By Rob Mattern
Published April 2014 in Legal Management Magazine
As law firms enter into another year of flat revenue and following a mandate to reduce headcount even further to meet budgetary constraints, it is time to revisit alternatives to this diminishing course of action.
As someone who has worked with law firms for more than 25 years, it is only in the last five years that I have seen firms consider alternative strategies to reduce expenses. While economic necessity required this course of action, so did a client-driven enlightenment based on the universal necessity to become more cost-effective and efficient in the delivery of legal services. In conjunction with this movement, the recovery of costs overshadowed other types of efficiencies, offering new types of business considerations for C-level executives.
The good news is that the market – though permanently changed – has stabilized. The time has never been so important for law firm leaders to stand strong, act on the positive, get out in front of the mission-stated values of their firms, eschew negative and fear-driven decision making, and focus on driving revenues and shoring up the bottom line. Here are six positive and concrete actions that law firm chief financial officers (CFOs), chief operating officers (COOs), chief accounting officers (CAOs) and executive directors can take right now to significantly improve their firms’ overall efficiency and simultaneously increase savings.
1. ANALYZE SUPPORT SERVICES COSTS.
For the law firm decision maker faced with the highly complex and lengthy process of negotiating support services contracts, the most important first step is to factor in the cost-recovery impact based on what the firm is recovering. If you do not, you may be leaving the majority of the financial impact on the table. This is not acceptable in today’s market – and not based upon positive decision making.
By conducting the Mattern & Associates Cost Recovery Survey every two years for the last decade and conducting more than 100 analyses of what firms are recovering, writing off and giving up, I have found that the recovery of costs is not dead and rumor of its demise is exaggerated greatly. While it’s true that clients are pushing back, attorneys are writing off such things as support services. These are symptoms of poorly conceived and managed cost-recovery strategies in particular firms, and not the exemplars of best practices that are executed with high degrees of success at other firms.
For every anecdote of a client pushing back, there is an example of a firm strategically increasing its billable recoveries. One example of a firm recently repositioning its cost recovery is Armstrong Teasdale of St. Louis – one of Missouri’s largest law firms with 250 lawyers. The firm analyzed all of the firm’s support services operations and cost-recovery strategies against industry benchmarks, and gained a keen interest in an opportunity to recover printing costs – something the firm had tried previously and failed.
When asked about his firm’s experience with expanding their cost-recovery efforts, Luis Lizarribar, Executive Director for Armstrong, said, “Based upon the benchmarks, this was something the majority of the industry was doing and we were not.”
Armstrong initiated a competitive request for proposal (RFP) process, selected Copitrak for the firm’s cost-recovery software as a result, and immediately arranged to roll out a pilot program to test the system, gather feedback and confirm the projections. The pilot was successful and Armstrong decided to go firm-wide with the software and cost-recovery protocols.
According to the latest estimates, the firm is going to not only meet, but exceed the expected goals that had been set for that project at the beginning. To that end, this successful tale of a firm taking positive action is based upon its goals and market data, and not reactively striking cost-recovery programs based upon rumor, innuendo and client pushback.
2. RECOVER MORE EXPENSES THROUGH REIMBURSEMENT.
Another way to positively improve your recoveries is to recover as many legitimate expenses as possible. While there is an intense focus on the expense side, a firm can realize the real tangible benefits on the recovery side. Most firms narrowly focus on expense reduction, not reimbursement of costs; this myopia is compounded by lack of expertise in this area as well as an incorrect assumption that clients will not pay for these charges.
Would you and your firm consider a project a success if you were able to lower your costs 10 percent without impacting your services? Most firms would say, “Yes.” Well how about impacting the bottom line in a positive way by 333 percent? Chances are if you achieved this level of impact, your firm would name a conference room after you, give you a plaque or make you a partner.
This impact is certainly achievable and within reach; the secret is focusing on shifting non-billable expenses to reimbursable expenses. See the following chart:
As the table illustrates, a 10 percent reduction in costs on an item that has a 70 percent billable percentage will impact the bottom line by 3 percent (Column C: $7,500/$225,000). However, as you can see in Column D, a 10 percent increase in the billable percentage without a cost reduction will impact the bottom line by 10 percent – a 333 percent increase versus the reduction in costs.
3. USE THE REQUEST FOR PROPOSAL PROCESS TO IMPROVE BUSINESS RELATIONSHIPS.
In some instances, there is a value-added benefit when a C-level decision maker or executive director communicates and coordinates with the firm’s managing partners to achieve a win-win through the RFP process that also results in new business intake.
When we analyzed why certain firms chose certain vendors, we realized that the ability to either establish or expand a client relationship with the vendor was becoming increasingly prevalent in the decision process. In other words, firms were interested in the topline instead of the service enhancements, total expense and other factors they previously considered with vendor selection.
With outsourcing expense being in the top five spends for most law firms, the financial package the law firm is offering to the vendors is substantial. How prevalent is this practice of leveraging outsourcing spend to attain revenue? The contract has to be significant enough for the vendor to commit to a legal spend with the law firm, but in the deals that average in excess of $1 million a year, approximately 50 percent resulted in some type of quid pro quo with the selected vendor.
