by Rob Mattern
Published March 2014
At the inception of Mattern & Associates in 1997, I had a concept that firms would be willing to pay for expertise to assist them in making their back office operations more cost-effective and efficient. I had been working on the vendor side for over a decade at two outsourcing companies, and I had paid witness to a lot of firm executives making poor outsourcing or vendor decisions. The decision makers either did not truly understanding the ramifications of outsourcing or they did not understand how to structure a contract that would fulfill their objectives.
In one case, for example, a firm was persuaded to outsource all their locations when originally the firm was only interested in outsourcing their home office. This resulted in both an unexpected increase in turnover in addition to agreeing to non-solicitation charges being placed on their own employees. An incoming vendor wanted to displace competitive equipment for another firm and persuaded that firm into a complete equipment refresh when their fleet was relatively young and did not require it. In other instances where the firms did not outsource their operations, the firms’ staff lacked the market knowledge and expertise to improve their in-house services.
To say the first couple of years of Mattern & Associates were a challenge is an understatement.
Here we are in 2014, the number of law firms outsourcing parts of their back-office is increasing and more and more firms are interested in the process as a way to control costs and increase the efficiencies in their back office operation. Why the change? To explain it fully requires one to look at the evolution of the process.
It Didn’t Work As Promised
“I look at it as, once you pull the trigger, you can’t get the bullet back in the barrel with some of these things or, if you do try, you’ll end up spending a lot more than you’re saving if they didn’t work right.”
– Gary Sokulski, Reed Smith, LLP
Many firms rushed into the outsourcing phenomenon in the early 2000s and came away disillusioned. The promises by the outsourcing vendors that all their back office problems would go away did not come to fruition. The transition from an in-house operation to an outsourced operation was rarely smooth: many employees that were outsourced felt burned and became disillusioned by the lack of management the outsourcing companies offered. The proactive management sold by the outsourcing vendors was a farce and, in many situations, the placement of the labor aspect was just a cover to sell more equipment. This led to turnover, diminishing service levels and disillusioned clients.
Many firms brought their operation or specific functions back in-house, only to be burned by the non-solicitation fees inserted into the contracts. Not a positive experience firms were rushing to replicate.
Where Are the Savings?
70% of outsourcing projects fail and 90% do not deliver the projected financial results.
– The Gartner Group
Another important aspect that must be mentioned is that in many situations, the projected savings promised at this time did not come true. Hard to believe, but in many situations the outsourcing companies themselves completed the projected savings as part of their proposal or they used soft costs as part of the projected savings. Firms did not challenge these assumptions and were later burned in the process.
This left the early adopters of outsourcing in the belly of the lose-lose, with operations that delivered neither the efficiencies nor the cost savings promised.
The Split In the Market
And so it went. Many firms brought their operations back in-house and swore off outsourcing forever. Some firms became wiser and started managing the outsourcing vendors better by inserting performance standards, monthly reporting and additional vendor oversight. Still others became more entrenched and comfortable with the mediocrity: 30% annual turnover of on-site employees, lack of a firm-wide strategic plan on equipment, onerous contract terms, etc., or worse.
Some credit must be given to the vendors, however. Some of them recognized that there was an opportunity to improve their operations. They created more defined career paths for their people; they instituted better training for their employees; they structured their contracts in a more client friendly way; and they began to proactively manage their national accounts. This evolution brought outsourcing into a much more accepted management practice that firms were willing to roll out on a national basis.
The Next Step: You Don’t Know What You Don’t Know
The firm that wanted to improve its operation either got smarter through trial and error or began to hire outside expertise.
Outside expertise at this time also began to develop; it was no longer just a pricing exercise, but more of a vested interest in defining best practices for the process or method. Attention was paid to the performance of the vendor after the contract was in place, and supplemental management reporting – along with scorecards – began to be provided by these experts.
