by Rob Mattern
Published September 2014
In this continued age of economic uncertainty and transition for law firms, the back office and support services functions have become an increased target of opportunity. Firms are thinking more strategically about how to reduce and recover back office costs, increase efficiency, and implement newer technologies, all while maintaining or increasing services to the end users. This is indeed a tall order for any firm to achieve.
Law firm decision makers now need to consider how the systems they put in place today will function strategically in five to 10 years. According to the Altman Weil Law Firms in Transition Survey 2014, many firms realize that they need to plan better for their future:
“Since the recession, when law firm were planning in six month or one year increments (if they were doing so at all), the planning outlook has stretched out again. Sixty-nine percent of firms now say they have a basic planning horizon of three to five years. “
The best way to guarantee that the work you do today will be relevant far into the future is to “future proof” your outsourcing contracts and the associated services that support these areas. This means structuring your contracts and services so that the work you do today is in place in five to 10 years, even with changing demands and market conditions. Firms that fail to do so risk relapsing back into service mediocrity and/or perhaps most damaging, escalating costs.
Firms have increasingly learned the importance of significantly driving costs downward through a competitive request for proposal process; now is the time to also prioritize this momentum by additionally controlling and decreasing costs going forward.
As neutral consultants, Mattern & Associates is exposed to every kind of back office scenario, including both outstanding in-house operations and equally outstanding outsourcing operations. We’ve noticed that the outstanding in-house operations we’ve seen do three key things:
- Pay their people competitively for the position;
- Procure their equipment and technology intelligently; and
- Proactively manage the operation.
Unfortunately, most in-house operations fail in one or more of these areas. If this is the case, outsourcing might very well be the right solution. Rather than ceding control over operations, as some firms may fear, we’ve found that a proven benefit of outsourcing is that it places you in the driver’s seat, with the ability to maintain, control and decrease costs. Of course, this is possible in-house as well, but it can be much more difficult to accomplish while dealing with the potentially sensitive staffing and labor aspects of the operation.
The contract structure you have in place is paramount to keeping your outsourced situation competitive. Too many firms select a vendor and simply just renew after the initial term without first checking market pricing. Based upon the data from the Request for Proposal processes we have run for firms that did not seek competitive proposals during their last renewal, the average savings these firms achieved by going through a competitive renewal process for their current contract is in excess of 30%.
In order to structure your contract correctly, what’s included is just as important as seeking the best terms and prices. As Peter Drucker stated, “you can’t manage it if you can’t measure it.” Your monthly or quarterly reporting package should always include a detailed analysis of volumes, headcount, service levels and recommendations based on this data.
Your contract should include the following.
Monthly and Quarterly Reporting
Quarterly Scorecard Process
Based upon the agreed-upon performance standards, every contract should have a scorecard with penalties. Obviously, the goal is not to collect the penalties, but rather to make sure the vendor is keeping its eye on the ball. Vendors will argue that penalties are counter-productive and prevent them from focusing on solving the issue (yes, a vendor actually argued this point). In actuality, if a vendor is doing its job correctly, it should welcome a scorecard process because it protects the vendor from instances of one-off complaints (e.g., “yes we did make a mistake but our on-time performance is 99.99 %”). It is a quarterly reminder of how the vendor is performing, and if it is performing well and creating additional opportunities with the client.
Guaranteed Implementable Yearly Savings
Every contract should have yearly savings goals with penalties for the vendor to deliver implementable savings. If a vendor is doing its job, it should constantly be monitoring your operation and services to find ways to reduce your costs. This may involve modifying service levels, adjusting volumes and changing equipment configurations. If your vendor is not bringing these document recommendations to your attention, you have to consider that it is not doing the best job for you.
Capped Yearly Price Increases with Options
Every contract should contain a capped yearly increase keyed off of CPI. In addition, this increase should only apply to the labor aspect of the contract if it is an outsourcing contract. Too many firms allow increases across all areas that are — for example, equipment leases.
