Karnika Seth, Managing Partner SETH ASSOCIATES ADVOCATES AND LEGAL CONSULTANTS

Seth Associates, 2007 All Rights ReservedLEGAL PROCESS OUTSOURCING IN INDIA-AN INSIGHT INTO THE GROWING INDUSTRYICFAI National Seminar on Prospects and opportunities in Knowledge Services 9th July,2007,Sirifort Auditorium, New Delhi

Introduction to the LPO business Scope of Services renderedPreference for destination-IndiaDifferent Models of Outsourcing Potential of growth in the LPO IndustryImportant Indian Government InitiativesIdentifying major Issues in dealing with foreign clients in an LPO businessEnsuring data protection-Case study-Mphasis BPO FraudPractical experience & suggestions

Presentation Plan

What is Outsourcing?Outsourcing is the contracting out of a company's non-core, non-revenue producing activities to specialists. It differs from contracting in that outsourcing is a strategic management tool that involves the restructuring of an organization around what it does best its core competencies. Three common types of outsourcing are Information Technology (IT) outsourcing ,legal process outsourcing (LPO) and Business Process Outsourcing (BPO). BPO includes outsourcing related to accounting, human resources, benefits, payroll, and finance functions and activities. All these activities fall under broad category of Knowledge process outsourcing (KPO)

What LPO means?LPO or Legal Process Outsourcing is a kind of high value added BPO service involving legal work that industry vendors or in-house departments of organizations outsource from off-shore areas where it is costly to perform Services rendered may involve low skilled quantitative tasks or high end qualitative tasks

Nature of Services High end The Qualitative tasks include: Intellectual Property Rights Patent Search Patent Application Drafting IPR Portfolio Management TM and Copyright Registration Legal Research/Opinion work Document Review and Analysis Intelligence Services Contracting and Administration Low endThe Quantitative tasks include:

Paralegal Services

Legal Transcription Legal Memo Development Medical Transcription

Document Management Corporate Secretarial Services

Litigation Support. Legal Coding Data entry

Paralegal servicesImage and Document coding Indexing and Tagging Legal transcription Archiving Deposition and Testimony summarization Document/Evidence Review

Spheres of lawLitigationArbitrationADRBanking SecuritiesIPRMergers and acqReal estate TaxationGeneral business lawsInsuranceCorporate consultancy

Major International clients source of work The in-house legal departments of MNCs Legal research firms International law firms Legal publishing companies Independent attorneys

Work inflow is observed to be more from USA, Australia, U.K , France ,Japan, China

Preference for destination -India?Experienced Legal professionals Communication and education advantage-English languageprofessionals skilled in use of ITPresence of IT Infrastructure and Government facilitated schemes for ITES sector, better telecommunication initiatives, power and transport facilitiesExposure to foreign lawsForeign qualifications in legal streamCost reductionAdvantage of time zoneEfficacy at workStaffing 24x7Supports regional assignments

Preference for destination-IndiaLaws Governing International Contracts "Proper Law of the Contract"When the parties in the Contract make an express choice of law ,Indian Courts have always recognized such choice of proper lawUnder Indian Law, parties are free to stipulate their terms of contract and lay down the law by which the Contract is to be governed. Courts in India have held that the intention of parties would decide the law of which country would govern the Contract and which Court would have jurisdiction. Sections 13, 15 and 44A of the Indian Civil Procedure Code and Section 41 of the Indian Evidence Act, govern the conclusiveness and enforcement of foreign judgments in IndiaThe parties may also choose a foreign venue for arbitration. A Foreign arbitral award would be recognized in India if the country of venue has signed either the New York or Geneva conventions and has been notified as having reciprocal relations with India in the matter of enforcement of foreign awards. A foreign arbitral award would generally be more easily enforced in India than a foreign court judgment.

