Why mid-tier firms must take the long view on costs

Today, mid-tier law firms in the UK face a toughest challenge – maintaining profitability amid fierce competition. Unlike the magic circle and top 10 law firms – which have leveraged their stature to grow revenues (by increasing chargeable rates despite pricing pressures and undertaking minimal business adjustments) – the mid-tier category represents squeezed margins and falling profit per partner (PEP). This is a compensation model law firms are reluctant to relinquish.

However, lock-step is becoming increasingly difficult to uphold in this market category and economic pressures are forcing ‘change’ – in business operation, business model and organisation. Tactics such as downsizing, merger and acquisition and cutting administrative costs have been the typical methods adopted to maintain profits thus far. Unlike previously,firms can no longer make money despite what they do.

Henceforth, though, the impact of cost control alone on organisational profitability will be minimal and even less on PEP. This is primarily because of the fixed nature of the business services cost base – premises, depreciation of assets, IT infrastructure, and perhaps most importantly, their people. You can only reduce administrative costs by so much.

Firms need to think beyond short-term cost reduction measures, and consider innovative sourcing and procurement techniques, strategic human resource management, business intelligence and cost/profitability analysis, and an overall modern attitude towards technology and business practices. These tactics would allow firms to build flexibility and agility into the business, rather than undertaking knee-jerk reactions such as headcount reductions and hastily conceived business alliances. Such methods do not necessarily address deep-rooted business problems triggered by the commercial climate.

Better utilisation of human resources is imperative. A recent EY survey highlights that staff costs of the top 50 UK law firms accounts for 40% of their turnover. The big challenge that firms face in better utilising their human resources is a lack of actionable information. Having acquired multiple business applications over the years across functions, firms are finding it hard to get these systems to talk to each other, share and assimilate data. All too often I hear comments such as: ‘We know we need to make informed decisions regarding resourcing, but we don’t have an accurate picture of the business today.’

Similarly, from a management perspective, lack of information is a major constraint when it comes to strategic decision-making. Often key business performance metrics are slow to be delivered after month- and year-end, and even then they do not always contain the relevant information. When lawyers become practice group Leaders, typically there is no training programme to help them become star business managers. The following information should be their lifeblood: which clients are profitable; what does a profitable client actually look like; what options are best for cross-selling services to other sectors; how can I pitch for work knowing what the costs and profit margins are; and how can I ensure that we use the right people of the right matters. 

In reality, though, responses to these questions are based on gut instinct rather than logic and insightful business intelligence. A strategic and structured approach to pricing, matter planning and costing in general is required. Over time, the historical data will throw up significant insight into profitability, process inadequacies and areas for cost improvement.  

Additionally, the consequences of inconsistent and inaccurate data are wider still and snowball through the firm. A simple task such as raising an invoice, I am told, can take between two to three days because data is not only difficult to acquire, but because it is handled so many times in multiple locations that inaccuracies creep in. This unnecessary time spent on raising invoices is a cost to the firm. The billing guide remains everyone’s worst nightmare and partners regularly receive 60-70 emails per day from credit control which they do not read as they are cynical about the data accuracy around invoicing. Furthermore, reconciling expenses against matters when the data is stored in different systems and formats is another challenge, especially on large matters where fee-earners throw their time and expenses into the bucket hoping to look utilised.

Procurement is another area that law firms must nail, too. Owing to disjointed systems, leakage is a major issue for law firms. How many times does it happen that costs of third party services are not included in a client invoice? Subsequently, trying to recover the cost after the matter has closed is not only seldom successful, but also causes much angst to clients and the firm. At the very least, control and visibility of the purchasing process – from requesting a purchase order through to accounts payable – is a must. Taking the following steps could also be of great value: procuring matter specific resources, such as staff counsel or new staff with specific expertise, and considering an integrated asset management capability that looks at business resources comprehensibly.

All the above mentioned challenges can to a large extent be overcome by adopting widely prevailing approaches to business practices and technology. While larger firms may have big budgets to integrate old and new business practices and systems, for mid-tier firms, it is not a viable option. A single working platform that ties in all the facets of business, delivers immediate efficiencies, which in turn enhances profitability, and, most importantly, benefits clients too. Making business changes with client interests at the forefront, deliver long-term gains.

 Stu Gooderham is head of client relations at LexisNexis Enterprise Solutions