The fallout from the financial crisis as well as growing threats from the legal process outsourcing industry is making it even more difficult for legal practices to juggle client expectations and fee income, says Peter Collins of Retain International. Many are looking to manage their own resources more effectively in order to compete against cheaper foreign competitors and deliver value for money for their clients.
All businesses strive to manage their resources as efficiently as possible. But for law firms, especially smaller and mid-tier firms, the fact that staff represent both their biggest cost and biggest source of revenue has been brought into sharp focus given the reduced pool of commercial work following the financial crisis.
Law firms globally saw a 6% reduction in fee revenue during 2009/10, the first decline in over a decade according to analysis by TheCityUK. The situation isn’t getting any better as legal process outsourcing (LPO) firms start to look increasingly attractive to businesses looking to cut costs.
At the same time, bigger companies are facing internal pressure to improve processes and do more with less, and this will have a knock on-effect on the UK legal services industry. According to research from Mari Sako, a professor at the University of Oxford’s Saïd Business School, general counsel in big businesses are considering an increasingly “production line” style approach to legal work, outsourcing some of the more process driven activities to LPO firms and other similar suppliers.
Often based in India, these types of firms can do some of the work of a UK firm, but for a fraction of the cost. With the heads of legal departments having to show where they can reduce costs, LPO firms appear to offer a simple solution.
For legal service providers in the UK, this is compounding the issues that they are already facing. Law firms have already experienced a tricky 12 months, with significant delays in the processing of payments by the Legal Services Commission, changes to personal injury funding and the increasing cost of indemnity insurance premiums.
These issues have put smaller firms in particular under immense strain. Many are looking at mergers with foreign firms to help them cater for the increasingly international nature of their clients and are also looking inward to improve their competitiveness.
In order for UK-based law firms to compete with LPOs and offer an attractive value proposition, effective resource management is going to be critical to creating client value, enhancing profitability and maintaining a competitive edge. Work must be planned, resourced and executed in a way that allows a firm to find the right combination of team members and sector knowledge to maximise billable hours at lowest cost and achieve the best possible margin.
They also need to know that they have the headroom to take on new cases and clients. This is particularly challenging in the current economic climate, where headcounts have been reduced and recruitment programmes frozen. The more clients there are in the pipeline, the greater the risk that the firm will be unable to deliver effectively. At the same time, having visibility across their business is just as important in terms of ensuring transparency for clients.
Faced with competition from a much cheaper, foreign workforce, UK law firms have to take a very structured and analytical approach to the way in which they allocate work and resources in the business. Simply using a basic spreadsheet package to track who is doing what will never provide the level of foresight and analysis firms need to effectively manage resources.
Although many firms continue to use conventional spreadsheets to plan projects and allocate resources, they are finding it increasingly difficult to maintain visibility across their organisation and manage resources effectively.
Without the means to report on and analyse internal resources, senior manage
ment has no way to identify where resources are being under-utilised or where spare capacity may exist. Trying to offer services at competitive rates is therefore very difficult, making it a challenge to go up against cheaper outsourcing providers. It can also leave the business vulnerable to spikes in demand if more cases or clients are taken on, or existing cases run over. Furthermore, without visibility across the business, a firm is unable to identify and analyse trends that would otherwise help to improve the business and plan for future work.
A growing number of services-based businesses such as law firms now use resource management and staff planning software to efficiently manage the distribution of client matters amongst their professional staff. These systems can also be used to monitor the amount and type of staff provisioned in support of a project according to the specific equipment and feature requirements of each individual case or client – as well as the requirements of the staff tasked with handling it.
Much of the success of smaller law firms is now going to hinge on their ability to successfully deliver on a client’s demands while offering a value proposition that can effectively compete with the legal “production line” being offered by outsourcing firms. Often, this is based on the law firm having sufficient resources available to dedicate to the client and making the best use of the resources the firm has available.
The key challenge is to find the optimum combination of experience, sector knowledge and pay grade to ensure the most cost-efficient resources are allocated to the case. Thus the ability to match resources based on these factors and book them in advance provides firms with the confidence that they have the headroom to deliver. It also allows firms to identify and address any potential knowledge and experience shortages in advance.
When looking to secure staff for client work, a major frustration is that senior management often request the same staff each time, because they know that certain individuals have the experience and knowledge necessary to do the job. Aside from the obvious problem that these individuals might not be available or become overworked, there is the wider issue of talent management at play. Firms must provide opportunities for personal development and growth, especially since many are now operating with reduced workforces. Being able to use new work to expand the capabilities of staff and enable them to grow as individuals not only means they can be charged out for more in the future, but that they also remain motivated because they have the opportunity to diversify.
Delivering on client expectations
By operating a much leaner operation with optimum staff utilisation, law firms are able to maximise their return on investment in terms of allocating resources against a client’s budget and ensure that cases are not being over-serviced and staff not over-worked, making the best use of limited resources and ensuring they maintain a competitive edge. In other words, client expectations can be managed efficiently and delivered upon to agreed service levels, without being exceeded and thus impacting on profitability.
At the same time, budget over-run can be identified early on when allocating resources, meaning terms are easier to subsequently renegotiate. This ensures that a high standard of client service is maintained.
Clearly, the external threats from LPO firms are presenting domestic law firms with a type of threat they have not had to face before. To effectively combat this challenge, all law firms are going to need to reassess the way in which they work. Now more than ever, the benefits of using technology to effectively manage resources cannot be underestimated.
Forecasting future requirements assures firms that they have the headroom to deliver on client expectations and flag potential bottlenecks and skills shortages well in advance. By being able to mix and match skill-sets and experience, law firms not only benefit from allocating the most cost-efficient resources and the opportunity to further the development of staff, but ensure the long-term sustainability of their business in what is an increasingly competitive and globalised market.
Ultimately, law firms in the UK are going to have to fundamentally change the way in which they manage resources if they are to cut costs and compete with outsourced, foreign competition.
Peter Collins is a director of Retain International