Wednesday, October 31, 2012

Outsourcing -- How it Works in Practice

Parsley Sage Rosemary & Ginsburg llp
“always a reasonable result for a reasonable fee, always”

All Partners and Senior Admin Staff
Mike Marget
October 31, 2012
Outsourcing – How it Works in Practice

“Who wants to manage the accounts payable clerks, and the billings?”  Thus spoke practice management consultant Peter Zeughauser as he predicted that large law firms eventually will outsource most of their back office functions.  The quote appeared in a Wall Street Journal article discussing the many ways large firms are trying to reduce their back office costs.  I think Peter is correct.[i]  Outsourcing makes business sense – it reduces costs, increases efficiency and frees up management time for more important things.  Not just for large firms, it makes sense for small and midsize firms, too.  Let me explain.

The purpose of this memo is to make the business case for small/midsize firms outsourcing their accounting and billing functions to an experienced, qualified outsourcing service provider (“OSP”) – someone like 4L Law Firm Services LLC (“4L”).

This is the third of three memos inspired an article appearing in the  Wall Street Journal article on October 7.  The others:  WSJ—Big Firms Wring Costs from Back Office Tasks and Outsourcing—How it Works in Theory.

Is it even Possible to Outsource a Law Firm’s Accounting & Billing?
Before making the business case, let’s first discuss whether outsourcing is even possible?  The answer is “yes.”  Advances in Internet connectivity and desktop virtualization make outsourcing not only possible, but practical for small and midsize firms.

With today’s technology, a law firm’s back office no longer needs to be located in the same building or even same city as the firm’s lawyers.  Big firms discovered this long ago and resisted duplicating accounting staff in every office. 

The same technology which permits big firms to centralize their accounting enables small and midsize firms to outsource.  Regardless of where the software resides, back office and front office personnel in different locations can utilize the same applications.  This allows billing and general ledger accounting tasks to be assigned to individuals in one city and for lawyers in another to enter time, initiate disbursements (with the checks printing to any designated printer in the lawyers’ office) and have real-time online access to a myriad of actionable financial data to manage their practice, their client work and the firm.

Outsourcing Lowers Costs for the Law Firm
The primary promise of outsourcing is quality back office services at a lower cost than the law firm can provide with internal resources.

Quality service and lower cost are made possible through a combination of economies of scale and process improvement.  Because it services multiple firms, 4L handles a higher volume of accounting and billing transactions each month.  With this greater volume, 4L is able to leverage its accounting workforce more efficiently than any single law firm with lower volume could hope to accomplish on its own.

In addition, because the accounting and billing operations constitute 4L’s front office, 4L has invested in superior accounting software – from OrionLaw Management Systems, Inc. – and assembled an experienced law firm accounting staff capable of handling the workflow more efficiently and productively than any single firm could duplicate with internal resources.

Through a combination of higher volume, improved technology, experienced talent and process improvement, 4L provides the accounting and billing services to law firms at lower cost and passes along significant savings to its client law firms.

The following chart illustrates the potential cost difference to law firms using internal resources versus outsourcing its accounting and billing tasks:

Law firms with 11-to-20 lawyers spend on average $7,005 per lawyer annually on accounting and billing staff salaries and benefits.  This data is from the 2011 Small Law Firm Economic Survey.[ii] 

Using the Survey census data, I applied 4L’s service fee pricing model to the participating firms.  The outsourcing option would cost those firms an average of $4,614 per lawyer annually[iii] – as compared to $7,005.  The savings is $2,391 per-lawyer or 34% annually.

The Collateral Benefits of Outsourcing
If lowering accounting and billing support costs by 30%-to-40% is not enough, outsourcing provides other collateral benefits.  Outsourcing:

·         eliminates future capital expenditures;
·         fosters greater efficiency and productivity for the front office;
·         introduces best practices and stronger internal controls; and
·         frees up firm leadership time to focus on other practice management challenges.