Preference for destination-IndiaIndia has ratified the World Trade Organization (WTO) Agreement, which came into force on January 1st 1995 and has also become a party to the Agreement on Trade Related Intellectual Property Rights. It has made several amendments to its laws concerning Intellectual Property to suit the international standards

Models of International IT-Enabled Outsourcing

Out-tasking model: export a task and, upon completion, import it for use in home country 7/24 model: maintain a continuous work schedule by having teams in various time zones Foreign local subsidiary model: outsource tasks in support of operations in that country Global model: establish data and service center overseas to support global operations

Different Categories of LPO PlayersBPO/ITES Players Providing LPO Services e.g Office tiger,Pangea3Law Firms Providing LPO Services e.g Seth Associates, J sagar Associates,, Kocchar & CoThird Party Units (Single-Focus LPO Excluding Patents Services) e.g Lexadigm ,MindcrestThird Party Units (Single-Focus Patents Services)- e.g EvalueserveKPO Players Providing LPO Services e.g Evalueserve, IntegreonCaptives of Law Firms lex sphere, Atlas legal researchCaptives of Corporate Legal Departments e.g GE, Dupont

Survey Reports: predicting future of LPO business in India

According to a study by the United States-based Forester Research, the current annual value (2004-05) of legal outsourcing which is worth $80 million can rise up to $4 billion and can fetch 79,000 jobs in India by 2015.The National Association of Software and Service Companies -- Nasscom -- also projected that legal processing outsourcing (LPO) providers in India will soon rise to $3-4 billion industry.

Potential of growthValueNotes, a Pune based research firm released a survey report Offshoring Legal Services to India claiming Legal Process Outsourcing is expected to be a $640 million by end of 2010 as against $146 nowNumber of people employed in this sector will go up to 32, 000 from 7, 500 now, in next three yearsThe frontrunners are leading due to their strong capabilities, onshore offshore presence, growth strategies, and the strength of their brand in the global LPO marketRising demand, vendor maturity and capability to offer higher value services has led to the 50% growth in this sector in 2005-06

Important Indian Government InitiativesForeign Direct Investment (FDI) for 100 percent of the equity in BPO companies -options to foreign companies to engage independent service provider, branch office, set up JV or wholly owned subsidiary, acquire exiting companyForeign Investment Regulations Software development and BPO services is now under the automatic route and no foreign investment approvals are required to set up a wholly owned subsidiary; only certain filings need to be made after receipt and issue of share capital. However, acquisition of shares in an existing Indian company may still require a prior foreign investment approval. Most foreign corporations set up their subsidiaries as private limited companies with liability limited by share capital. Duty-free imports of capital goods (under the Export Promotion of Capital Goods scheme)

Important Indian Government Initiatives 100% Income tax exemption for export of services: according to CBDT, the exemption would embrace the following (few) services: Back-office Operations Content Development or Animation Engineering & Design services Human Resource Services Insurance Claim Processing Legal Databases

Important Indian Government Initiatives Promotions of STPs which provide ready-to-plug IT and telecom infrastructure Indian tax laws have recently included provisions relating to transfer pricing, requiring pricing of transactions between associated enterprises to be at arms length allows repatriation of profits, calculated in accordance with approved accounting rules.

National Venture Fund for the Software and IT Industry with a corpus of Rs. 100 crore

Government Incentives in infrastructure segment The government has been continuously improving infrastructure with better roads, setting up technology parks, opening up telecom for enhanced connectivity, providing uninterrupted power to augment growth.

Tax Incentives-Infrastructure sector

The tax incentives offered to the investors by the Government of India are a boon for firms involved in IT outsourcing to India. The incentives that facilitate economic growth and development are: 1. Infrastructure: A 10 years tax holiday to ventures engaged in developing and / or maintaining and operating an infrastructure facility.2. Power: 10 years tax holiday to undertakings, which generate and / or distribute power.3. Telecom: 5 years tax holiday for companies providing telecom services including Internet services and broadband services. Also 30 % deduction from profits for the next 5 years in any 10 continuous years out of first 10 years is also offered. 4. Industrial Parks and Special Economic Zones10 years tax holiday is applicable to ventures that develop and /or operate or maintain in notified IT parks and special economic zones.

