The legal and business environment in India necessitates all businesses to maintain a standing legal counsel for compliance advice, secretarial services and legal auditing. The recent trends in legal and business sector favours outsourcing legal audit and services by businesses. Many factors have contributed to the growth of this trend.
Firstly, Despite the endeavours of the government to replace the legal regime characterised by license raj into one characterised by ‘ease of doing business’, the legal compliance requirements for running a business remains extremely complicated. Though the Indian economy has witnessed tremendous growth of start-ups, small scale industries and online businesses, the lack of access to affordable and reliable legal counsel remains a great impediment to growth of these sectors. These small-scale businesses lack the human and financial resources required to maintain a permanent inhouse legal department. They also have to endure the dual expense of maintaining both an inhouse legal department and a standing counsel for litigation.
Secondly, Before a few decades, small scale businesses in India was mostly run through self-proprietorships. The standard practices in corporate governance have changed radically in all the industries that now majority of the small-scale businesses uses legal entities as vehicles for their business and has complicated corporate governance structures. This makes the legal and secretarial requirements more challenging.
Thirdly, The businesses that have units across different geographical locations also encounters the difficulty in supervising legal compliances by all units. Maintaining a legal unit in every geographical location is not financial plausible.
Finally, the growth of technology & e-governance and the pandemic situation that accelerated this process has created a trend in favour of handling services like compliance advice, secretarial work and legal audits through virtual platforms.
As the legal sector is witnessing the integration of litigation and advisory services, the growth legal enterprises that combine litigation and advisory services and outsource the same using modern technology is the need of the hour.
Advantages of outsourcing legal services
The costs of maintaining inhouse counsel, physical access to legal services and costs incurred by directly employing lawyers including expense of providing benefits under labour laws can be curbed by outsourcing legal services.
B. Enhanced quality and speed of legal services using latest technology.
Increasing customer expectations and the COVID-19 pandemic demand modernised digital infrastructure for providing speedy, accurate and quality legal services.
A good legal outsourcing partner will have a network of connections with general counsels and law firms worldwide. Small businesses that wouldn’t normally have access to such global expertise at a local level can benefit from such services.
B. Effective handling of intercorporate relationships
Using third party legal outsourcing partners for handling relationships with employees, clients and associates including matters like contract negotiations and dispute mediations helps effective handling of intercorporate relationships
C. Simplified corporate governance structure
Diminishing the role of inhouse counsels simplifies the internal governance structure and coordination mechanism of businesses.
D. 24/7 access to legal services
Outsourcing legal services can provide round the clock access to legal aid.
C. Compliance with legal ethics
The enterprises that functions solely for outsourcing legal services often have a greater grasp over legal ethics which protects their clients from legal action and loss of reputation caused by unethical practices.
The third-party legal outsourcing partners can indemnify their clients against compliance defaults caused by ineffective legal support.
When services like legal advice and audit is conducted by third party agencies, it enhances objectivity and impartiality.
F. Greater satisfaction of stakeholders
It increases satisfaction of stakeholders like management, employees, clients and shareholders. The Following are the benefits for stakeholders:
Directors (particularly Non-executive Directors)
- Adherence to Corporations Law obligations
- Better corporate governance issues
- Better integrity of the relied upon internally prepared financial information
- Better financial risk management issues including adequacy of internal controls, solvency, etc
- An external perspective of the business independent of day-to-day management.
- Reliable financial information – better management decisions
- Improved management of the financial risks of business
- Stronger internal financial discipline
- A supplement to the internal finance team skill set
- External assessment of accounting policies – improved financial performance reporting
- Reliable financial information to assess managements performance
- An external perspective of the business independent of day-to-day management
- Reliable financial information – more ‘lend worthy’
- Improved credibility of covenant reporting
- Stronger internal control systems – increased business value
- Reduced risk in acquisition due diligence
Disadvantages of outsourcing legal services
A. Additional costs
Additional costs such as rising operating costs, communication costs, and induction costs have to be incurred. The business shall have full knowledge about cost break-up before hiring an outsourcing legal partner.
Outsourcing exposes businesses to a greater risk to confidentiality. The business shall ensure that the outsourcing contract is fool proof in matters like confidentiality and conflict of interest.
C. Lack of customized and localized services
Outsourcing entities are not always equipped to provide customized services sensitive to local laws like an inhouse counsel.
Alby Stephan. K, Legal Executive at Legality Simplified.
Neysa Desouza, Legal Executive at Legality Simplified.