FC Weekend Slowdown in the west triggers boom for LPOs
$1b industry hopes to grow 30-50% within a short time, but smaller players struggle
A segment that is thriving because of the downturn in USA and Europe is legal process outsourcing (LPO). More the legal hassles of developed countries, better the prospects for outsourcing services providers. However, while large companies are benefiting out of the slowdown, smaller ones are struggling to survive.
“Most financial institutions in the west are caught in litigation. They don’t have a choice not to defend themselves. In the process, these banks and financial institutions have to process over a million documents. The only way to do it fast and efficiently is by outsourcing the processes. Law firms handling the cases can gain anything between 30 per cent and 90 per cent cost savings depending on the maturity of outsourcing they have attained,” told Sanjay Kamlani, co-CEO of LPO firm Pangea3, in a recent interview with FC.
The $1 billion industry is hoping to grow by 30-50 per cent in the near future. However, the financial results of LPO firms also reflect the challenges they face as a result of the global financial crisis. The large pure-play Indian LPO companies such as Integreon, Intellevate, Pangea3 and UnitedLex are driving growth in the industry while smaller companies appear to be lagging behind, said Arun Jethmalani, managing director of ValueNotes.
The analyst and consultancy firm studied 32 pure-play LPO firms in India.
Despite a slowdown in growth since 2008, there are clear indications of revival, he added. However, LPO companies with revenues of more than Rs 10 crore have been able to sustain positive operating margins in each of the last five years. Among them, the large companies – with revenues of over Rs 50 crore have consistently achieved double-digit operating margins. This is the result of consistently high revenue per employee in the segment. Small companies (revenues Rs 2.5 crore to Rs 10 crore) have typically reported operating losses in each of the last five years, barring a few exceptions.
“Hit by slowing growth, rising costs and under-utilisation, smaller companies have been forced to take on more debt. An area of concern for the small LPO service providers is their inability to maintain consistent operating profits, resulting in rising debt levels,” he added.
The overall scenario for the larger service providers in the Indian LPO industry looks promising as the quantum of their revenue and profit growth outweigh short-term liquidity problems. The situation is gloomy for the smaller service providers. They will need to urgently address the challenges of a falling top line coupled with rising costs and debt that they are unable to service.