Tax Incentives5. Other Industries:5-year tax holiday is available for new industrial units to be set up in backward states and districts. 6. Incentives for Exports:No Tax is deducted on exporters profits for unit set up on EPZs, STPs, EHTPs, FTZ and SEZs. 7. Other Incentives:Tax concessions are allowed for FTI and a weighted deduction of 150% for scientific research and development expenditure have been offered. 10 years tax holiday is available for R&D companies engaged in scientific and industrial research.

Government Incentives in SEZIn India units are allowed to be set up in SEZ for rendering of services as well. The units in the zone are required to be a net foreign exchange earner.

The units in SEZ set up during the financial year 2005 will get the following exemptions:100% exemption of profits and gains from business for the first 5 years50% exemption of profits and gains from business for the next first 5 years50% exemption to the extent that such amount is reinvested in the SEZ Special Reserve Account.Losses falling under the heads Profits and gains from Business or profession and Income from Capital Gains can be carried forward/ set off as long as such loss is related to the business of the SEZ unitExemption from Central sales tax on inter-state sale or purchase of goods

Facility to retain 100% exchange earnings in EEFC account. ( exchange earners foreign currency account) Exemption from Service tax Export proceeds to be realized within 12 months

SEZ units may import or procure from the domestic sources, duty free, all their requirements of capital goods, raw materials, consumables, spares, packing materials, office equipment, DG sets etc. for implementation of their project in the Zone without any licence or specific approval.

The Key issues-dealing with International clients in LPO business Your Market presence How you introduce your organizationIT & systems in place Understanding cultural differencesDue diligence Establishing credibility,endorsement of valuesExhibit experienceAddressing IPR & data protection issues Clear terms of engagement Competence & Manpower Promptness & Quality Control Payment arrangements

Approaching

Introduce LPO

Discussing work possibilities Understanding Differences in culture

Scrutiny Background Check EstablishingCredibilityIPR & Data protection issues Steps in Dealing with an International Client

Agreement Competence Payment

Services & Quality

The Six Fundamental Value ParametersParentagePresencePeopleProductProfessionalPromise Global leader more than 5 decades of customer loyalty & service Continuous onsite and global support to handhold and troubleshoot immediately Professionally qualified, hands-on industry experience, specific domain expertise & proven delivery capabilities Most user friendly, futuristic design, easy scalability, zero vendor dependence, technology backing Continuous commitment, on-time delivery, reliability, & flexibility Guaranteed success

LPO Industry s prime challenges:

High attrition rates Unpredictability in regular flow of workHigh cost of training and infrastructure investment Ensuring information security and confidentiality especially under varying privacy laws Abdication of responsibility Risk managementQuality assurances

Quality related accreditations International Standards Organization (ISO) 9000 series Six Sigma CMMi Model (Capability Maturity Model) SEI-CMM Model People Capability Maturity Model (People-CMM) e Services Capability Model (eSCM)

LPO Literature Printed/Online directory

Past Experience of The firmExperience of key personnel Advertisement Website Media/press conferences Publications References Giving/hosting Seminars Approaching a client

Agenda for discussion with a foreign clientExchange of GoalsCommitmentUnderstanding RelationshipAgreement

Earliest contacts should include a detailed exchange aimed at achieving long term goalsA thorough understanding of the clients business objectives in the context of political, economic and social systems in the local jurisdictionAn understanding of how different business practices, customs and etiquette can affect the relationship between the firm and its foreign clientAn agreement recording terms of engagement, issues-IPR, Data protection, tax issuesTo avoid unverified assumptions and to address issues when they arise.

