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”

MEMORANDUM

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

Amonth ago, I commented on two articles from Law.com 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.

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[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:

 

Firm	# attys	date	action
Akin Gump	791	1999	Outsourced most accounting tasks to Deloitte
Baker & McKenzie	3,805	2001	Established back office center in Manila, PI
Orrick Herrington	1,049	2002	Set up back office center in Wheeling, WV; 350 employed there, some outsourced to Williams Lea
CMS Cameron McKenna (London)	2,800	2010	Outsourced all back office jobs to Integreon; 10-year contract valued at $933 million
Wilmer Hale	884	2011	Moved 187 accounting, HR jobs to Dayton, OH
O’Melveny & Myers	766	2011	Outsourced 75 admin jobs to Williams Lea
Pillsbury Winthrop	700	2012	Moving 160 accounting and other jobs to Nashville, TN
Bingham McCutchen	855	2012	Budgeting $22.5 million to relocate 250 jobs to Lexington, KY
Foley Lardner	874	2012	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”

MEMORANDUM

To:	Top 10 File
From:	Mike Marget
Date:	October 24, 2012
Re:	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? 

Key Behavioral Traits for the Successful Law Fim Manager

Top 10 Ways to Make Chess More Popular

Parsley Sage Rosemary & Ginsburg llp

“always a reasonable result for a reasonable fee, always”

MEMORANDUM

To:	Top 10 File
From:	Mike Marget
Date:	October 11, 2012
Re:	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.”

Legal Industrial Complex Still Struggling with Rising Costs

Parsley Sage Rosemary & Ginsburg llp

“always a reasonable result for a reasonable fee, always”

MEMORANDUM

To:	Management Committee
From:	Mike Marget
Date:	September 25, 2012
Re:	Legal Industrial Complex Still Struggling with Rising Costs

Two big financial institutions, who bank many of the largest US law firms, recently released surveys concerning the financial condition of the Legal Industrial Complex.[i]  While these surveys attract less attention than pronouncements from the Federal Reserve, The American Lawyer magazine makes a big deal out of them, as do most big firm managing partners.

The elite law firm lending units at Wells Fargo and Citi Private Bank surveyed 115 and 176 law firms, respectively.[ii]   Since some firms participate in both surveys, it is not surprising that both banks reached the same conclusion about big firm financial results for the fist six months of 2012:

·         Revenues up
·         Expenses up more than revenues
·         Profits down.

The magazine’s takeaway:  After 4+ years of lawyer headcount reduction, staff layoffs and overhead cost reductions, managers at the Legal Industrial Complex firms are running out of ideas for aligning slow revenue increases with faster escalating expenses.

What’s a law firm manager to do?  Plenty actually, but it will require some out-of-the-box thinking and nimble execution.  I’m indebted to Hal M. Stewart (who I’ve never met), the COO at the mega-firm Chadbourne & Parke LLC, for suggesting a list of technology-centric initiatives in an articlepublished last December.  I’ve tweaked Stewart’s list a bit to emphasize operating efficiency and lawyer productivity improvement opportunities.  Most of these initiatives will improve the bottom line for small and midsize firms, too.

		applicable to smaller firms, too?
1.	Back office functions:  outsource or relocate them to lower-cost locations.  (Selective big firms are doing this and the trend is sure to continue.)	√ Absolutely, especially outsourcing
2.	Digitize all incoming mail/Document Management Systems:  improvements in scanning technology and integration with document management systems bring efficiencies to mail distribution and storage-and-retrieval of correspondence; enhanced use of client-matter databases to keep track of all relevant documents, emails, voicemails, PDFs and filings.	√ Absolutely,  document management is a big deal
3.	Reduce office rent – “hoteling” and other efforts to reduce office space	Probably Not
4.	Workflow automation to streamline client billing process: faster processing of client charges; electronic distribution of pre-bills; email invoice delivery (no mailing of paper invoices); faster processing equals faster collection cycle	√ Absolutely, available through outsourcing
5.	Actionable financial data:  faster, more informative financial reports; client budgeting, especially for fixed fee and contingency matters to gauge profitability	√ Absolutely
6.	Unified messaging for email/voicemail and lower telecommunications costs:  VOIP (voice-over-Internet protocol) telephone systems; ability to forward voicemail messages and save them (long-term) for retrieval via case-matter database	√ Can be accomplished inexpensively
7.	Social media to recruit associates:  Facebook as a recruiting communications tool.	Probably makes sense
8.	Precedent retrieval/Document assembly: utilize document management systems to store prior work product for prompt retrieval to avoid duplicating prior research or drafting; and utilize form documents integrated with specific case management databases to draft recurring forms (e.g., pleadings; interrogatories; motions).	√ Absolutely, available through  managed  IT services

Let’s be real.  There is still a lot of work to be done to realize the potential of law firm workplace technology – both in big firms and small/midsize firms. 

Value billing, alternative fee arrangements, contingency fee windfalls and busts aside – at the end of the day there are only 24 hours for lawyers to do what they do – represent current clients, prospect for future clients, and all the other things.  Lawyers (and administrators) need more time for all three. 

Full Disclosure Note:  4L Law Firm Services manages – for small and midsize law firms – all those things given the √ Absolutely references.

