Legal Outsourcing Sacha Baron Cohen, the irreverent British comedian whose fictional characters have included Borat, Ali G, and Bruno, is no stranger to lawsuits, including several from members of the public who claimed they were duped into appearing in his 2006 film, Borat: Cultural Learnings of America for Make Benefit Glorious Nation of Kazakhstan. In 2009, Cohen was sued yet again, this time by a woman who claimed Cohen defamed her during a sketch in the Da Ali G Show, in which Cohen plays the linguistically challenged rap star Ali G. Like most other suits against Cohen, this one was dismissed. In rendering his opinion, Los Angeles Superior Court Judge Terry Friedman stated, “No reasonable person could consider the statements made by Ali G on the program to be factual. It is obvious that the Ali G character is absurd, and all his statements are gibberish and intended as comedy.” An interesting aspect of this case was that the majority of the preparatory work was done not by lawyers in Los Angeles but by a six-member team of lawyers and legal assistants in Mysore, India. A veteran media lawyer noted that without legal outsourcing to somewhere such as India, mounting a defense against this kind of lawsuit would not have made economic sense. The defendants would have simply paid the plaintiff to go away to avoid paying U.S. legal fees, even though the case had no merit. But with a team of excellent Indian attorneys trained in U.S. law doing a major chunk of the legal work, it was less expensive to fight and win the suit than it was to settle out of court. Legal outsourcing to places such as India and the Philippines is growing. Although the amounts involved are still small—estimates suggest that of the $180 billion Americans spend on legal services each year only about $1 billion is outsourced—the growth rate is high at 20 to 30 percent annually. The driving force has been spiraling legal fees in the United States. Between 1998 and 2009, hourly rates at big American law firms shot up more than 65 percent, according to industry sources. Faced with escalating costs, law firms and corporate law departments are exploring outsourcing. Some legal tasks cannot be done cheaply. If the fate of your company hangs on the verdict, you will probably want a brilliant lawyer to argue your case. However, plenty of legal tasks are routine. These include reviewing documents, drafting contracts, and the like. American law firms typically use fresh law graduates to do such grunt work, billing them out at steep rates to generate lots of profit for the firm. The 2008–2009 recession prompted clients to rebel against this practice. Increasingly, clients are pushing their law firms to drive down legal costs through outsourcing. While hourly rates for U.S. lawyers doing grunt work can run from $100 to as high as $500, lawyers in India will do the work for between $20 and $60 an hour, resulting in significant cost savings. One major beneficiary of this trend has been an outsourcing company known as Pangea3. Founded in 2004 by David Perla, the former general counsel of Monster.com, Pangea3 has headquarters in New York and Mumbai, India, and a staff of more than 450. India is favored because local universities produce a steady stream of lawyers trained in common law, which is the legal tradition India inherited from the British. The same tradition underlies American law. Also, educated Indians speak English well, and the 10- to 12-hour time difference between India and the United States means that work can be done overnight in India, increasing responsiveness to clients.Pangea3 serves two kinds of clients, corporations and U.S. law firms seeking to outsource routine legal work to low-cost locations. Some 75 percent of its business comes from Fortune 1000 companies, while the rest comes from law firms. Pangea3's value proposition is simple: It helps companies and law firms improve their efficiency, and minimize their business and legal risks, by having routine, labor-intensive legal work that requires a low degree of judgment done in India. Most industry experts believe that in the short to medium term, companies such as Pangea3 will see their market opportunity expand from about $1 billion today to $3 billion to $5 billion by decade's end. In anticipation of this rapid growth, Thomson Reuters, one of the world's largest media and information services companies, bought Pangea3 in November 2010. Case Discussion Questions 1. What are the benefits to a law firm of outsourcing legal services to a foreign country? What are the potential costs and risks? 2. What kind of legal services are most amenable to outsourcing? 3. Which groups gain from the outsourcing of legal services? Which groups lose? 4. On balance, do you think that this kind of outsourcing is a good thing or a bad thing? What are the risks here? 5. Why were the services in this case outsourced to India, as opposed to another country such as China? What does this case tell you about the kinds of factors that are important when a firm is considering whether to outsource a value creation activity, and where to outsource it to? Sources “Offshoring Your Lawyer,”The Economist, December 19, 2010, p. 132; D. Itzkoff, “A Legal Victory for Ali G and Sacha Baron Cohen,” The New York Times, April 21, 2009; and D. A. Steiger, “The Rise of Global Legal Sourcing,” Business Law Today, December 2009, pp. 38– 43. This case study appeared in “International Business: Competing in the Global Marketplace, 11th edition, McGraw- Hill authored by Charles Hill and Tomas Hult. 2017The Global Financial Crisis and Protectionism Two facts have characterized international trade between 1986 and 