six-figure income doing basic legal work for several years as they work their way up to partner. They will have to adjust their expectations, and they will have to figure out how to justify the salaries they hope to receive.
As legal educators, we have an obligation not only to inform them about the effect LPOs will have on their careers but also to prepare them for this dramatic shift in the practice of law. We have to get ahead of the curve on the whole issue of outsourcing and think through how to make it a win-win situation for all involved, including clients and lawyers here and in countries doing outsourcing work. This will require some creative, fearless thinking and problem-solving.

Initially, for example, one might start by saying “OK, what legal work can’t be outsourced? Let’s figure out what that is and give our students job security by teaching them to do that.” Or we could modify the question slightly, adopt a “best practices” approach and ask “What legal work can best be outsourced, and what legal work can best be done by someone local?” Or maybe the real question we need to ask is “How can we best prepare our students to practice law globally, including how to use outsourcing effectively?”

Republished with Permission from Anne M. Enquist, Associate Director Legal Writing and Professor of Lawyering Skills, Copyright June 13 2009, Seattle University Law Faculty Blog, Seattle University School of Law.

Lately, there has been no shortage of underemployed big firm lawyers. Watching one’s friends, colleagues and law school classmates lose jobs is not pleasant. Negative economic growth is not good for anyone.

Yet as law firms’ deal flow, litigation activity and patent filing volume have all fallen off, law firms are faced with a decidedly difficult question: Once the inevitable layoffs are complete, what does a firm do with underemployed attorneys when offshore legal providers can provide the same work for vastly lower costs?

Legal offshoring is here to stay. In August 2008, the ABA gave guidance on how domestic lawyers can ethically offshore legal work. Pangea3 and several other players have demonstrated that strong vendors are consistently producing offshore work that is fit for consumption domestically. Our long list of Fortune 500 clients will affirm this, and have affirmed it at conferences and in reference checks for years. Firms can no longer plausibly claim to be unaware of successfully outsourced legal work.

In spite of this, can a firm use its own resources even if they are overpriced relative to proven offshore resources? What does the firm tell clients who catch it in the act?

When he knows a less expensive qualified resource is available is it within the ambit of a lawyer’s judgment to use a resource that is twice as expensive? Four times? Ten times? At what point does it cross over into malpractice for the firm to put its own economic interests (keeping expensive associates busy) ahead of a client’s interests (containing costs and obtaining legal work at a fair price)?

Law firms have some rough sailing ahead before the return to fat times. We hope they are thinking about how to navigate these tough ethical questions.

Obama’s proposals to end deferral of US income tax on foreign subsidiary earnings of US companies, coupled with his employment restrictions on professional immigrants is likely to result in a substantial reduction in American GDP and American jobs resulting in further contraction of the US economy.

The traditional tax treatment of US companies and their foreign subsidiaries, long before talks on Obama’s proposals started, had already put American companies at a competitive disadvantage vis-à-vis their non-American peers. This disadvantage arises because many countries only tax companies on income earned in their home country and exempt them from tax on earnings of foreign subsidiaries. America, on the other hand, ultimately imposes additional US taxes on those foreign subsidiaries to the extent that the US tax rate is higher (e.g., after a credit is accorded for the foreign taxes). For example, in the case of a company enjoying a tax holiday in India, many European parent companies would pay no tax in their home country on the Indian subsidiary’s earnings, but in the US, a parent company would have to pay US taxes making the benefit of the Indian tax holiday worthless. Under current rules, the US tax system in most cases imposes that additional tax only when the earnings are brought back to the United States. President Obama’s proposed rules would impose that tax in the year the foreign subsidiary generates the earnings even before the earnings are sent back to the United States, putting those companies at an even more unfavorable competitive position. The European companies and the local companies with which they are competing have no such additional tax burden. The US simply can’t afford to make its corporate citizens even less competitive than they already are today.

Take for example, a US based IT services company with operations in India as compared to an India based IT services company with similar operations in India. The India based company pays little or no taxes in India because of Indian tax holidays. Under Obama’s new tax proposals, the US based company would have to pay taxes to the US government of 35% on the same type of income. This means that the US Company has 35% less after tax profits or must increase its prices for customers by 35% to be in the same position as the Indian company. Let’s say that both, the US company (US CO) with all of its operations in its Indian subsidiary and an Indian company (India Co) each earn $1 billion in revenue and incur aggregate expenses of $500 million resulting in a net profit of $500 million. In certain circumstances both the India Co and the Indian subsidiary of US Co would pay no taxes in India under typical STPI/EOU programs. But US Co would end up paying 35% ($175 million) in taxes to the US Government as opposed to zero for India Co. The only way for US Co to get to the same after tax profit as India Co would be to charge 35% higher prices or earn 35% more revenue through more business.

To make matters worse, the new immigration restrictions are tied mostly to government bailout funds and restrict banks and recipients of TARP and other bailout funds from employing professionals in the United States on H-1B visas. This makes it difficult for leading financial institutions and other firms to hire highly qualified experts and professionals. The new proposals to restrict H1-B and L1-B employment beyond government bail-out recipients could ultimately result in an exodus of talent from the country, along with the revenue generation that would have been attributable to them and the spending they would have incurred.

This clearly makes it a double hit to America.

Obama’s immigration restrictions actually force Indian entrepreneurs and professionals out of the US to India where they establish more off-shoring business and the tax policies make the US based companies less competitive with the Indian based companies such that more and more US dollars flow to the Indian companies. While this appears to lack wisdom from the standpoint of the US economy and corporate, one must also appreciate that Obama is thinking of the average American individual who is angry about American companies making money by getting work done in India rather than in the United States.

The irony however, is that these protectionist policies are likely to harm American individuals much more than others since it makes the way for less jobs for Americans. The flip side is that they also signal good news for the Indian IT/BPO industry. The policies force more business and revenue to Indian based companies operating in India by making US companies less competitive and by precluding what might have been on-shore activity.

The reality is that the best way to protect American jobs is to eliminate the trade barriers and the immigration barriers—facilitating commerce by enabling foreigners to come into the US and for US companies to operate outside the US. Immigration and tax policies that make it difficult or preclude foreigners from doing business in the US and for US companies operating outside the US respectively simply push dollars and jobs outside the US. It may be good politics but it is bad for the economy.

It is very unfortunate for Americans that President Obama is out fooling the American public into believing that opportunity lies in the heartland of America protected by artificial barriers at the border known as Visas and tax disincentives. At some point the American public will realize that opportunity lies not in the heartland but across the internet sea in Bangalore where people are truly free to do work anywhere in the world they please.