In my last post I wrote about large law firm Howrey opening its own document review facility in India. Is it a good idea for law firms to own and operate their own offshore center? 

Because I now work for a legal process outsourcer (LPO), I was reluctant to question Howrey’s wisdom in building an owned and operated (“captive”) offshore processing center. An article today relieves me of that reluctance. Rethinking the India Back Office in the Wall Street Journal (11 Feb 2008) explains that captives are often more expensive than companies expect. Consequently, “Some of the largest outsourcing units are still those belonging to Western companies, including Wall Street’s biggest banks… could soon be looking to get out of part or all of the business by selling either to Indian companies that specialize in outsourcing services, to private-equity firms or through initial public offerings.”

Dollar depreciation and Indian wage inflation have taken a toll but India still offers a significant cost savings. The bigger problem is that operating a captive is expensive and hard. A recent McKinsey / Nasscom study found that captives are “less efficient than companies run by outsourcing firms that specialize in the business. ” The article continues to observe that “Once the initial benefit was felt, companies found it hard to keep on top of their costs. Salaries and the cost of office space jumped. Staff turnover has been high, and companies are having to spend on headhunting fees and training.”

My 20 Sept 2008 post, What Direction Legal Outsourcing?, also cites an article analyzing the trend of companies that built their own offshore centers to sell them.

So, to answer my own question… I think Howrey has great vision in opening an office in India and offering its clients the option of low cost, high quality services from India. But if the history of captives is a guide, Howrey’s Pune office may someday be owned and run by a third party, even if it is for the exclusive use of Howrey.