This month, India Law Journal's Founder Dirctor, Vikrant Pachnanda spoke to Mr. Hemant Batra, Lead Partner, Kaden Boriss Legal LLP,Vice-President SAARCLAW & Chairperson IICLAM and discussed with him his views on various challenges that today face the LPO industry in India.

Ques: One of the key challenges facing the LPO industry is the lack of a regulatory framework for the outsourcing industry. Though initially it is considered an advantage, don't you feel that the absence of rules and standards is turning into a serious hindrance as lack of regulations create a sense of danger as legal policies begin to emerge?

Ans: Having fixed rules and standards for the regulation of the LPO industry has both advantages as well as disadvantages. One must appreciate that the legal systems world over are heterogeneous and rules and regulations vary from country to country. Taking an example of the outsourcing industry, since two or more countries are involved, there can never be a single universal law regulating the terms of business. In fact, law governing general contracts are the core rules governing the outsourcing business.

It all depends upon the parties to an outsourcing contract to be subject to a specific law and jurisdiction. However, there are some specific areas of concern for foreign companies as to issues of confidentiality and secrecy as there are no specific laws in India protecting the confidentiality of the propriety information disclosed to legal units. Data protection is another major area of concern as there is no law to that that effect except Information Technology Act, which majorly falls short in covering some of the key issues relating to data privacy and theft.

It is up to the government to come up with laws which take care of the growing LPO industry and provide protection against conflict of law, contractual disputes, and employment related issues as well as to come up with special tax treatment to LPOs.

Ques: Don't you think that rising costs and fluctuating exchange rates pose additional challenges considering the fact that as the rupee appreciates, supposedly cost-efficient solutions in India become far less attractive when converted into US dollars since the vast majority of India's clients are based in the US?

Ans: Yes appreciation of rupee against dollar may negate the cost arbitrage factor involved in any outsourcing business. However, it's not necessary that the impact will be negative as the LPO industry is still in its infancy so the exact impact of such currency appreciation can not be measured.

The concerns over falling of the price of the dollar can be two fold. While those LPOs which have long-term commitments through contracts running into many years and finalized in dollar denominations, are worried about losing profits, those with short term contracts worry about lack of future demands, as a higher rupee might send the prospective clients to other jurisdictions.

I think the impact will be higher on small LPOs that do not have the financial ability to internalize the rupee appreciation, and neither have the bargaining power to revise contracts, or to raise billing rates in near future. The larger players will be able to sustain in the near term, but will be in trouble in the long run unless corrective action is taken now. Volume growth and operational efficiencies can help to narrow the effect the rupee appreciation. In such a time, exploring non US markets such as UK or Japan is an important factor to avoid such risk.

One can also explore the possibility of hedging in high value contracts to minimize the risks on either side.

Ques: Whilst India continues to dominate the global call centre outsourcing landscape, the Philippines threatens to poach some activity as its own market grows in strength and is emerging as a lower cost alternative to India. What are your views on this?

Ans: Legal outsourcing today has gone beyond lower cost value proposition. The key driving factor here is not only the cost difference, but it also involves undertaking complex activities which have never been done before. More and more, higher end legal work is being outsourced by companies and foreign law firms than just routine corporate compliance and patent documentations. LPOs in India are valued in the international scenario not only due to being cost-effective but also because they offer an efficient and vast pool of legal talent and an amazing quality of work. While Philippines, China, Vietnam and South Korea are still gearing up, there remains no doubt, why India should not be able to fortify its position. Further, there was big news in the recent past regarding problems being faced by the Philippines educational authorities in coping up with the diminishing interest of their new generation in the English language; which speaks for itself.

Ques: In the Bush regime, corporations were able to defer paying tax on income earned overseas until they bring that money back to the US either a dividends or as retained profits on their balance sheets. However, now President Obama plans to reform this tax code. How would this have an impact on the India LPO industry?

Ans: It must be noted that the present US tax deferral system allows the US companies earning profits in a foreign country to deduct expenses for overseas operations and defer payment of US taxes until those profits are repatriated back to the US. It appears that Obama’s tax proposals intend to curb overseas tax advantages enjoyed by multinationals in US; change the legal treatment of international subsidiaries, used to park earnings into low tax offshore havens; and eliminate an ambiguity that allows US multinationals to avoid paying taxes on profits earned overseas.

In my opinion, since all these are still only proposals, the immediate impact on the Indian LPO industry cannot be accurately assessed moreso because the said proposal is not outsourcing centric only. Even assuming that the proposal comes into force, it is an attempt by the US administration to reduce the role of small tax-haven countries that have eroded the tax bases of US rather than targeting the outsourcing industry in general. They also aim to increase their own revenue amount. I see no immediate threat to the LPO industry by Obama’s proposal.

Ques: Why is it that full fledged law firms are now opening LPO? For instance, FoxMandal opened Legal Circle two years ago and now AZB has started one by the name of Bodhi Global.

Ans: Interestingly, post Lehman collapse when more and more companies faced credit crunch and insolvency proceedings, it appears that the ones who benefited most by it were lawyers in India. More and more companies and foreign law firms in order to cut costs are relying on outsourcing for their routine legal work such as electronic data management, due diligence, post-merger contract integration, researching on various laws, drafting of contracts, proofreading, document discovery in litigation and IP related work. Indian law firms who have come up with their dedicated LPOs are aiming to cash in on this opportunity by providing all kinds of legal services at all price levels possible within the legal gamut. These LPIO outfits are nothing but a hybrid of law firms set up with a wholesale business model in mind; meaning thereby, that these LPIOs will undertake bulk cross border legal assignments at cost-effective rates.