4. CONSIDER ALTERNATIVE SERVICE DELIVERY MODELS.
In the area of outsourcing, law firm chief operating officers, in particular, are taking a hard look at the structure of their on-site support services model, asking such questions as:
Are all of the current hours of operation necessary?
Must we staff each support area on weekends?
Is there an easier way to provide services without negatively impacting service levels or end user satisfaction?
The answers to all of these questions are definitely, “yes” – with one caveat: In each case, the “yes” is predicated upon the firm’s willingness to redefine its service delivery.
Buchanan Ingersoll & Rooney PC has an impeccable reputation and more than 450 attorneys and government relations professionals practicing in 15 domestic office locations. The leadership at Buchanan is redefining its service delivery model by modifying the level of manned services provided on-site and utilizing the vendor’s overflow facilities to provide reprographics and litigation support. Historically, firms have desired keeping this type of work on-site to charge-back and recover the costs to the clients.
Nolan Kurtz, Chief Operating Officer of Buchanan Ingersoll & Rooney, said the following about the near site solution and his motivations: “We are very interested in migrating our locations to a nearsite solution with our current outsourcing vendor – it potentially decreases our fixed costs and could provide for a cleaner recovery of the costs. Obviously we have to meet or exceed our current service levels to our end users, but we believe we could do so under this model.”
Other strategies that we are seeing in the marketplace are the transition of structuring on-site outsourcing contracts on a transactional basis and recovering the costs of services via a hard cost method.
5. INCREASE THE VALUE, SAVINGS AND SERVICE LEVELS OF A CONTRACT.
One opportunity that is easily available to every firm is maximizing the value of a support services contract once it is in place. Based on our studies, more than 90 percent of firms don’t regularly audit invoices or receive any regular performance reviews on the contracts they put in place. On average, when they do review their invoices, they will discover billing errors equal to 8 percent of the value of their yearly billings.
A key aspect of the audit process is setting up the parameters during the RFP and ensuing contract negotiations. There should be detailed monthly and quarterly reporting standards along with a scorecard containing financial penalties for non-performance. The point of a score card and penalties is not to collect the dollars attached to the non-performance, but rather to maintain the vendor’s focus on the account and rectify the issues.
An example of a firm that executes contract management techniques is Best Best & Krieger of California, a full-service law firm of more than 350 professionals located in nine offices in California and in Washington, D.C. As part of their RFP and contract negotiation process, they require their outsourcing and office supplies vendors to supply monthly and quarterly reporting with scorecards tracking their performance. “The bottom line goal is to consolidate, save costs, become more efficient and provide consistencies throughout our nine locations,” said Maria Casas, the firm’s Operations Manager.
Maybe even more importantly, however, the firm is ultimately more pleased and derives more value from the contracts in which they invested through lengthy negotiations and close monitoring. On the outsourcing contract, for instance, Casas said, “The scorecards and headcount reports are an important value-add in the contract. With nine locations, it is physically impossible for me to be present at all of the locations at the same time; with the vendor maintaining these reports, I’m able to confirm we are on track.”
In the end, through this process, Best Best & Krieger is not just more pleased with their service contracts, but has also gained more effective contracts. That’s a win-win.
6. CREATE COMPETITIVE SITUATIONS: DON’T REACT WITH FEAR.
Oftentimes, it is the chief account officer, executive director or director of administration charged with the task of renewing the firm’s support services contracts. While it is important to develop beneficial relationships with the firm’s service providers, more than 70 percent of existing contracts in law firms do not go through any type of competitive process before they are renewed.
Why don’t firms go through a competitive process? Firms give some of these more common reasons: their comfort with their current vendor, insufficient resources, lack of sufficient area expertise or a combination of the three. This brings us back to the overarching theme of this article: Firm leadershipis in its best position when acting on the positive mandates set in-house as well as acting on objective data – and not making decisions based on fear or based on negative rumors.
We spoke to Larry Schulte, Director of Administration at Thompson Coburn, on this point. Thompson had a good relationship with Novitex (Pitney Bowes Management Services) and the firm was, in fact, pleased with the services they had been provided. Why would Schulte, then, go out to market and create a competitive situation, in essence, testing a vendor that was performing well? His answer: “We felt we could improve our due diligence by doing a full-scale analysis of current pricing models and service offerings.”
Did Thompson lose Novitex during this process, or somehow harm their situation with the vendor? The answer is, no. At the end of the renewal process with Novitex, the contract was more advantageous for the firm and also included substantial savings, Schulte said.
In summary, as law firm decision makers adjust to the long-term reality of flat revenue, the time has never been so important to focus on driving cost recovery and shoring up the bottom line in every direction. The need to reduce expenses is not going away any time soon, but the method that law firm executives employ to do so must change. This next step in the expense-reduction process will require firms to increase their strategic thinking, adapt alternative service delivery models, effectively recover costs and put vendors in to competitive situations – and with every efficiency, savings and topline revenue captured, firms may save more than a job or two along the way.
ABOUT THE AUTHOR
Rob Mattern 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.