Law firms are announcing layoff’s weekly. The most recent news in the trade press is about Holland & Knight and Bingham McCutcheon. These firms get credit for addressing challenging economics and being public about their decision.
After several years of unprecedented growth, many firms now struggle with the moral, legal, PR and operational issues of layoffs. Some take more aggressive action than others and each has its own philosophy, both about how much pain it can endure and how to communicate its actions internally and externally.
What can firms do to reduce costs in a down economy? Rent is the largest operating expense but not practical to reduce because of lease obligations and a challenging sub-let market. Some firms may be able to push out unproductive partners and associates but most firms prune regularly so only a few have this option.
More often than not, law firm management targets the support staff in the back-office/middle-office for savings. Those of us who have spent our careers focused on the law firm middle office know there are ample opportunities to drive efficiency and savings. Law firm middle office functions typically lack the best practices and heavy automation found in corporations. Consequently, in many firms, recent good years have magnified the staff headcount problem because staff has grown in tandem with lawyers.
Innovative outsourcing is one management tool used far more aggressively in corporations than in firms. Companies outsource as a way to manage cost when growth falters or when revenue swings by geography or product lines. They understand that outsourcing is more than just savings from labor cost arbitrage – operational flexibility is a key benefit. Law firms, as relatively late outsourcing adopters, are only learning this now.
The flexibility of a properly structured outsourcing contract can save law firms big dollars not to mention pain and suffering during periods of contraction or expansion. Turning the volume up and down with an outsourcer is far less painful than over-hiring one year and firing the next. Law firms must also assess costs carefully and over time. