Are finance directors up to the outsourcing challenge?

In the second of two features on law firm outsourcing, Chris Bull challenges finance directors to lead their firm’s approach to sourcing decisions, and proposes five areas on which to focus.

In the last FD Legal, I took a helicopter view of the use of outsourcing in the legal world, focusing on trying to demystify some of the terminology used. In this piece, I will direct my attention to the FD’s role in leading their firm’s sourcing strategy. At the heart of this feature is an assertion that the FD – as the most commercially skilled and least compromised executive in the business – is uniquely placed to own the firm-wide policy around, and the application of, outsourcing.

First, clear your mind

Outsourcing is a word which conjures up associations for all of us. Often, quite a few of those associations are negative. While sometimes based on hard, personal experience, it is common for perception, misinformation and misunderstanding to play their part. Part one focused on trying to clarify some of the terms involved, and I have no intention of repeating the whole piece again here. I would suggest, however, that anyone tasked with considering the use of outsourcing in their firm starts with the following five simple statements:

Outsourcing is used successfully by every law firm today across a range of services from tax advice to payroll bureau to cleaning;
Outsourcing is simply one potential outcome of the fundamental ‘make versus buy’ analysis firms should be revisiting regularly;
Outsourcing services can be dedicated to your firm (as well as shared) and located onsite (as well as offsite);
Outsourcing can cost more than your current in-house service; and,
Outsourcing is more common to an onshore, rather than offshore, destination.

Taking this further, it is important for the FD to take a position of informed neutrality. For the classic ‘make versus buy’ analysis we all understand so well to operate, the ‘buy’ option has to be evaluated fairly. As outsourcing options are evaluated more regularly by firms, the finance function will increasingly have to take the position of neutral arbiter among peers and colleagues who will often find it more difficult to be impartial, especially where large portions of their functions may be under consideration. In many firms, where there may be some instinctive resistance to outsourcing, this may require FDs to take the lead in presenting the issue objectively and examining all the angles.

Progressing procurement

For many law firms, the adoption of corporate-standard procurement policies and practices has not been a priority. There is some justification for this – law firms don’t have the raw materials, stock, heavy-asset purchases or opportunity for huge economies of scale that many other businesses have. The fundamental cost-base is managed by the human resources – rather than the procurement – function. But there are also less well-thought-through explanations: firms have been too comfortable for too long with cosy, long-standing relationships delivering more comfort than value. There is often too little insight centrally into the way in which often complex products and services, particularly in the technology and information areas, are purchased.

Firms have begun to introduce procurement managers into their ranks in recent years, but it is only a trickle. At Osborne Clarke, we appointed our first procurement manager on a fixed-term contract in 2004, and have moved on to create a permanent role. Our procurement manager has overseen the creation of the firm’s first procurement policy, and more detailed best-practice guidance aimed primarily at budget-holding business service heads/managers. As a by-product of this development, she has also been able to take a lead role in supporting the business development team by articulating exactly how the firm expects our own suppliers to behave in a range of areas, including CSR, diversity, environmental impact and business ethics. Alongside this, she is now (appropriately) a leading player in directing the firm’s environmental strategy and reflecting this important agenda in our procurement decisions.

One challenge for us has been to determine where the role should sit. That question is more loaded than it may at first appear. Major-spending departments would probably have preferred to have the procurement manager sat inside their function, rather than operating outside of it. However, this would undermine the independence and cross-functional coverage we intended for the role. Many people, including at first the procurement manager, were concerned that too obvious an alignment to finance would suggest that the role was exclusively concerned with nailing the best price, potentially at the expense of quality and the wider supplier relationship (a little like your business development function being focused only on ‘sales’ and not ‘client-relationship management’). Ultimately, however, we felt that the role sat best within finance, reporting directly to the head of finance and working closely alongside the management accounting team and accounts payable (AP). We now view the role as essential, and it has reduced the burden on individual functional managers, especially when large set-piece tenders are required, and broadened the armoury of our finance function, underlining their primary firm-wide responsibility for the sourcing agenda – the theme of this piece.

Taking charge of the ‘value agenda’, not the ‘cost agenda’

By ‘value agenda’, I mean the drive to achieve the right quality or service (not necessarily always ‘the best’ – many partnerships need to remember that) for the lowest cost. Looking from the top of the organisation across the entire firm, finance should understand and direct this agenda. For any finance function to truly lead it, they need the right processes – knowledge and access to information. It is often a challenge for finance to get under the skin of the quality or service level that the firm is getting in return for the expenditure being committed. But it is important – never more so than in the current climate. Finance staff who are able to objectively review expenditure plans based on value rather than cost alone are a massive asset to managing partners and partnership boards.

Measuring outsourcing options has to be done against the value agenda. An attractive cost saving might only come at the expense of service levels. Outsourcing providers might sell hard on the basis of quality of service alone, when cost savings might also be available if sought. Challenges to outsourcing on risk or service grounds may be allowed to close down the internal debate on outsourcing before the financial benefits have even been assessed. Finance are very well positioned to be the primary honest arbiters of this balance.

Outsourcing finance and accounting functions

It would be impossible to conclude a short article on the FD’s role in assessing outsourcing options for firms without including the question of whether finance and accounting (F&A) functions can successfully be outsourced. It is certainly unrealistic for FDs to expect to be able to ignore this area, while leading the examination of outsourcing across other functions.

It may well be that the objective, value-based exploration of F&A outsourcing by finance could serve as the model for similar exercises across the firm. Interestingly, however, it might be a lot tougher to shift to outsourced services in these areas, certainly for now.

The typical F&A functions outsourced, although the range is very broad, would include AP and debt recovery/accounts receivable. Even in these areas, that many corporate finance functions would see as commodity services, the concept of outsourcing finance processes within law firms is fraught with difficulties. The AP function has relatively little exposure to our clients and is not excessively sensitive work. For most firms, the challenge to outsourcing AP is not around sensitivity but scale – in all but the largest firms the AP function is small and run reasonably efficiently. Where the function is larger there is potential – Clifford Chance launched their much-heralded Delhi-based operation (strictly speaking an offshore ‘captive’) with AP.

The more common concern about F&A outsourcing in law firms is sensitivity, particularly around client information. Where firms still have largely manual billing-processes managed by central teams, there is some potential here: bill production and distribution is very well established in corporate (especially business-to-consumer) markets. Similarly well-established is outsourced debt recovery – many law firms themselves undertake this service for their clients. These services lend themselves well to outsourcing, but firms will rightly look long and hard at the credentials of potential providers in two ways:

Their ability to maintain high levels of confidentiality – bills commonly include descriptions of the work done and often detailed time/activity breakdowns; and,
Their skill in dealing with the subtlety required to handle the complex four-point financial relationship between the finance functions of the firm and the client, the instructing individual at the client and the partner inside the firm.

There could – perhaps should – be a professional service-focused accounts-receivable outsourced-service that corporate law firms could confidently buy into in both of these respects. But for now, I don’t think we have a tailored option available to us. No doubt we should ‘watch this space’ over the next year or so though.

Chris Bull is chief operating officer at Osborne Clarke. He can be contacted at chris.bull@osborneclarke.com