Law firms who work with 4L never have to worry about capital expenditures for software upgrades or hardware purchases or maintenance.  4L provides the Orion accounting software via the Cloud where each firm’s data resides on a separate private virtual server.  The software and hardware is provided and maintained by 4L without cost to the law firm.    

Use of the Orion accounting software also makes the law firm’s front office more efficient.  There are numerous ways to enter billable time, to lookup client-matter numbers and task codes, and make online inquiries of key financial data such as bank balances, aging of accounts receivable and client status as to last billing, last payment and other information required to manage the firm.

Working with 4L provides a higher degree of internal accounting controls than smaller firms generally implement.  The 4L staff performs monthly bank reconciliations on all firm and trust accounts and balances the detailed monthly accounting summaries to the general ledger accounts to ensure accuracy of the numbers.

Outsourcing also improves existing internal procedures.  4L works with its law firm clients to implement the best practices to streamline billing and collection processing.  We recommended changes to billing procedures at one firm which increased their cash flow by nearly $140,000 this year.  With another firm, we identified and corrected flaws in produces used to collect documentation needed to bill client advances which increased billing and reduced expenses by more than $150,000.

But perhaps the most significant collateral benefit of outsourcing is it makes firm management more effective.  The Peter Zeughauser quote at the top of this memo sums it up nicely.  Is the law firm best served when senior management is spending time on accounting and billing processes?  I think not.  Freed from the day-to-day oversight of these back office tasks, firm management can devote increased attention to the things which matter most:

·         Representing current clients;
·         Supervising, training and developing junior lawyers;
·         Seeking ways to become more profitable by reducing the direct costs of providing client service; and
·         Engaging in activities needed to attract future clients to the firm.

Outsourcing Makes Business Sense
A central precept of business management is to purchase goods and services from responsible suppliers who can provide the requisite quality at the lowest reasonable price.  A make-versus-buy decision should be a “no-brainer” when purchasing produces equal or better quality and is less expensive than doing it yourself.  In this way, outsourcing has become a $500 billion-a-year business.  Big business has embraced it in a big way and big law firms are turning to outsourcing with greater frequency – even though they already enjoy significant economies of scale 

Outsourcing makes sense because it reduces costs, improves efficiency and lets management focus on core business issues.  It just makes good business sense to outsource – regardless of the size of your law firm.

[i] I decided to go with the first name reference here because it lets me tell the following story.  I’ve met Peter on a couple occasions.  The first time was about 10 years ago in Chicago.  We were both presenting at the same conference and all the speakers had dinner together the night before.  All I recall about that dinner is there was good wine (French, naturally) and good conversation with Peter regaling stories about his service as a hockey goal judge for Anaheim Ducks’ home games.
[ii] Small Firm Economic Survey, 2011 edition, published by ALM and The National Law Journal.
[iii] It is important to note the projected annual fee per-lawyer includes the cost of the Orion accounting software which 4L provides, without fee to its client law firms.

Monday, October 29, 2012

Outsourcing -- How it Works in Theory

Parsley Sage Rosemary & Ginsburg llp
“always a reasonable result for a reasonable fee, always”

All Partners and Senior Admin Staff
Mike Marget
October 28, 2012
Outsourcing – How it Works in Theory

Outsourcing is a $500 billion-a-year business.  Big business embraces outsourcing in a big way to reduce cost, foster greater efficiency and free management time to focus on core competencies. 

Outsourcing initiatives tend to target back office tasks – HR, payroll, call centers, help desk and accounting/billing activities.  Xerox – who in recent years has become a big outsourcing service provider (“OSP”) – runs a number of TV commercials[i] touting how they perform accounting tasks for Michelin and Marriott and call center management for Virgin Airline. 

The purpose of this memo is to discuss how outsourcing works from the perspective of the OSP and the benefits to the OSP’s business customer.

How Outsourcing Works for the OSP
The OSP’s goal is simple.  Deliver quality services better, cheaper and faster than the business customer can accomplish with internal resources, and do so profitably over the course of an enduring relationship.  In order to grow its business, an OSP works hard to provide excellent service to each business customer in order to secure quality references essential to attracting additional customers.

The outsourcing business model is significantly more complex than simply moving jobs from high cost metropolitan areas to places where salaries are lower.  While wage differentials may be part of the equation, an OSP’s success is primarily dependent upon two other factors: 
       1.       Economies of scale; and
       2.      Technology, talent and process improvement.

Economies of Scale/Leverage
Volume matters.  An OSP with multiple business customers enjoys a higher volume of work.  Higher volume results in more consistent capacity utilization with fewer peaks and valleys in the workflow.  Fewer peaks and valleys permit the OSP to leverage its workforce for higher productivity – and consequently lower operating costs – as compared to a single organization with lower volume. 

In Microeconomics 101, we learned that higher volume generally results in greater productivity.  The higher volume/greater productivity thesis is confirmed in the context of a law firm’s back office with data from a national survey of law firm economies focusing on firms with 20 or fewer lawyers.  According to the survey, firms with 11-to-15 lawyers average 0.12 FTE accounting personnel per lawyer versus a 0.11 FTE per-lawyer ratio among firms with 16-to-20 lawyers. [ii]  So, what does this mean?  Take for example a firm with 13.33 FTE lawyers and 1.6 FTE accounting personnel; then assume the firm increases 50% in size to 20 FTE lawyers.  Will this now-bigger law firm require a corresponding 50% increase in support staff to 2.4 FTE to handle the increased number of accounting and billing transactions?  Not according to the survey.  The now-bigger law firm should require just a 37.5% staff increase (not 50%) – to 2.2 FTE – since the typical 20-lawyer firm is able to manage its accounting and billing operations with 2.2 FTE, rather than 2.4.  The 0.2 FTE difference illustrates the workforce economies of scale available in a higher volume environment.  A high volume OSP is able to further maximize the economies of scale when leveraging the work effort supporting dozens or even hundreds of lawyers.

Investment in Technology, Talent and Supervision
Whether you work in a law firm or a Fortune 500 company, it is infinitely easier to justify capital spending on front office activities – the things which attract clients, generate higher revenue or reduce direct costs – than on measures aimed at improving back office functions or reducing indirect costs.  Granted, if a particular back office system is broken or on its last legs, you have a shot; short of that, back office capital spending is a tough sell.  An OSP views capital investment on matters related to the business customers’ back office activities through a different lens.

With outsourcing, the business customer’s back office is the OSP’s front office.  As such, OSPs invest heavily in technology, talent and process improvement in order to bring down the OSP’s operating costs.  The OSP requires lower operating costs in order to (a) pass a portion of those savings on to the business customer, (b) recoup marketing and capital investments and (c) make a reasonable profit.  It is standard practice for OSPs to upgrade the business customer’s (former) back office technology and implement “best practices” in order to streamline and standardize operations. 

From a staffing perspective, OSPs generally engage better talent than the business customer is able to attract and retain in a on its own.  Recruiting and retention is easier for a larger, focused OSP who can provide a career path and greater responsibilities and opportunities than can the business customer on its own.  This is particularly true when the OSP’s business customer operates in an environment where mobility from the back office to the front office is limited, if not impossible, due to training, experience or licensure, as it is with law firms.

Finally, a high volume OSP has greater flexibility and management depth to utilize part-time workers and provide 24/7 services than a single organization trying to operate hard-to-supervise second and graveyard shifts. 

How Outsourcing Works for the Customer Firm
From the business customer’s perspective, the primary motivation to outsource is to save money.  Outsourcing permits businesses to reduce their indirect costs and either realize higher profit or pass the savings on to their customers in the form of lower prices.  However, cost is only one of three motivating factors when businesses evaluate outsourcing.

Cost Savings
Obviously, each situation is different, but proponents of outsourcing trumpet 30%-to-40% cost savings when businesses outsource.

