Outsourcing in the New Legal Model

As anyone who has been working with or in law firms for the past four years will attest, the legal industry as a whole has changed dramatically. This change, while primarily economically based, has impacted the traditional legal model financially, operationally, and even socially. Gone with the wind are the days where clients did not question invoices, every matter was hourly based, all associates eventually made partner and every client paid 25 cents per copy. There's a new legal model in town ' ushered in by a new era of law firm client ' and both require firms to streamline operations and capture cost efficiencies at every level while also maintaining the high quality of services on which their reputations are staked.

While this change has created hardship for some organizations, it has also created opportunities for firms that have been able to shift their management paradigm to embrace these changes. The old way doesn't work anymore, and not only in the areas of partnership leverage, career track and management structure, but also in the areas of soft cost recovery, back office operations and the use and structure of outsourcing. Just as the traditional legal model has died, so too has the traditional outsourcing model.

A Look at Outsourcing

In the traditional model of outsourcing, a firm took some internal duties such as copying, mail and facsimile, selected a vendor to manage those services onsite, signed a three- to-five-year contract, and then charged-back to the client for these services under the traditional cost recovery model with pricing that bore little or no connection to the costs the firm was paying for these services. While many firms still employ this model, the end is in sight. With the support services model shifting from a copy/fax to a print/scan/lit support basis and with firms reluctant to charge clients any new costs due to the increased scrutiny they are under, firms are faced with a declining revenue stream in this area that ultimately will make this model obsolete.

There is no successful option that says to beat a dead horse; the best option is to move forward. In terms of outsourcing, how do firms use and structure outsourcing most effectively under the new legal model and what are the opportunities that are available? In order to address that question adequately, here are four baseline assumptions about the successful traits all competitive and profitable law firms are now required to possess under the new legal model:

1. Flexibility;
2. Transparency in the recovery of costs;
3. Firm-wide strategies to keep costs as competitive as possible; and
4. Leverage technology and alternative methodologies to drive down costs.

1. Flexibility

Support Services Contracts

As many firms discovered when they were forced to close unprofitable offices, their support services contracts (MFD equipment, offsite records storage, etc.) were not as flexible as they thought they were or had been represented to be. Many firms were stuck with an overabundance of equipment or were forced to pay early termination fees or penalties. Every contract entered into should be negotiated to minimize the restrictions for cancellation or early termination.

Specifically, the chart on below is a sampling of some of the typical support service contracts and the types of flexibility firms should negotiate into them.

2. Transparency in the Recovery of Costs

Besides alternative fee arrangements, the erosion in the recovery of soft costs is of major concern to the parties responsible for the financial health of law firms. With 86% of firms reporting client pushback/refusal to pay for legal research costs and 51% reporting the same for telephone, and with net realizations decreasing across the board, firms are experiencing a retrenchment on the concept of cost recovery. The idea of transparency does not only apply to external forces (clients) but even more so to the internal forces (billers) where the majority of write-offs occur.

When there is a lack of trust on the costs that are being charged to clients, and the billing attorneys are not in a position to knowledgably defend them, the entire system is eventually doomed to failure. According to the Mattern & Associates 2010 Cost Recovery Survey, on average, less than 50% of internally generated soft costs are ultimately paid by the client. On the flip side, in excess of 98% of hard costs are ultimately paid. Why? Verification. In other words, internal and external constituents trust that hard costs are legitimate costs.

As a firm, you have the choices listed in the first chart below.

On a related note, if the firm is not migrating to a print/scan model of cost recovery in the next two to three years, then the question of which strategy to employ will be mostly moot. At the current rate of decline of copy volume and the explosion of print and scan volume, any system based just on copy volume alone will not be sustainable in the next two to three years.

3. Firm-Wide Outsourcing Strategies/Contracts to Keep Costs Competitive

Firm-Wide Contracts Priced Competitively

To maintain competitive cost structures for your outsourcing contracts, firm-wide contracts to leverage spending are no longer optional, they are mandatory. The good news is that the quality of vendors inhabiting these spends has improved dramatically over the past decade. With these two forces combined, there is no logical reason not to consolidate services with one national, and if appropriate, international vendor.