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[i] “Legal Industrial Complex” is a term applied to the 200 largest US firms identified each year by name in The American Lawyer magazine as having the highest gross revenue.  The published numbers there are mostly about bragging rights – to impress corporate clients and potential lateral candidates (i.e., the richest clients use the richest lawyers).  Although the magazine claims to do extensive due diligence on the numbers, the “real numbers” sometimes get massaged multiple times by managing partners, management committees and image consultants before being given up for publication.  The Wells Fargo and Citi Private Bank surveys, as well as a private one conducted by PricewaterhouseCoopers, provide comprehensive, reliable financial data, useful for peer group comparison purposes because the data for each participating firm is kept confidential. 

[ii] What, you might ask, do these 2 banks get for all the time, expense and trouble of compiling these surveys 4-times a year?  They get a “sit down” with the managing partner of each participating law firm; an excellent time to solidify relationships with their law firm customers and to market themselves to firms who bank elsewhere.

No 4th Quarter Lateral Hiring! (Subject to Exceptions)

Parsley Sage Rosemary & Ginsburg llp

“Always a reasonable result for a reasonable fee, always”

MEMORANDUM

To:	Management Committee
From:	Mike Marget
Date:	September 21, 2012
Re:	No 4th Quarter Lateral Hiring! (Subject to Exceptions)

There is never a bad time to add a lateral partner; especially someone with a big book of business, whose practice fits the firm’s culture, and who will be accretive to the financial bottom line.  However, certain times are better than others – early (in the fiscal year) is much, much better than later.

At a prior firm, we had a rule – no lateral hiring in the 4^th quarter.  Being a law firm, there were many exceptions to this rule.  One permitted filling vacancies when short-handed or when special expertise was needed for an active matter.  Another was crafted for the proverbial “lateral too good to” turndown; somebody certain to be snatched up by another firm if we don’t act immediately; the “let’s thank our lucky stars and ignore the calendar” candidate (“L2G2” for too good to…).

The rationale for the 4^th quarter lateral hiring freeze is simple arithmetic.  Assume the following:

a)     L2G2 joins New Law Firm (“NLF”) effective October 1, 2012, agreeing to the same 2012 compensation package as at Old Law Firm (“OLF”) – $300,000 annually: monthly draws of $15,000, plus deferred comp of $120,000 payable as a year-end distribution.

b)     L2G2’s October production at NLF is subpar due to transition issues – delays in transferring files, obtaining conflict waivers and the like.[i]

c)      The headhunter’s invoice (15%-to-20% of one year’s compensation) is paid before year-end.

d)     Invoices for October time are issued by mid-November, and then scheduled for payment on a 45-to-60-day cycle by L2G2’s clients.  November time is billed in December.  Little or no revenue is received in 2012 from L2G2’s clients or L2G2’s work on other firm clients. 

e)     In addition to making three monthly draw payments of $15,000, NLF must foot-the-bill for the entire $120,000 deferred comp for 2012 even though L2G2worked only three months at NLF.[ii]

 The negative financial impact to NLF’s legacy partners is fairly easy to calculate.  NLF will generate virtually no incremental cash-basis revenue to cover L2G2’s 2012 compensation and the recruitment fee.  As a result, NLF will have roughly $210,000 less net income available to distribute to legacy partners when it comes time to make the year-end distributions.[iii]  The $210,000 “loss” represents the investment NLF is making in L2G2.

	cost to NLF	paid by OLF	L2G2 total 2012 comp
NLF revenue from L2G2	$      --0--		
3 monthly draws	$       45,000		$     45,000
9 months draws		$    135,000	135,000
year-end distribution	120,000		120,000
recruitment fee (15%)	45,000
L2G2 2013 Compensation			$  300,000
total expenses	$    210,000	$  135,000
NLF Net Income (Loss)	$ (210,000)

Note:  The financial loss is greater if L2G2 joins NLF with a supporting cast (staff and/or other timekeepers) or if NLF incurs other incremental costs (e.g., higher insurance premiums).[iv]

With any lateral partner candidate – but especially those who must join the firm in the 4^th quarter – there are two questions to be answered after due diligence is completed and financial terms and projections made:

1.      Are the partners willing to relinquish current year compensation in exchange for projections of higher earnings in future periods?

2.      If the answer to the first question is “yes”, then how much current year compensation for what magnitude of return?

These two questions will be explored in future Management Committee Memos focused on:

• Creative accounting[v] for lateral partner investments, and 
• Financial due diligence/financial projections for potential lateral partners.

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[i] Lateral partners invariably assure me they will “hit the ground running;” their initial month’s billable hours will be exceptionally high; all client files will be transferred on Day 1.  It never happens that way. 

[ii] L2G2 worked 9 months of 2012 (January through September) at OLF, but forfeited the accumulated deferred comp by joining NLF.  In order to make up the difference to L2G2, NLF is on the hook for the entire $120,000.  The subject of Making a Lateral Partner “Whole” is discussed at length in a previous Management Committee Memo.

[iii] In an effort to reduce the 2012 “loss,” some law firms might structure L2G2’s compensation so the $120,000 make-whole payment is paid in 2013 against the 2013 budget, rather than as a 2012 payment.  L2G2 might be amenable to this structure – deferring taxable income on $120,000 for a year has some merit assuming tax rates are unlikely to increase.  However, I don’t think this is the best approach.  How to “cover” compensation “hit” to legacy partners will be covered in the promised future “creative accounting for investment in lateral partners” memo.

[iv] Despite the fact I really love footnotes, this is point is too important to bury in one.

[v] Creative lawyering is a good thing.  Creative accounting is a bad thing.  I sometimes find this troubling.