In addition, outsourcing generally relieves business customers from ever again having to make capital expenditures to support the outsourced tasks.  From the business customer’s perspective this conserves capital for expanding front office activities and converts back office fixed costs into variable costs.

Improved Internal Services
As a result of its ongoing investments in technology, talent and supervision, OSPs support business customers as change agents.  They tend to document and clarify back office procedures leading to continuous process improvement and error reduction associated with back office activities.  Time-saving technologies are introduced and the OSP staff brings new ideas and perspective to back office tasks. 

The back office procedural improvements collaterally enhance front office operations as well.  For example, reducing the back office time needed to process invoices can lead to saving time and resources in the front office.  Similarly, the new technology implemented to reduce the billing process may provide more meaningful financial data to improve management supervision over sales, billing and collection efforts.

Reduced Management Distraction on Non-Core Activities
Perhaps the most important collateral benefit derived from outsourcing involves liberating management time to focus on core competencies.  Outsourcing avoids management headaches such as finding, recruiting and evaluating back office staff, supervisory oversight and problem-solving.  It permits management personnel to focus on their “highest and best use” – those things directly associated with revenue generation – customers, delivery of goods and services, attracting new customers and increasing profit margins by reducing direct costs.

A $500 billion-a-year industry isn’t going away anytime soon.  I believe it is here to stay because a big part of management involves managing the costs of running the business.  Goods and services are generally purchased from the supplier who offers the requisite quality for the lowest reasonable price.  If an OSP can provide back office services of comparable (if not better) quality for a lower price, shouldn’t such offers be entertained?  If not, isn’t management letting down the business’ shareholder owners?  Moreover, what happens when the business’ direct competitors make the move to outsourcing and thereby obtain a competitive advantage? 

Today most OSPs focus on big business – where there are bigger contracts and bigger profits to be made.  Eventually, outsourcing will expand further among middle market companies and make inroads into small business as well.  It’s inevitable.  It just makes business sense.

[i] Xerox has a really coolwebsite devoted to their outsourcing prowess.  The TV commercials tend to run during Notre Dame football games on NBC.  GO IRISH!
[ii] Small Law Firm Economic Survey, 2011 Edition, p. 179.  This survey is published annually by ALM and The National Law Journal.

Wednesday, October 24, 2012

WSJ: Big Firm's Outsource Back Office Work to Reduce Costs

Parsley Sage Rosemary & Ginsburg llp
“always a reasonable result for a reasonable fee, always”

All Partners
Mike Marget
October 24, 2012
WSJ: "Law Firms Wring Costs from Back Office Tasks"

Amonth ago, I commented on two articles from reporting declining profits among Legal Industrial Complex law firms due to rising operating costs.  The website cited a couple surveys published by big banks who lend to the largest US firms.  The Wall Street Journal jumped on the story on Oct. 7, publishing its own piece describing strategies[i] adopted by 5 big firms to stem the tide of rising operating costs and bolster PPP.[ii]  The two strategies:

·         Relocating back office jobs to less expensive cities; and/or
·         Outsourcing administrative tasks to third party providers capable of performing the tasks just as well (if not better), faster and cheaper.

I’m usually critical of the Journal for its eponymous, laser-like focus on Wall Street – and consequently Wall Street law firms – while feigning interest in Main Street, the middle class and the small/midsize firms who serve them.  However, Rupert gets a pass this time.  Admittedly, a 15-lawyer firm in Atlanta is unlikely to reap any significant savings by moving its 1.8 FTE accounting and billing staff[iii] to Tampa.  However, [BSP alert][iv] the same 15-lawyer firm will be able to reduce its operating costs and realize other benefits by outsourcing those  accounting and billing tasks to an experienced service provider like Tampa-based 4L Law Firm Services LLC.

My next two memos/postings will deal with how outsourcing works in theory and in practice.