The question becomes, however, how do you maintain that competitive pricing? The answer is simple: by keeping it competitive. While this may sound circular, firms that automatically renew with their vendors will eventually lose their competitive pricing. All vendors are under incredible pressure to maintain market share ' use that market pressure to your advantage. Every contract renewal should be met with a comprehensive review of advances in the marketplace.

The second chart below is based upon what my consultancy experiences when working with some of the nation's largest law firms. It clearly illustrates how many firms make out at contract renewal time. Firms that just renew with their current vendor based upon the renewal offered by the vendor realize about a 3%-6% savings. Firms that issue a “closed” RFP to their current vendor make out a little bit better. Last, firms that create a competitive situation, or an “open” RFP with other vendors involved, will end up with the most competitive pricing. Firms that choose a closed RFP, however, are not just shooting themselves in the foot. Occasionally, a firm indicates a level of satisfaction with the current vendor that there is not even the slightest intention of switching vendors from any RFP; occasionally, and not as sweet, the structure of the current contract makes the inclusion of any other vendor in the RFP prohibitive. The biggest takeaway is that there ought to be no instance or explanation for automatic contract renewal; automatic contract renewal with any vendor clearly should be avoided as it decreases savings and services overtime for the firm.

4. Leverage Technology and Alternative Methodologies To Drive Down Costs

In the areas that outsourcing touches, the opportunity to leverage technology to drive down costs and/or reduce headcount is abundant. There has been an explosion in practice management software that integrates time, billing, case and matter management, increasing the efficiencies of the billing attorneys.

Also, a number of our clients are considering decreasing the level of back-office services offered on site and providing these services through third party vendors in nearby locations. The argument is simple:

• The technology is available to make this transparent to the end user.
• The advantage of offering these services onsite has diminished. In many situations, a firm is “losing” money on these services through the erosion of the cost recovery revenue.
• Many firms cannot afford the expense of technology, hardware and resources to offer the services on a 24/7 basis that today's legal market requires.

An alternative that utilizes both technology and an alternative methodology is the fact that some firms are relocating their back office and low-end legal functions to less expensive geographies with less expensive labor. Following the lead of Orrick, Herrington & Sutcliffe, a growing number of firms are choosing this strategy with mixed results; however, the premise is sound and the results, if achieved, will be impressive. Probably two of the most recent examples of this are Pillsbury Winthrop Shaw Pittman and WilmerHale. Pillsbury sent its back-office functions ' including information technology, finance, new client intake, and word processing ' to Nashville, and WilmerHale sent its non-legal work and document review to an office in Dayton, OH.

Finally, another alternative methodology that is exercised by a growing number of firms is to hire an expert consultancy to spearhead contract negotiations and oversee the vendor relationship once it is in place. This can save time for permanent staff and allow staff to focus more effectively on their own areas of expertise; this may also allow the firm to avoid placing additional, and costly, permanent head count on the payroll to oversee these types of cyclical contracts.

Don't Beat a Dead Horse: Move Forward in the New Legal Model

In summary, firms that have embraced the above strategies have more than held their own and, in some cases, flourished under the new legal model. The keys as I highlighted above are:

• Building flexibility into your contracts;
• Developing a transparent, defensible cost recovery model;
• Firm-wide strategies on all outsourcing contracts; and
• Leveraging technology and embracing alternative methodologies.

Will there be failures and some disappointments? Yes. The bigger risk, however, is to maintain the status quo and not recognize the winds of change, where they're coming from, and why. The consequences for that will be far worse in the long run than any short-term setback.

[IMGCAP(1)]

[IMGCAP(2)]

Robert C. (Rob) Mattern is President and Founder of Mattern & Associates LLC, a consultancy firm dedicated to decreasing law firm overhead expenses through developing in-house and outsourcing strategies. Contact him at www.matternassoc.com.