Working out detailed strategies & plansAppreciate Clients goals Tune your Business objectives and strategy Risk Implications of the clients position in the home market Domestic Market place Safeguarding LPO Reputation in the local jurisdiction confidentiality, security concernsAgree on policies and standards for assignment management and client service Collect feedback on client satisfaction

Understanding common cross border differences Professional precedence and deference Communications Holidays Adjusting to inevitable time gaps

Ready for Scrutiny ?TEAMINFRASTRUCTURECAPABILITYRELIABILITYSKILLSRELEVANT APPLICABLE LAW

What is indispensable to a Foreign Client? A trustworthy & value adding partner - that ensures Quality & service Reliability -that ensures success Values - that goes beyond words Experience - that holds Client in good stead to make right decisions

What Clients look for? Expertise- that provide accuracy. Infrastructure- that can ably support & value add to Customer Quality- that assures you error-free and timely project delivery Support - that ensures success

Establishing credibilityFully skilled TeamStrong infrastructurePrevious tasksCompleted TaskAppreciation from the client

Background Check on a New ClientConduct due diligence incase of new client .Website checkPersonality analysis over phone discussions Verify the identity of the company with the corresponding Countrys embassy/government/country records Confirm that the signatory is authorized to sign on behalf of the company Verify that the company is legal and doing real business

Collate detailed InformationFirms must maintain procedures and obtain satisfactory evidence of identity for all new clients.Confirm the Clients Identity

If the official name of the companyexists in the corporate records of the state or region in which the contract needs to be enforceable.

If the signatory signing on behalf of a legitimate company, is listed as an authorized signatory of that company.

Due diligence techniquesCheck The Client's Backgroundfind some history about the company in the public corporate records consultants who specialize in checking out company backgrounds credit reporting companies (like Equifax) corporate credit and information bureaus (like Dunn & Bradstreet) consolidated information sources (like knowx.com) Identity procedures should not be an end in themselves.

CLIENT IDENTITY VERIFICATION

IdentityAddressIndividualBirth Certificate Record of home visitPhoto driving license Council tax / rent demand Passport Utility bill Photo card (Corgi / CIS) Inland revenue document Government identity card Entry on electoral role Residence permit State benefit entitlement Firearms certificate Paper driving license

CLIENT IDENTITY VERIFICATION

Persons Identity evidence Business or entityProprietorUtility bill Bank signatories registration certificate Inland revenue document Bank details Tax returns Business records Professional registrations Personal visit

Legal IssuesIssues relating to the ownership of intellectual propertyLiability for failures, and limitation of liability The right of termination-exit route Prohibition on hiring the others employeesData Protection, confidentiality-contractually enforceable ,Art 21 of constitution, common law,fiduciary duty, breach of trust-criminal offence both IPC and IT Act 15432

Types of security related risksThree types of security related risks: Theft of Data and Information Natural Disasters External Acts like virusesThe National Association of Software Services Companies or Nasscom is working with the government to ensure that India's data privacy legislation is more in line with the U.S. It also intends to have the security practices of all its 860 members audited by international accounting firms. A cyber crime unit, which NASSCOM initiated in Bombay's police department where officers were trained to investigate data theft, is planned in nine other cities.

Create strong confidentiality protection regimesDedicated teams to maintain strict security, info -access and staffing rulesSecure transmission and storage of informationProcesses to be streamlined only if need to know principle be adoptedNDA, adopt foreign data protection principlesIP of projects belongs to clientClient attorney priviledgeQuality assurance accrediation

Data Protection-UK

The Data Protection Act 1998 came into force on 1 March 2000 Under the Data Protection Act, anyone processing personal information must comply with eight principles of good information handling. fairly and lawfully processed; processed for limited purposes; adequate, relevant and not excessive; accurate and up to date; not keptlonger than necessary; processed in accordance with the individual's rights; secure; not transferred to countries outside the European Economic area, unless there is adequate protection.

Legal Provisions dealing with data protection under the IT Act,2000

IT Act, 2000 delineates both civil and criminal liabilities for -cyber contraventions[S.43(a) to (h)] and cyber offences[Ss.65-74]

Legal Provisions dealing with data protection under the IT Act,2000Sec 2(1)(o) of IT Act 2000 defines Data-A representation of information, knowledge, facts, concepts or instructions which are being prepared or have been prepared in a formalized manner, and is intended to be processed, is being processed or has been processed in a computer system or computer network, and may be in any form or stored internally in the memory of the computer;

Legal Provisions dealing with data protection under the IT Act,2000Computer database[ S.43 Exp (ii)-A representation of information, knowledge, facts, concepts or instructions in text, image, audio, video that are being prepared or have been prepared in a formalized manner or have been produced by a computer, computer system or computer network and are intended for use in a computer, computer system or computer network.