[i] I haven’t really been tracking these developments, but here is a partial list of firms who have made significant changes to their back office operations:
# attys
Akin Gump
Outsourced most accounting tasks to Deloitte
Baker & McKenzie
Established back office center in Manila, PI
Orrick Herrington
Set up back office center in Wheeling, WV; 350 employed there, some outsourced to Williams Lea
CMS Cameron McKenna (London)
Outsourced all back office jobs to Integreon; 10-year contract valued at $933 million
Wilmer Hale
Moved 187 accounting, HR jobs to Dayton, OH
O’Melveny & Myers
Outsourced 75 admin jobs to Williams Lea
Pillsbury Winthrop
Moving 160 accounting and other jobs to Nashville, TN
Bingham McCutchen
Budgeting $22.5 million to relocate 250 jobs to Lexington, KY
Foley Lardner
Outsourced 37 records mgmt. jobs to Williams Lea
[ii] PPP is short for “Profits per Partner.”
[iii]According to the Small Law Firm Economic Survey, 2011 Edition (ALM Intelligence and The National Law Journal), p. 179, a firm with 11-15 lawyers will employ .12 “finance/accounting” staffers per lawyer: 15 lawyers x .12 = 1.8 FTE.
[iv] BPS is short for “Blatant Self Promotion.”

Top 10 Questions to Ask Yourself Before Contributing $5 Million to a Super PAC

Parsley Sage Rosemary & Ginsburg llp
“always a reasonable result for a reasonable fee, always”

Top 10 File
Mike Marget
October 24, 2012
Top 10 Questions to Ask Yourself Before Contributing $5 Million to a Super PAC

A while ago I read something online from NPR which included a list of big dollar donors to various so-called “Super PACs.”  For those of you so inclined, here's my advice:

Top 10 Questions to Ask Yourself
Before Contributing $5 Million to a Super PAC
10. – Do my kids really need to go to college?

 9. – Before making the contribution, can I possibly save $750,000 (15%) by spending 15 minutes on the phone with Geico?

 8. – Have I recently divorced Tom Cruise or Kobe Bryant?

 7. – Would it make more sense simply to watch the campaign on cable and eat $5 million worth of snacks?

 6. – No #6.  I’m still trying to wrap my brain around the concept of actually having $5 million in the bank.

 5. – Will I be known forever as “the jerk who gave $5 million to a Super PAC?”

 4. – Can I really afford this and still buy Yankee tickets?

 3. – Couldn’t I inflict almost as much damage on a democratic society with just a $4 million contribution?

 2. – If I’ve got $5 million in the bank, shouldn’t I instead invest in something sensible like one of those dancing Olympics horses?

 1. – What am I, nuts? 

Wednesday, October 10, 2012

Top 10 Ways to Make Chess More Popular

Parsley Sage Rosemary & Ginsburg llp
“always a reasonable result for a reasonable fee, always”

Top 10 File
Mike Marget
October 11, 2012
Top 10 Ways to Make Chess More Popular

In a video-game world, this was inevitable.  Accordingto reliable sources, the World Chess Federation is secretly studying ways to alter the 1,500 year-old rules of the game of chess to make the sport more appealing to the general public.  I can't simply stand on the sidelines while this is happening, so here are my contributions:

Top 10 Ways to Make Chess More Popular

10. – Free vuvuzela horns for the first 1,000 ticketholders admitted to watch each match.

 9. – Lose a piece, down a shot of single malt.

 8. – Permit viewers to repeat the accounts and descriptions of play without the written permission of Major League Chess.

 7. – Suspend for one season any coach or player who offers a cash bounty for injuring an opposing team's Bishop.

 6. – Frequent TV timeouts so viewers can run to the kitchen to replenish their beer and chips without missing any of the action.

 5. – More bench-clearing brawls.

 4. – Schedule matches opposite hockey games.

 3. – Replace the knight pieces with carvings of those adorable dancing horses from the Olympics.

 2. – Settle draws with penalty kicks.

 1. – Rename Pawns the “47-percenters.”