As anyone who has been working with or in law firms for the past four years will attest, the legal industry as a whole has changed dramatically. This change, while primarily economically based, has impacted the traditional legal model financially, operationally, and even socially. Gone with the wind are the days where clients did not question invoices, every matter was hourly based, all associates eventually made partner and every client paid 25 cents per copy. There's a new legal model in town ' ushered in by a new era of law firm client ' and both require firms to streamline operations and capture cost efficiencies at every level while also maintaining the high quality of services on which their reputations are staked.

While this change has created hardship for some organizations, it has also created opportunities for firms that have been able to shift their management paradigm to embrace these changes. The old way doesn't work anymore, and not only in the areas of partnership leverage, career track and management structure, but also in the areas of soft cost recovery, back office operations and the use and structure of outsourcing. Just as the traditional legal model has died, so too has the traditional outsourcing model.

A Look at Outsourcing

In the traditional model of outsourcing, a firm took some internal duties such as copying, mail and facsimile, selected a vendor to manage those services onsite, signed a three- to-five-year contract, and then charged-back to the client for these services under the traditional cost recovery model with pricing that bore little or no connection to the costs the firm was paying for these services. While many firms still employ this model, the end is in sight. With the support services model shifting from a copy/fax to a print/scan/lit support basis and with firms reluctant to charge clients any new costs due to the increased scrutiny they are under, firms are faced with a declining revenue stream in this area that ultimately will make this model obsolete.

There is no successful option that says to beat a dead horse; the best option is to move forward. In terms of outsourcing, how do firms use and structure outsourcing most effectively under the new legal model and what are the opportunities that are available? In order to address that question adequately, here are four baseline assumptions about the successful traits all competitive and profitable law firms are now required to possess under the new legal model:

1. Flexibility;
2. Transparency in the recovery of costs;
3. Firm-wide strategies to keep costs as competitive as possible; and
4. Leverage technology and alternative methodologies to drive down costs.

1. Flexibility

Support Services Contracts

As many firms discovered when they were forced to close unprofitable offices, their support services contracts (MFD equipment, offsite records storage, etc.) were not as flexible as they thought they were or had been represented to be. Many firms were stuck with an overabundance of equipment or were forced to pay early termination fees or penalties. Every contract entered into should be negotiated to minimize the restrictions for cancellation or early termination.

Specifically, the chart on below is a sampling of some of the typical support service contracts and the types of flexibility firms should negotiate into them.

2. Transparency in the Recovery of Costs

Besides alternative fee arrangements, the erosion in the recovery of soft costs is of major concern to the parties responsible for the financial health of law firms. With 86% of firms reporting client pushback/refusal to pay for legal research costs and 51% reporting the same for telephone, and with net realizations decreasing across the board, firms are experiencing a retrenchment on the concept of cost recovery. The idea of transparency does not only apply to external forces (clients) but even more so to the internal forces (billers) where the majority of write-offs occur.

When there is a lack of trust on the costs that are being charged to clients, and the billing attorneys are not in a position to knowledgably defend them, the entire system is eventually doomed to failure. According to the Mattern & Associates 2010 Cost Recovery Survey, on average, less than 50% of internally generated soft costs are ultimately paid by the client. On the flip side, in excess of 98% of hard costs are ultimately paid. Why? Verification. In other words, internal and external constituents trust that hard costs are legitimate costs.

As a firm, you have the choices listed in the first chart below.

On a related note, if the firm is not migrating to a print/scan model of cost recovery in the next two to three years, then the question of which strategy to employ will be mostly moot. At the current rate of decline of copy volume and the explosion of print and scan volume, any system based just on copy volume alone will not be sustainable in the next two to three years.

3. Firm-Wide Outsourcing Strategies/Contracts to Keep Costs Competitive

Firm-Wide Contracts Priced Competitively

To maintain competitive cost structures for your outsourcing contracts, firm-wide contracts to leverage spending are no longer optional, they are mandatory. The good news is that the quality of vendors inhabiting these spends has improved dramatically over the past decade. With these two forces combined, there is no logical reason not to consolidate services with one national, and if appropriate, international vendor.