Cyber ContraventionsDeals primarily in with unauthorized access to computer, computer system or computer network.May result in civil prosecutionLiable to pay for damages by way of compensation not exceeding one crore rupees to the person so affected.

Cyber OffencesDeals with computer, computer system, or computer network related serious offences such as hacking (Section 66).May result in criminal prosecutionIT Act, 2000 has identified offences which are punishable with imprisonment or with fine or both.

Computer Related Crimes under IPC and Special Laws*

Case Study- BPO Data TheftThe recently reported case of a Bank Fraud in Pune in which some ex employees of BPO arm of MPhasis Ltd MsourcE, defrauded US Customers of Citi Bank to the tune of RS 1.5 crores has raised concerns of many kinds including the role of "Data Protection".

Case Study (contd.)The crime was obviously committed using "Unauthorized Access" to the "Electronic Account Space" of the customers. It is therefore firmly within the domain of "Cyber Crimes". ITA-2000 is versatile enough to accommodate the aspects of crime not covered by ITA-2000 but covered by other statutes since any IPC offence committed with the use of "Electronic Documents" can be considered as a crime with the use of a "Written Documents". "Cheating", "Conspiracy", "Breach of Trust" etc are therefore applicable in the above case in addition to section in ITA-2000. Under ITA-2000 the offence is recognized both under Section 66 and Section 43. Accordingly, the persons involved are liable for imprisonment and fine as well as a liability to pay damage to the victims to the maximum extent of Rs 1 crore per victim for which the "Adjudication Process" can be invoked.

Case Study (contd.)The BPO is liable for lack of security that enabled the commission of the fraud as well as because of the vicarious responsibility for the ex-employee's involvement. The process of getting the PIN number was during the tenure of the persons as "Employees" and hence the organization is responsible for the crime. Some of the persons who have assisted others in the commission of the crime even though they may not be directly involved as beneficiaries will also be liable under Section 43 of ITA-2000. Under Section 79 and Section 85 of ITA-2000, vicarious responsibilities are indicated both for the BPO and the Bank on the grounds of "Lack of Due Diligence". At the same time, if the crime is investigated in India under ITA-2000, then the fact that the Bank was not using digital signatures for authenticating the customer instructions is a matter which would amount to gross negligence on the part of the Bank. (However, in this particular case since the victims appear to be US Citizens and the Bank itself is US based, the crime may come under the jurisdiction of the US courts and not Indian Courts).

The Outsourcing cycle: Memorandum of Understanding (MOU) Agreement Negotiations Outsourcing Agreement & engagement letter Service Commencement Service Improvement Renewal or termination

Points to be addressed in the engagement letter Availability and access Responsiveness. Working language(s) Status reports. Delegation of legal work Communications with the foreign clients home office and local subsidiaries. Communications with third parties. Conflict and unfair competition issuesStaff sustitution Billing Expenses and disbursements. Payment.Applicable law & settlement of disputes

IMPORTANT CONSIDERATIONS-Service Level AgreementQuality - The client should be able to get out of the contract if he finds the quality below par. Quantity- volume of work to be done in an hour/day/week/month as per agreed. Confidentiality- assurance that all the information and data would be not be disclosed to any third party. Pay Cycle- how to remit professional fees Price Increases- dependence of the client-ensure that for large, long-term projects, once the vendors personnel have acquired experience on the client projects, the vendor does not result in unreasonable price increases or replacement of key employees

Billing How often will fees be billed? How much detail does the client require on the invoice? Billing practices vary considerably. A foreign client who is used to itemized, detailed hourly billing might take exception to the summary form of invoice that is customary for the firms local clients.

Billing ratesDepending upon the type of services being delivered, the billing charges range from US$ 10 to 150. Mainly in the industry, three kinds of standards are prevalent in terms of charging the clients.One, the flat rate fee the clients have to pay the fixed amount of charges for the entire months working. Second, the packaged fee wherein the clients pay for buying the entire package of services like patents prior art search would cost them around US$ 900 for 12 hours. Third, on hourly basis. High-end jobs would cost more than even US$ 100. The value for money has to be given by keeping prices relatively reasonable.