2007. First, the volume of world trade grew every year, creating an increasingly interdependent global economy, and second, barriers to international trade were progressively reduced. Between 1990 and 2007 international trade grew by 6 percent annually compounded, while import tariffs on goods fell from an average of 26 percent in 1986 to 8.8 percent in 2007. In the wake of the global financial crisis that started in the United States in 2008 and quickly spread around the world, this changed. As global demand slumped and financing for international trade dried up in the wake of tight credit conditions, so did the volume of international trade. The volume of world trade fell by 2 percent in 2008, the first decline since 1982, and then slumped a further 12 percent in 2009. This contraction was alarming because past sharp declines in trade have been followed by calls for greater protectionism from foreign competition as governments try to protect jobs at home in the wake of declining demand. This is what occurred in the 1930s, when shrinking trade was followed quickly by increases in trade barriers, mostly in the form of higher tariffs. This actually made the situation far worse and contributed to to the Great Depression. Much has changed since the 1930s. Treaties now in place limit the ability of national governments to raise trade barriers. Most notably, the World Trade Organization rules, in theory, constrain the ability of countries to implement significant increases in trade barriers. But WTO rules are not perfect and there is plenty of evidence that countries are finding ways to raise barriers to international trade. Many developing countries have latitude under WTO rules to raise some tariffs, and according to the World Bank, in 2008 and 2009 they were doing just that. For example, Ecuador raised duties on 600 goods, Russia increased import tariffs on used cars, while India placed them on some sorts of steel imports. According to the World Bank, however, two-thirds of the protectionist measures taken in 2008 and 2009 were various kinds of “non-tariff barriers that are designed to get around WTO rules.” Indonesia, for example, specified that certain kinds of goods, including clothes, shoes, and toys, can be imported only through five ports. Since these ports have limited capacity, this constrains the ability of foreign companies to sell into the Indonesian market. Argentina has imposed discretionary licensing requirements on a range of goods including car parts, textiles, and televisions. If you can't get a license, you can't sell into Argentina. China has stopped a wide range of imports of food and drink products from Europe, citing safety rules and environmental concerns, while India has banned imports of toys from China for safety reasons. Developed nations in general did not take similar actions, but they sharply increased subsidies to troubled domestic producers, which gave them an advantage against unsubsidized international competitors, and therefore may have distorted trade. The key example of this in 2008 and 2009 was the automobile industry. To protect national producers, hold on to jobs, and stave off bankruptcies, rich countries including the United States, Britain, Canada, France, Germany, Italy, and Sweden gave over $45 billion in subsidies to car companies between mid-2008 and mid-2009. The problem with such subsidies is that they could cause production to switch from more efficient plants to less efficient plants that have an advantage due to state support. Although the WTO has rules against trade-distortingsubsidies, its enforcement mechanisms are weaker than in the case of tariffs, and so far countries that have been increasing subsidies have not been challenged. The volume of international trade has since rebounded strongly, growing by around 14.5 percent on the back of a 3.1 percent increase in the size of the global economy in 2010. As this happened, protectionist pressures abated somewhat. Trade rebounded more strongly in developing nations than in the developed world. China, in particular, saw a massive 28.5 percent leap in the volume of its exports, which created additional trade tensions. Case Discussion Questions 1. Why do you think calls for protectionism are greater during sharp economic contractions than during boom periods? 2. Despite the sharp economic contraction during 2008–2009, the increase in protectionist measures was fairly modest. Why do you think this was the case? Page 290 3. During 2008–2009 many developed nations gave subsidies to their automobile producers. How might this have distorted international trade? Was this a reasonable thing to do given the circumstances? 4. What might occur if a renewed economic slowdown triggered a wave of protectionist measures around the world? Would protectionism actually protect jobs, or would it make things worse? 5. The volume of world trade rebounded sharply in 2010 on the back of a fairly modest growth rate in the world economy. What does this tell you about the nature of international production in today's global economy? What does this tell you about the vulnerability of the world economy to any future trade wars? Sources “The Nuts and Bolts Come Apart,” The Economist, March 28, 2009, pp. 79–81; “Barriers to Entry,” The Economist, December 20, 2008, p. 121; “Beyond Doha,” The Economist, October 11, 2008, pp. 30–33; and “Trade Growth to Ease in 2011 but Despite 2010 Record Surge, Crisis Hangover Persists,” World Trade Organization press release, April 7, 2011. This case study appeared in “International Business: Competing in the Global Marketplace, 11th edition, McGrawHill authored by Charles Hill and Tomas Hult. 2017.