Outsourcing comes of age

Law firms have traditionally kept their distance from outsourcing functions, but many are actively reconsidering it as a means of achieving greater cost control and competitive advantage.

By Margaret Lang, Intelligent Office UK

It is an axiom of corporate life that getting financial management right defines a successful business, while it is generally poor financial management that leads to corporate failures. To a limited extent, non-lawyer financial managers have been part of law firm senior-management teams since the late 80s, but recently the long discussed move to a more corporate structure has placed the finance team very much at the centre of the management structure.

However, law firms may have underestimated the cultural shift required to turn a professional partnership into a successful business operation. While the much-trumpeted headline Top 100 revenue and profit numbers tell one story, margins at many firms are under considerable pressure with costs, particularly support costs, rising quickly.

PricewaterhouseCooper’s (PwC’s) 2006 Law Firms’ survey stated that the principal driver of increased profits per equity partner (PEP) has constrained the numbers of equity partners in many firms, with over 50 per cent of Top 25 firms reducing equity partner numbers. The survey also sees many firms effectively controlling costs, particularly staff costs at 40 per cent or less of fee income. However, in many firms, margins remain under pressure due to low levels of staff utilisation, continued upward salary pressure and high levels of professional staff attrition.

In addition to the cost/revenue equation, there are other significant drivers of change impacting the legal profession. The 2007 Legal Services Bill, following the Clementi Report, will create an operating environment for firms that will see significant changes in regulation and complaint handling, and will provide consumers, or clients, with greater choice on how to access legal services. This new environment will create radical opportunities for new, well resourced and marketed businesses to compete with law firms. They will operate within new business structures that will offer quite different service standards and improved efficiencies, based around a completely different cost model, which will dramatically alter the competitive landscape at all levels of legal practice.

Is outsourcing the way forward?

In light of a new competitive model, the concept of outsourcing certain clearly-defined business processes is rapidly gaining ground in UK law firms. More than ever, businesses are looking at outsourcing a wide range of core functions as part of their strategic approach to both growth and success. Indeed, with an estimated 10-15 per cent of a firm’s annual revenue spent on office administration and document management, it is expected that UK law firms will adopt outsourcing, like their US counterparts, within the next 5 years. US firms have consistently found that by outsourcing office services they have more time to devote to fee earning and client management.

A 2005 survey of the US legal profession found that 85 per cent of all firms outsource some or all of their business processes. Over 60 per cent initiated outsourcing arrangements as part of an overall review of internal costs.

In the UK, as firms face rising costs to support areas such as risk management, compliance and performance measurement, the outsourcing of support functions, such as HR, marketing, administration, procurement and IT is likely to increase significantly. For firms with insufficient in-house resource to cope with the demands of running the modern law firm, outsourcing may even become necessary for survival.

The cost of support services

The support services of a firm can be viewed in two ways – either as expenditure or investment. In the expenditure camp, support services are considered as a cost base, an amount of money that has to be spent. However, more progressive firms view support services as an investment that makes a valuable contribution to the organisation and can play an active part in financial performance and efficiency.

Many firms take the expenditure view of services due to a lack of clear and measurable information on the actual cost of service provision. Once this crucial information is available, however, services can be benchmarked using key-performance indicators, allowing management decisions to be taken about the future of these support services based on facts rather than perception. This will also have a cultural benefit where the support services see themselves as an integral part of the business, sharing and participating in the firm’s strategy and objectives.

Losing control

One of the key inhibitors to any form of outsourcing arrangement is the fear of a ‘loss of control’. The irony is that outsourcing services should deliver greater control – it is just leveraged in a different way. Selecting a service provider with legal-sector experience and ensuring there is an appropriate cultural fit between both parties is also critical. The outsourced provider will need to have designed their services with the nuances and individual requirements of each firm in mind, rather than adopting a one-size-fits-all approach.

The provider will be able to present detailed information on both the in-house and outsourced management of each service and identify in advance the cost and service benefits to the firm of each outsourced service option. The service should be clearly measured against agreed performance standards, both internally and externally.

Outsourcing is often a catalyst for change inside firms as well and a well-run service can be used to benchmark other aspects of support performance and drive internal change.

Successful outsourcing arrangements

As mentioned above, the key to successful selection of the outsourced service provider is not the service itself but the cultural and attitudinal fit of the two organisations. Choose a provider with similar values and aims and their people will become an integral part of your own team, particularly when the service provision is ‘on site’. As buyers, firms should speak to the provider’s clients and their staff, visit their premises, check their internal employee communications and really get under the skin of the provider company.

An open and clear communications channel with the service provider will ensure that everyone is striving to meet the same goals. Finally, look at the relationship the firm has with its own best clients and learn the communication and performance lessons from those successful client/supplier relationships.

Looking to the near future, there is no doubt that law firms need to both recognise and manage the fact that the nature of work in the professional-services sector will continue to change. The delivery of high-value knowledge-based services will continue to evolve as the competitive landscape changes, the barriers to competition are removed and new entrants join the market. Competition will create new ways of working as firms drive growth and profitability in order to sustain significant infrastructure and technology investments and to retain the best people in the market.

As new ways of working change the relationship between lawyers, professional-support lawyers and support services, the insourcing/outsourcing debate, which has to date mainly been confined to the outsourced provision of administrative services, document management, accounts, IT and service help desks, has now begun to focus on areas such as memoranda and contract drafting, document review, primary and secondary research, paralegal services and back-office knowledge-based support.

With client/consumer demands becoming both more complex and more segmented, and with intensified competition in all market sectors, firms will require access to specialist capabilities and highly flexible resources that they will not economically be able to provide in-house. Fee earners will need to do just that, while senior management need to focus on strategy, direction and growth while narrowing the staff utilisation gap referred to in PwC’s 2006 survey as a key inhibitor of continued profitability. For many firms, an outsourced future has already arrived. For those that have not seen this future, it may be soon too late to catch up with profitable and well-resourced competitors operating substantially different cost models.

Margaret Lang is chief executive of Intelligent Office UK, a provider of managed offices services for the legal sector. She can be contacted at margaret.lang@intelligentofficeuk.com