Billing ratesThe billing charges are as follows: Area Amount (USD per hour) Telemarketing 5-12 Transaction Processing 10-14 Tech Support (inbound) 11-12 Printing Support Services 15-25 Basic Back Office 15-25 F&A 15-35 Document Management Services 30-50 Research & Analysis 40-90 Patent Drafting & Legal Research 150

Per-transaction priceA norm in the US and the concept is fast gaining popularity among top Indian firmsPTP for the uninitiated is a form of pricing where a firm company is paid only on the basis of completed transactions. The client pays a portion of the value that he gains from outsourcing rather than a fixed cost based on the number of seats or hours of effort that a service provider uses to deliver the solution. This ensures that the client pays only for the benefits that he derives and not for inefficiencies of the service provider. Transaction-based pricing requires high degree of domain specialization especially for high end work a firms credibility and proven track record that today is not widespread.

Expenses and disbursements. The range of expenses and disbursements that are accepted as reimbursable can vary considerably from country to country.What is customary in one jurisdiction might be viewed as bordering on dishonesty in another? Unless reimbursement of expenses and disbursements is discussed and agreed at the start, the firm should expect the foreign client to challenge some of these charges.

Payments provisionsAmounts to be paid-(i) Lump sum contract; (ii) Time based contracts; (iii) Success fee based contract; (iv) Percentage contract; (v) Indefinite delivery contract.

Schedule of payments-

Payment procedures, shall be indicated in the draft contract and agreed upon during negotiations.

Payments may be made at regular intervals (as under time-based contracts) or for agreed outputs (as under lump sum contracts).

Payments for advances if any should normally be backed by Bank Guarantee. The limit for advance payment will be as prescribed by GFR. Normally, it should not exceed 10% of the cost of the contract.

Payments shall be made promptly in accordance with the contract provisions.

Three words of Caution-Payment It may be the custom in the foreign clients country to age professional services invoices for up to 90 to 120 days. A demand for payment within 30 days might be viewed as distrusting and insulting to the clients integrity.

Law firms must also be very careful about attempting to charge interest on accounts that are more than 30 days old. In some countries, interest payments, especially to providers of trusted professional services, are considered highly improper or even immoral. Litigation to collect a fee is considered to be a breach of professional ethics in some countries.Even though these professional rules might not apply to a law firm outside the clients home jurisdiction, even the suggestion of possible legal action to collect a fee could be viewed as highly offensive by the client, especially if the client feels that there are unresolved service issues. CustomsLitigationInterest

Key Performance Indicators (KPIs) Average Data Value (Sales and Reservations Only) Customer Satisfaction Service Level Abandoned Percent of DataCost Per DataErrors and Rework Forecast Work-load to Actual Scheduled Staff to Actual Adherence to Schedule Average Handling Time Reviewing strategies for increasing performance levels

Dealing with a complaint If the complaint is in writing, acknowledge it immediately Tell your client who will be dealing with the complaint, and what the likely timescale is for dealing with it Keep your client informed of the complaints progress if it is unlikely to be resolved quickly Note what the client expects from the complaints process, and whether those expectations are reasonable If your client asks for a meeting, try to arrange one as soon as possible Open a complaint file, and keep a record of what steps you take towards resolving the complaint Finally, remember that speedy resolution of complaints helps to maintain client goodwill, and is frequently the most cost-effective solution for you.

Thank You! Seth Associates, 2007 All Rights ReservedSETH ASSOCIATES ADVOCATES AND LEGAL CONSULTANTSNew Delhi Law Office: C-1/16, Daryaganj, New Delhi-110002, IndiaTel:+91 (11) 55352272, +91 9868119137Corporate Law Office: B-10, Sector 40, NOIDA-201301, N.C.R ,IndiaTel: +91 (120) 4352846, +91 9810155766Fax: +91 (120) 4331304E-mail: mail@sethassociates.com