Is Outsourcing an Opportunity for Law Firms?
In the very broadest sense, any service acquired outside of an organization to supplement core services and resources is outsourced. Although outsourcing is a bad word among some categories of employees, it allows companies to focus on core competence, build expertise, control expenses, eliminate waste and directly provide value to clients or customers. Ideally, the vendor bears the overhead cost for the outsourced service, and when the need comes to an end, so does the financial relationship.
Opportunities for outsourcing exist for law firms as well. Over the four decades since the explosive growth in private firms began, many of their needs have been outsourced, from mailroom and photocopy services to accounting. Legal research has been outsourced to leased databases, and so has more specialized legal research and brief writing, the traditional work of law firm associates. Since associates, paralegals, and library services now make up a substantial part of a law firm’s operating budget, properly leveraging the best talent and outsourcing the balance of services can stop the bleeding of many firms. Reassessing the meaning of profitability can also help. If the right outside provider is found, this can be an ideal relationship for cost-conscious management.
Outsourcing arrangements support the professional problem solving that is the real art being sold by law firms. The tools needed to solve a legal problem are rarely of any interest to a client unless or until they show up on a bill. When faced with high legal fees, a company with a large legal department may prefer to buy efficiencies and fixed costs through a legal research and brief writing firm and keep the problem solving in-house. The research and brief writing can be bought from the best recommended providers at a fraction of the cost of today’s billable hour. The billable hour, after all, includes the cost of waste and inefficiency.
Many of the challenges law firms face today are due to the lack of profitability. This is a sea change in the world of law firms. Clients who are being forced to keep costs down are asking law firms to do the same and will no longer pay for excess. Many law firms still believe they are indispensable in their current form; but news of firms in trouble presents a cautionary tale. In a turbulent regulatory environment, for example, it is not uncommon for a client to contact a law firm with information or news that has yet to hit their lawyer’s desk. The tolerance that sophisticated clients have for this scenario is limited. There is a threshold for excessive billing rates even when a firm has full-time staff gathering industry alerts.
Today, excess is out and lean is in. Business clients embraced technology more quickly than law firms and realized a return on investment that continues to pay off. Sophisticated clients can set up or buy their own database access, perform research and writing, and respond themselves to complex business problems that may take lawyers hours of effort and many dollars in fees.
Law firms, like many other professional firms, often decrease expenses by eliminating personnel. A better strategy can introduce client value by just eliminating ancillary expenses as a marketing advantage, thus thanking clients for working with them. This is an essential handshake with clients who are introducing their own lean standards for selecting outside legal services. They demand that technology be up to speed, collaboration be at an all-time high, and line item charge-backs reduced or altogether eliminated.
Why work with one law firm over another? Not every large multinational firm is well managed. Most are financed in about the same way, through fees and reimbursements. The world is very complicated today and, frankly, the average law firm is represented by followers and not leaders, worried that giving up the usual run of services might put them at a disadvantage.
The risk, however, is in the failure to lead. One choice is to make heavier investments in IT and outside services, shifting the internal organization a few notches leaner. We now understand that law is a business and even identify it as an industry. And today, when technology is king, all forms of businesses and industries represented in a typical law firm client base are looking for ways to avoid expenses when the return on investment is suspect.
With the right amount of creativity, law firms can turn to their IT departments for efficiencies without first downsizing or changing organizational structures. One way is to better negotiate for contractual services based on specific project demands. Few law firms have associates so experienced and specialized that their research and writing is effective and efficient in all fields. Internal housekeeping requires a serious inventory of ancillary services and standards for retaining them. Some areas may be ripe for outsourcing to reduce operating expenses.
Each operating department must be scrutinized. Every firm is different, so it behooves each firm to look inward to the best approach to reducing costs and enhancing value — and maybe to do so in some unconventional ways. A creative IT department, for example, can help develop a truly useful research database from the firm’s stored work product. Firms pay lip service to doing this but still reinvent the wheel with each billable matter. I am not talking merely about document management. Firms understand that their work product should be carefully documented and stored. But it is time to reuse more than just boilerplate and forms. Past work products can be part of a serious research database. This is one thing that a law firm has that is truly unique. And selling unique and accessible work products has value when the work originally delivered results. Accomplishing this task may require some firms to make a bigger investment in IT applications development, but this short-term development cost can return measurable results.
There are specialized firms today that provide temporary lawyers, expert witnesses, legal research and brief writing, and e-discovery, among other things. It is well known that people who do one thing extremely often and extremely well can perform a service better and faster than a cheaper in-house staffer who is only occasionally faced with certain problems to solve.
Going lean may also include a reassessment of yearly bonuses and lawyer salaries even if done only for prospective new hires. Law firms may seek to leverage associates, paralegals and librarians to serve more clients with cheaper dollars, however cheaper dollars without experience and expertise may not be worth much to sophisticated clients. Online services and direct access to outsourcing opportunities may be a better substitute.
The Banking Model
When Switzerland recently began to wage war against high executive compensation in investment banks, they cited a bonus structure that diverted 30% to 70% of yearly revenues to employees “rather than being paid out to investors or reinvested in the business,” as reported by Francesco Guerrera in The Wall Street Journal. Guerrera goes on to say that “the fact that successful traders and bankers expect large bonuses — and that many of them are spread over several years — has made pay expenses inflexible. That, in turn, has forced banks to fire people when they need to cut costs, contributing to boom-and-bust cycles in the sector. Third, the lure of big payouts has encouraged employees to take risks with banks’ and clients’ money.”
This is a familiar story. Many law firms feel they have to pay huge salaries to new law school graduates in order to attract the cream of the crop. But as with banks, “instead of slashing the workforce during a downturn,” law firms could reduce costs by decreasing salaries and bonuses. This is something to think about.
While law firms are not subject to the same regulations as investment firms and partners are their own shareholders, they are nevertheless subject to the same market forces that challenge the workforce in boom-and-bust cycles. Guerrera reports that Robin Ferracone, chief executive of executive-compensation consultancy Farient Advisors LLC, suggests that the EU rules could help banks contain costs. The same is true in a law firm. Imposing limits on themselves directly or indirectly could actually help contain costs. “Creative managers should try and use [the rules] for a positive end.” Certainly there are more good lawyers out of school and out of work than there are jobs in law firms awaiting them. Salaries and bonuses can be assessed.
When balancing technology and outsourcing for the average large law firm today, we might turn next to Lean Six Sigma. This is a combination of methodologies used in businesses to focus on lowering error rates in products and services in order to improve overall quality. There is also an emphasis on the voice of the customer and developing the tools needed to measure customer needs. Lean Six Sigma focuses on streamlining services from end to end to eliminate waste. Can Lean Six Sigma work for the law firm? A serious desire to provide client value is a large part of the task. At least one law firm I know in Chicago has introduced Project Management into their in-house strategy. If there is a new standard set to reinvest in the firm, the firm can afford to deliver services free of line item charge-backs. We’ll take a look at what technology and Lean Six Sigma might contribute in an article to come.
This article originally appeared in the May 2013 issue of LJN’s Legal Tech Newsletter. It is republished here with permission.