The LPO industry begins to consolidate
At this time of year it is quite natural to look back and reflect on key LPO industry events. Perhaps the most significant activity indicative of the direction of the industry as a whole, took place last month with the most high profile acquisition to date of a LPO provider when Thomson Reuters, Inc. (TRI) acquired Pangea3. Only a week earlier, UnitedLex acquired LawScribe.
What conclusions can be drawn from this activity? I think that there are four main points:
1. It validated the LPO market. As written so succinctly in The Wall Street Journal Law Blog post, “True Believer: Thomson Reuters Betting Big on LPO Boom”: “Did you politely nod along in conversations about India and ‘legal processing outsourcing,’ all the while thinking that it was just a fad? That U.S. law firms would ultimately somehow win back the work by figuring out how to do it better, faster, cheaper? Well, [this] news should extinguish some of that lingering scepticism.”
Thomas Reuters’ move validates market acceptance of LPO. Moreover, the acquisition is good news for the legal market as Thomas Reuters will inevitably look to invest in and promote LPO. This will educate law firms and law departments and accelerate growth for the whole market.
2. This news, while noteworthy, is not surprising. Consolidation is natural in a growing market. One year ago, LPO industry analysts at ValueNotes released a report on the state of the industry, “Crisis Creates New Opportunities for LPOs,” which observed that more than 20 percent of LPOs had ceased operating or closed down their LPO operations. At the time, I was insistent that change and consolidation was on its way, and wrote, “The coming 12-24 months could prove to be tough for many of the smaller LPO providers, several of whom may simply give up the chase and withdraw from the market altogether. Others will look for an opportunity to achieve the scale increasingly viewed as a prerequisite by potential clients, by either merging with a competitor, or selling to a larger, more stable provider. This activity, together with consistent growth by the leading, large-scale providers of legal and knowledge process outsourcing services will continue to push the industry as a whole further down the path towards consolidation.”
For a long time, I have thought that players in the LPO market would consolidate. The early LPO years, characterised by numerous small or boutique players, were simply not sustainable. 2010 has really been the year when the industry has moved up a gear. I anticipate further consolidation throughout 2011.
3. Lawyers want integrated, scalable and multi-service offerings. Large, diversified and well-funded companies are likely to dominate the LPO market because buyers of legal outsourcing services will increasingly opt for providers who offer financial stability and scalability through a global, multi-shore delivery platform. They will also seek providers who offer multiple service lines, across the legal services spectrum. In my view, electronic data discovery (e-discovery or EDD) is a key service because it is so closely connected to document review, the biggest component of LPO. The capability of providing the full spectrum of EDD capabilities (i.e., all the components of e-discovery, including defensible data collection, processing, hosting, review and production) without subcontracting, will soon become a prerequisite to compete in the LPO market. Another high growth area for LPO is the provision of end-to-end support for a corporation’s contract management function.
In a world where multi-national corporations are operating under increased scrutiny and regulatory compliance burdens, and while their legal departments are struggling with the “more for less” conundrum, only LPO providers with the domain expertise, global platform and the technical capability to provide support across the enterprise commercial contract lifecycle, can meet the challenges corporations are facing in this arena head on.
4. Legal domain expertise is critical to serve the legal market. Lawyers want service providers who have a deep understanding of legal practice. TRI clearly has this deep legal expertise. Its acquisition of an LPO makes me wonder about how LPO will fit in other very large global companies. For example, it is not clear to me if companies such as IBM or Accenture will enter the LPO market. Both are very capable but not known for legal expertise and they might find it difficult to build the domain expertise. (There is also a question of whether LPO is a big enough business to “move the needle” for them.)
I have commented in the past that both Infosys and Wipro, two of the largest and most successful outsourcing companies in India have previously signalled their intent to enter the LPO market. Both are great brands in business process and IT outsourcing but we have not seen evidence that the brands carry much value among lawyers.
To conclude, I believe that TRI has set the legal outsourcing market on a new, higher path. I expect scaled LPO providers to continue to educate and validate the market. While 2010 could well be thought of as the year that the long predicted industry consolidation began, the years to come will be exciting times where we see additional consolidation, and a broadening and escalating demand for LPO solutions.