The question becomes, however, how do you maintain that competitive pricing? The answer is simple: by keeping it competitive. While this may sound circular, firms that automatically renew with their vendors will eventually lose their competitive pricing. All vendors are under incredible pressure to maintain market share ' use that market pressure to your advantage. Every contract renewal should be met with a comprehensive review of advances in the marketplace.

The second chart below is based upon what my consultancy experiences when working with some of the nation's largest law firms. It clearly illustrates how many firms make out at contract renewal time. Firms that just renew with their current vendor based upon the renewal offered by the vendor realize about a 3%-6% savings. Firms that issue a “closed” RFP to their current vendor make out a little bit better. Last, firms that create a competitive situation, or an “open” RFP with other vendors involved, will end up with the most competitive pricing. Firms that choose a closed RFP, however, are not just shooting themselves in the foot. Occasionally, a firm indicates a level of satisfaction with the current vendor that there is not even the slightest intention of switching vendors from any RFP; occasionally, and not as sweet, the structure of the current contract makes the inclusion of any other vendor in the RFP prohibitive. The biggest takeaway is that there ought to be no instance or explanation for automatic contract renewal; automatic contract renewal with any vendor clearly should be avoided as it decreases savings and services overtime for the firm.

4. Leverage Technology and Alternative Methodologies To Drive Down Costs

In the areas that outsourcing touches, the opportunity to leverage technology to drive down costs and/or reduce headcount is abundant. There has been an explosion in practice management software that integrates time, billing, case and matter management, increasing the efficiencies of the billing attorneys.

Also, a number of our clients are considering decreasing the level of back-office services offered on site and providing these services through third party vendors in nearby locations. The argument is simple:

• The technology is available to make this transparent to the end user.
• The advantage of offering these services onsite has diminished. In many situations, a firm is “losing” money on these services through the erosion of the cost recovery revenue.
• Many firms cannot afford the expense of technology, hardware and resources to offer the services on a 24/7 basis that today's legal market requires.

An alternative that utilizes both technology and an alternative methodology is the fact that some firms are relocating their back office and low-end legal functions to less expensive geographies with less expensive labor. Following the lead of Orrick, Herrington & Sutcliffe, a growing number of firms are choosing this strategy with mixed results; however, the premise is sound and the results, if achieved, will be impressive. Probably two of the most recent examples of this are Pillsbury Winthrop Shaw Pittman and WilmerHale. Pillsbury sent its back-office functions ' including information technology, finance, new client intake, and word processing ' to Nashville, and WilmerHale sent its non-legal work and document review to an office in Dayton, OH.

Finally, another alternative methodology that is exercised by a growing number of firms is to hire an expert consultancy to spearhead contract negotiations and oversee the vendor relationship once it is in place. This can save time for permanent staff and allow staff to focus more effectively on their own areas of expertise; this may also allow the firm to avoid placing additional, and costly, permanent head count on the payroll to oversee these types of cyclical contracts.

Don't Beat a Dead Horse: Move Forward in the New Legal Model

In summary, firms that have embraced the above strategies have more than held their own and, in some cases, flourished under the new legal model. The keys as I highlighted above are:

• Building flexibility into your contracts;
• Developing a transparent, defensible cost recovery model;
• Firm-wide strategies on all outsourcing contracts; and
• Leveraging technology and embracing alternative methodologies.

Will there be failures and some disappointments? Yes. The bigger risk, however, is to maintain the status quo and not recognize the winds of change, where they're coming from, and why. The consequences for that will be far worse in the long run than any short-term setback.

[IMGCAP(1)]

[IMGCAP(2)]

Robert C. (Rob) Mattern is President and Founder of Mattern & Associates LLC, a consultancy firm dedicated to decreasing law firm overhead expenses through developing in-house and outsourcing strategies. Contact him at www.matternassoc.com.