Another area to consider is an optional fixed labor contract. Part of the outsourcing vendor’s responsibility and sales pitch is that it manages the labor force it supplies as part of the agreement. Too many vendors are not proactive in this regard and are either placing warm bodies to fulfill the contract, or not promoting good employees up through the ranks, thereby increasing your labor costs.
A good vendor should be constantly recruiting and placing talented, trained people into your operation, allowing the vendor to promote its most experienced (heavily compensated) people out of your account into more substantial roles in its organization or other accounts, and replacing them with lower-compensated employees — in other words, managing its workforce to keep your costs static. Granted there are other factors (healthcare, etc.) that may warrant increases, but by removing the salary component, we are addressing the largest aspect.
The concept of flexibility without cost in regards to services, labor, volumes and equipment is another key component of your contract. Part of future-proofing is setting your firm up to adapt to any future disruptions in technology or changes in the market without increasing costs or interfering with operations.
You should be able to add or delete services at any time throughout your contract, and your costs should be adjusted appropriately, preferable with unit costs already outlined in your contract.
Firms outsource labor in order to get out of the business of managing that labor. Why would you agree to severance or any penalties associated with that outsourced labor force? You should be able to add or delete labor at any time through the contract at your discretion.
Your contract should be structured so that it accurately reflects the services provided on a month-to-month basis. This means a zero-based contract for equipment or any outsourcing contract that contains equipment. Stay away from minimums, regardless of the certainty of hitting the volumes.
This is another area where maintaining flexibility and control is crucial. A portion of your equipment fleet should be able to be added, deleted or right-sized at any time throughout the life of your agreement. To accomplish this, you should avoid signing leases, or if you do, there should be a percentage of the fleet (30%-40%) that can be managed. Will vendors offer this up without being asked? No. Will there be a slight cost for this flexibility? Yes, but it will be less expensive over the long run if you are forced to buyout equipment due to an office closing or your volume decreases.
Semi-Annual Compliance Reviews
According to Gartner, “70% of outsourcing engagements fail and 90% fail to reach their financial goals.”
How many times have you gone back and revisited a contract you negotiated and updated it or made sure the original projected savings came true? These semi-annual reviews can be invaluable in determining if what you thought was going to work is, in fact, working and delivering the savings to the firm and services to the end user you originally scoped.
In professional sports, when an athlete signs a contract and has a good year, sometimes that athlete re-negotiates his contract due to the fact he “outperformed” it. For law firms, if your targeted spend rate is $1 million dollars a year in office supplies, and you execute a five-year agreement, and hit that $5 million dollar spend in year three — you should absolutely look at an early renewal. Will the vendor approach you first? Chances are it will not, because the pricing it submitted to you was based on your spend level, not at the higher rate at which you currently run. When shouldn’t you? When a vendor approaches you and you still have years left on your contract and your services and volumes have stayed the same.
Vendors push clients to renew early because they want to dissuade you from talking to other vendors and comparing pricing and terms. In fact, they will do everything in their power to keep you from checking the market. What is the vendor worried about? If its pricing is fair, it is doing a good job and its terms are competitive, the vendor should have nothing to fear from an open competitive request for proposal process. The vast majority of contracts that law firms sign should be out to bid every time they come up for renewal due to the basic fact that they are not structured to maintain costs for an extended period of time.
When was the last time a vendor came to you and said that it was able to modify services without impacting the end users and, in addition, reduce its price without you approaching it first? Probably when Nixon was still in office. If your contract is structured correctly, the mechanisms are still in place, and you are managing it effectively, then the vendor will have no choice but to do it on a proactive basis.
To guarantee that the work your firm does today will be relevant tomorrow, you need to future-proof your contracts. Each individual situation is different, but by structuring your contract correctly and maintaining it properly, you will be two huge steps toward that goal.
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.