Best Practices (And Even Better Questions) to Apply to Your Back-Office Operations

While the economy continues to limp along and the experts continue to predict a flat legal market, it is more important than ever to ensure your back-office operations are functioning in the most cost-effective, efficient way possible. With that goal in mind, I gathered a list of best practices that we at our firm have observed law firms implement this past year. These best practices range from important contract terms to service delivery considerations, to cost-recovery strategies and outsourcing determinations that will enhance your firm's bottom line.

Contract Terms: Flexibility and Reduced Financial Exposure Are the Keys

In examining more than 100 contracts every year for the past 15 years from law firms based all over the country, here are a portion of the key terms that we deem as best practices.

• Flexibility. Each and every contract you sign should have some component of flexibility to modify volumes, service levels and spend commitments. For equipment and outsourcing contracts, this should include the ability to add, delete or modify equipment configurations without lease buyouts, penalties or termination fees.
• Lack of financial exposure. In addition to the above flexibility, some type of language restricting your firm's exposure should also be included. Many firms execute agreements that include assumption of all obligations under a contract in the event of cancellation. However, if you are canceling for poor performance or breach, your firm should not be liable for these obligations.
• Cancellation penalties. Another big pushback should be in the area of cancellation penalties. Many contracts require a payment of X months if you cancel early. Why?
• Non-solicitation fees or severance. Chances are you have language in your outsourcing agreements that addresses the labor contained under their umbrella.

Non-solicitation fees are fees that clients pay to the outsourcing vendor in cases where they hire the vendors' employees or if a third party (i.e., another vendor) hires them. The argument is that the outsourcing company incurred “costs” to hire, train and manage these employees and should, therefore, be compensated if the employees are hired away from them. With the same logic and reasoning, some vendors are requesting severance pay (which in many cases is richer than what you give your own employees) for their employees if the client terminates its contract. Isn't this why law firms pay monthly management fees? Isn't this why firms outsource?

A few good questions to ask when faced with a vendor requesting non-solicitation fees or severance during a contract negotiation are:

1. Do you guarantee that any employee I pay non-solicitation fees for will stay in the new job for the life of the agreement?
2. Will you repay me these fees if they leave or are terminated during the agreement?
3. Where will you place these people if I don't hire them? If they are placed somewhere, then how is the vendor damaged?

These non-solicitation fees are just a fancy term for hostage fees and in many situations are illegal. It's time to bring a few good questions to bear.

Service Delivery and Cost Recovery Considerations

Now more than ever you have to examine how you have been
delivering your services to your end users. Not only does delivery have to be cost-effective, but it should also account for the cost recovery aspect. Here are some of the different delivery models that we determined are best practices.

Building the church for Easter Sunday ' Mattern Near Model'. With the shift from copy to print, the increasing pushback on soft-cost recoveries and the willingness of clients to pay for hard costs, it may be in your firm's best interest to question the reasons for having a full-scale copy center on site operating for extended hours. Based upon your operational and cost recovery data, it may be feasible to shift those volumes to an overflow vendor, actually collect more dollars and decrease your fixed cost.

Giving power to the pod people. Taking this thought process one step further and taking into account the growth of the pod-type layout in law firms, a successful move can be to give these clusters a more robust copy, scan and print capability, and scale back on the centralized services. Obviously there are cost-recovery ramifications and the question of the most efficient use of the end users' time, but in the right situation, this can be highly effective.

Pricing and Your Firm's Top Five Vendor Spends

Many of the contracts we deal with are in the top five vendor spends that a law firm incurs; it is imperative to ensure your firm is receiving the most competitive pricing and terms available. However, even in this marketplace, occasionally organizations renew a contract with an incumbent vendor without getting competitive pricing or receiving a renewal proposal benchmarked.

• Get competitive. Engagement after engagement serves as an illustration that your firm can increase savings by up to 50% if you put your current spend into a competitive situation. This is not to ignore the substantial improvement in the terms and conditions your firm can also expect through testing the market. Take the time to do a request for proposal (“RFP”) and solicit responses from multiple vendors that can provide the services your firm is looking for.
• Consider alternative models and contract structures. More than 90% of all outsourcing contracts have the equipment included. If your firm is large enough, it may make sense to procure these services separately. Who is servicing your printers? Perhaps it should be the same company that supplies your multi-functional devices (“MFDs”), and look at output together.

Cost Recovery Done Well

Based upon our biannual cost recovery survey, more and more firms are receiving pushback and refusal to pay for soft-cost recoveries ranging from legal research to copies to prints. The right type of cost recovery strategy can significantly impact your billable recovery revenue.

