Parsley
Sage Rosemary & Ginsburg llp
“always a reasonable result for a
reasonable fee, always”
MEMORANDUM
To:
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All
Partners and Senior Admin Staff
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From:
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Mike
Marget
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Date:
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October
31, 2012
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Re:
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Outsourcing
– How it Works in Practice
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“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.
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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.
