Author: Rich Smith
Publication: The Motley Fool
Date: January 26, 2004
URL: http://www.fool.com/news/commentary/2004/commentary040126rs.htm?source=eptyholnk303100&logvisit=y&npu=y&bounce=y&bounce2=y
Legal and financial publishing giant
Thomson Corporation recently launched a pilot program to outsource many
of its legal jobs to India, continuing a trend towards U.S. companies moving
professional jobs offshore. Foolish international attorney Rich Smith takes
a look today at the causes and consequences of moving legal work -- and
legal bills -- offshore.
"IBM Documents Give Rare Look At
Sensitive Plans on 'Offshoring'" blared the headline on page one of last
Monday's Wall Street Journal, which went on to describe how the computer
services giant plans to shift 3,000 computer programming jobs to countries
such as Brazil, China, and India.
It seems every day brings a new
story about a U.S. company closing down a factory or business division
here, and moving the jobs offshore. The movement began with the shipping
of low-skilled manufacturing jobs to Mexico and Southeast Asia. Then came
the shipment of customer service jobs to call centers in English-speaking
foreign countries (although low-cost-of-living U.S. states in the Midwest
and deep South also benefited).
Now, American companies are beginning
to ship out their professional jobs. Although the movement is still in
its infancy, IBM (NYSE: IBM) is far from the first to move higher- paying
professional positions off shore. To name just a few, Accenture Ltd. (NYSE:
ACN), formerly known as Andersen Consulting, has operated locally in India
for some time, and recently announced plans to more than double its Indian
workforce to 10,000. And both privately held Google and Time Warner (NYSE:
TWX) division AOL are also planning to open new engineering centers in
India.
It is beginning to seem like there
is no work that a U.S. worker can do that his employer cannot convince
a foreign worker to do as well, and for less wages.
Next up: Lawyers
About a week ago, West, the best-known
name in legal publishing in the U.S., began publicly ruminating about joining
the stampede to India. For the past few months, West has been running a
pilot program in Mumbai, India, where several Indian lawyers are preparing
summaries of unpublished U.S. court decisions.
For those not in the legal biz,
West is a unit of Canada's publishing behemoth, The Thomson Corporation
(NYSE: TOC). While many investors may also be unfamiliar with that name,
Thomson is truly one of the 800-pound gorillas of the publishing world.
Probably their best-known financial publishing unit, First Call, is quoted
daily by Wall Street talking heads, rattling off consensus earnings expectations.
But as big as the company is in
the financial world, financial publishing is only its third-largest business
segment. The largest by far is its legal publishing arm, spearheaded by
the twin on-line and off-line powerhouses Westlaw and West Publishing.
Those two units, along with others such as RIA, Findlaw.com, and the BAR/BRI
bar exam preparation program, combine to produce roughly 40% of Thomson's
$7.6 billion in annual revenues.
West also employs over 100 legal
editors in the U.S., who toil day and night reviewing court decisions and
preparing summaries of their major points of law for use by lawyers doing
legal research. So the hiring of a handful of lawyers in India may not
seem like much of a threat to the larger U.S. legal staff -- especially
when West requires the Indian lawyers' work to be quality-checked by the
U.S. lawyers.
But eventually, the Indians' work
will no longer need to be reviewed. They are, after all, qualified lawyers
in their own right, English-speaking, and educated in a common law system
(the same legal system as in the U.S.) And they receive on-the-job training
from West instructors in India, supplemented by supervision and feedback
from their counterparts in the U.S. Ultimately, the Indian lawyers' work
product will equal the quality of the Americans', at which point, the biggest
difference between West's U.S. and Indian lawyers will be that the Indians
earn about one-fifth the salaries of the Americans.
How long it takes to reach that
point should determine whether West decides to expand the program. For
as IBM has learned, the difference between the wages paid to foreign workers
and to U.S. workers does not translate immediately into corresponding savings.
On the contrary, while IBM's Indian employees earn about one quarter the
salaries of their U.S. counterparts, outsourcing industry analysts predict
the company will save less than 25% on the cost of the workers in their
first year.
This is probably due to the fact
that the new workers, even if they have skills equivalent to their U.S.
counterparts', are not thoroughly familiar with American laws. This would
increase overhead costs for IBM, which would have to assign American in-house
lawyers to check the Indians' work, decreasing efficiency and increasing
costs.
But once the Indian lawyers are
brought up to speed, those inefficiencies should disappear, making each
dollar saved on wages more and more likely to translate into a dollar saved
on operating costs for West. The example of another high profile user of
legal services, General Electric (NYSE: GE), seems to bear this thesis
out. By creating its own in-house legal department in India, GE reports
that in 2001 its plastics division saved approximately half a million dollars
that would otherwise have been spent on American advice purchased from
American law firms. By 2002, those savings had already increased by 40%.
The future of legal outsourcing
In coming years, expect to see
more and more companies outsourcing their legal work to offshore countries
-- most likely former colonies of England with English-speaking workers,
lawyers versed in common law, and highly educated populations.
In particular, companies with big
contingents of in-house lawyers, like West and its staff of legal editors,
will be moving more legal jobs offshore. If West, for example, begins to
see significant cost savings from its India venture, and uses those cost
savings to reduce the fees it charges to lawyers who use its services,
its main rival, Lexis-Nexis (owned by Anglo-Dutch publisher Reed Elsevier
(NYSE: ENL)) will almost certainly follow suit in order to remain price
competitive.
The impact back home
Dire as these predictions may seem
for the U.S. legal establishment, as Fool Bill Mann correctly pointed out,
outsourcing production of goods (including legal advice) ultimately lowers
costs to the benefit of everyone. Here are a few other predictions that
I see likely to arise from the move towards using offshore lawyers:
For legal publishers, those who
look abroad will lower their cost of producing goods, raising their profitability
and increasing their ability to compete against less nimble publishers.
For subscribers to those legal
publications (i.e., American lawyers) they will see some of the savings
by companies like West trickle down
in the form of lower subscription fees. Moreover, these firms may even
take a page from West's playbook and begin farming out low-margin legal
work to smaller American law firms and outsourcing some of their own "litigation
support" functions abroad.
Translation, transcription, and
document management services will all begin moving to low-cost
providers in India and elsewhere,
boosting the law firms' profits and enabling them to lower the legal fees
they charge. These lower fees should, in turn, trickle down further to
benefit the law firms' clients -- including companies such as GE, who will
also already be benefiting from their in-house use of offshore lawyers.
The double-savings to the American
companies that buy the legal services will then trickle down further to
the great mass of American consumers of the companies' products.
Rich Smith celebrated his fourth
anniversary as a card-carrying Fool yesterday. He has held his lawyer's
bar membership card for far longer, but holds no interest in any of the
companies mentioned in this article. The Motley Fool has a disclosure policy.