The advantages of hiring outside expertise were:
- The firm did not have to invest the staff hours to learn all the details of the operation;
- The firm did not have to manage the RFP Process (this move alone saved firms 300 to 400 staff hours);
- The firm gained knowledge of what works and doesn’t work);
- If the firm hired the right consultant, there was a much higher degree of success and guaranteed savings; and
- The firm gained ongoing compliance management.
Outsourcing Contracts Do’s and Don’ts
The bar was, and still is, set too low. Your outsourcing contract should be a flexible, living document that reflects the changing needs of the firm. It should expand painlessly when opening new offices and adding equipment and labor, and it should contract without undue penalties or buyouts.
At a minimum, your contract should contain the following:
- Flexibility. You should have the ability to add, delete and modify equipment, services and labor at any time without lease buyouts, penalties and/or liquidated damages.
- Monthly and quarterly reporting generated by an automated job submission tool. As part of the contract, the vendor should provide you on a monthly or quarterly basis a complete operational picture of their performance.
- Detailed performance standards. Your contract should contain a detailed schedule for each function performed at each site addressing exactly what has to happen each day.
- Scorecard with dollar penalties. Right now, the only recourse under your existing contract is probably cancellation. A scorecard with escalating dollar penalties is a great way to address performance deficiencies during the contract term and provide incentives to the vendor.
- Guaranteed annual savings incentives. As part of each vendors’ sales pitch, they promise to bring you idea after idea to save your firm money. Let them put their money where their mouth is and guarantee an annual savings amount.
- A firm-wide strategic plan for equipment. There is no reason why, under an outsourcing agreement, a firm should be executing separate leases for equipment not co-terminus with the master agreement.
- Cancellation for convenience. The firm should be able to cancel the agreement at any time for any reason without penalty. There may be some equipment assumption, which should be detailed in the master agreement, but that should be all the firm has to assume.
An outsourcing contract should not contain:
- Non-solicitation fees. These are the permanent withdrawal fees of the outsourcing world. They are unfair to the employees they are supposed to protect and unfair to the firm. The basis for these fees are the supposed cost of training, etc., that the outsourcing vendor has provided over the years. Isn’t this part of the cost of doing business.
- Severance fees. Why should you be forced to pay severance for employees that are not yours? You shouldn’t, especially when they are undefined and open-ended.
- Cancellation fees. As stated under the cancellation for convenience item, there should no fees associated with cancelling a contract.
In 1997, I had a concept that firms would be willing to pay for expertise to assist them in making their back office operations more cost-effective and efficient. Here we are in 2014, and what has changed? Well, for one, we have created a marketplace that is beneficially competitive to all – law firms and vendors. Increasing the competition among the vendors improved that process and leveled the playing field so that firms were less likely to be burned. Vendors wanted to compete in the process – so much so that any fees to the experts were paid, not by the law firms, but by the winning vendor. Law firms, learning they were less likely to be burned, were more willing to seek outsourced solutions to the benefit of the firm.
And knowing an expert was the intermediary in the process improved the practices on each side: law firms were left to focus on their core competencies, and vendors continually brought proactive solutions to the table.
In the right situation and if structured correctly and managed properly, outsourcing is a valuable management tool that can help law firms achieve the win-win of improving back office operations and saving the organization money.
Too many firms undertake the outsourcing initiative with little or no expertise, no benchmarks and a request for proposal downloaded off of the Internet and then sit back and watch the vendor fail or the performance of the outsourced operation not improve. In order for any operation to succeed, you must have the knowledge to make it work. If you decide to undertake this exercise, arm yourself with the expertise to make it succeed. Your firm, the chosen vendor – and you – will be happier for it.
Rob Mattern, a member of this newsletter’s Board of Editors, is President and Founder of Mattern & Associates, LLC. Mattern & Associates assists law firms in developing an unbiased strategic direction for their business processes while improving both the cost-effectiveness and the recovery of expenses for these services. For more information on Mattern & Associates, visit matternassoc.com, check out their blog, www.matternoffact.com, or follow them on Twitter @MatternOfFact.