20 Jun 12 Scale is now a clear differentiator for LPOs: Is a shake-out imminent?
Theory tells us that as industries mature, scale becomes increasingly important. ValueNotes’ latest research indicates that this is now the case with the legal process outsourcing or LPO industry in India.
Back in 2005, ValueNotes was one of the first analyst firms to track the (then fledgling) legal process outsourcing (LPO) industry. At the time, outsourcing of legal services was a “hot” new service line with much promise. Growth rates between 2003 and 2008 averaged more than 40% a year, though on a small base. Coupled with low entry barriers, this attracted hordes of new entrants.
The number of Indian service providers jumped from around 40 in 2005 to more than 125 by 2008. Early adopters (buyers) were willing to experiment with pilot projects, and this allowed start-ups to win small contracts and get going.
In late 2010, a ValueNotes survey of buyers in the US and UK revealed signs of disillusionment amongst customers. Significantly, complaints about quality, consistency and skills were complemented by concerns over data security and client confidentiality. Several small companies could not match the rising service levels demanded by savvier customers. Also, buyers now understood pricing mechanics better and a plethora of new suppliers (including IT and BPO companies) enabled them to negotiate more smartly.
The nature of projects and the engagement model also changed, in line with service maturity. Small one-off projects gave way to larger, continuing engagements. And single process relationships moved towards multi-service or end-to-end services. The higher risks inherent in such projects prompted buyers to start favoring larger, more experienced and “sustainable” vendors.
ValueNotes’ latest research (Legal Process Outsourcing: Financial performance review) reveals the financial impact of all these trends on “pure-play” Indian LPO vendors. The analysis of the balance sheets of 32 such companies shows a clear divide between the larger providers and the smaller ones. The larger players (such as Integreon, Intellevate, Pangea3, and UnitedLex) are growing faster, earning more per employee and making better profits than the small companies. Unless the smaller players are able to acquire clients quickly and scale up, they may well be out of the race soon.