The traditional model of cost recovery is the method that the vast majority of firms employ. This is where firms capture on-site costs through a cost recovery system with a pre-set charge for copies, facsimiles, etc. While a number of firms have given up on this method and many predict its demise, the vast majority of law firms still employ it. Here are the five best practices to ensure that your firm is maximizing the collection of your soft costs.

• Focus of firm management on the recovery of costs. The biggest reason for the success in firms that implement the traditional model is the across-the-board mentality on the recovery of soft costs. It is reflected from their engagement letters through their efforts to collect these costs. They monitor these costs through the use of dedicated resources, are not afraid to police abusers of the system, nor do they fear making changes to their overall strategy while embracing new technologies. They adhere to the principle that they are recovering justifiable costs, not charging their clients.
• Clear-cut, defensible policy. If the costs you are trying to recover are not transparent or justifiable, not only will the clients not pay for it, the billing attorneys will not bill it. A clear-cut pricing strategy based on actual costs along with a solid basis for their recovery will lead to the highest net realization of internal soft costs. Another factor to consider is firms that have the highest net realization are not the firms with rates at the higher end, but instead almost universally have recovery rates that are at the lower end of the range, reflecting sensitivity to the market and competitive in-house operations.
• Attorney buy-in. Attorney buy-in is critical to the success of the recovery of soft costs. One of the items that participants are most surprised by in our survey is that internal write-offs (attorneys) are higher than external write-offs (clients) as a percentage of net realization. As with most initiatives, the key is getting the attorneys involved. Another non-scientific reason for this attorney buy-in is the trickle-down effect it has on the other employees of the firm. If the attorneys have a recovery mentality, the secretaries will have it, along with the paralegals and the support staff. It is critical for the success of your cost recovery program.
• Dedicated resources. The firms that are the most successful in the recovery of costs have a dedicated resource to manage and oversee the recovery of soft costs. They understood the policies, analyzed the data and understood the mechanics. They were also instrumental in the strategy and the decision-making process.
• Technology awareness. One of the best practices is the adoption of technology and the recovery of these costs from their clients. Almost universally, firms that have a high realization in recovery for prints and scans recover a significantly higher percentage than firms that don't. They have accepted the changes in workflow/technology, incorporated them into their strategy and are reaping the benefits.

The Decision to Outsource: Make Each Team Member an Expert

This past year, our firm has outsourced our marketing, bookkeeping, CFO functions and, most recently, our human resources. Was it because we didn't have the resources or were doing a bad job? No. On the contrary, we were performing well ' but not outstanding, and therein lies the key difference.

We made a conscious decision to focus on core competencies ' consulting on support services and cost recovery to law firms ' and implemented the accompanying management decisions to ensure these results. This meant creating the structure where each person on our team is not only an expert in their field, but could also perform as one; it was a decision to stop dissipating valuable resources on other functions we couldn't do on a world-class level.

Law firms are in a similar situation: teams of highly trained experts whose valuable resources should not be dissipated through over-extension to areas which are not their core competencies. Focus on what you do well, and support your organization with external resources that will do a better job than your internal staff.

The Cost Factor

Is there a cost to outsource these services? Absolutely. But there is more of a cost not to do it. Take marketing. Could we do the type of marketing internally that our external consultant provides us? Probably not. Even if I hired a dedicated marketing person who has the required expertise and training and dedicated the management resources to the effort, when I compare what I pay when outsourcing these services versus our firm doing it internally, I estimate I am saving 50% annually. And then there are the results. Our revenues increased 14% last year, and we had more marketing opportunities (speeches, writing opportunities, etc.) than ever before in addition to increased name recognition.

The questions you have to ask yourself when you consider outsourcing a function are:

1. Do we really have the knowledge in-house to do an excellent job, at the highest level of expertise possible? Just because you are intelligent and can perform these functions doesn't mean that is where you should be focusing your skills or where you will be performing at the highest level possible. Heck, I used to do the payroll, and we are still trying to clean up the mistakes.
2. Do we have the time? Do I have the time to stay abreast on the new payroll changes and the impact on health care by the passing of the Patient Protection and Affordable Care Act? No ' but Paychex does.
3. Can we guarantee the results if it is done in-house? We outsource HR to Paychex in addition to having it handle our payroll. Part of the attraction was the fact that Paychex indemnifies the company against lawsuits if we follow its procedures on terminations. For a company that has spent close to $300,000 in the past five years on legal fees defending ourselves on termination lawsuits, this was attractive. Taking into account the fact we won all these lawsuits doesn't mitigate the issue ' better they never occurred.

Most often, these questions can't be answered by the person doing the function currently; only rarely will someone admit they don't have the expertise. It may seem by this argument that I am solely pro-outsourcing. In the correct situation, outsourcing is a great tool. But if you are willing to obtain the expertise, apply the necessary management time and tools, and make the tough choices on labor, then you can fulfill the aforementioned excellence criteria internally.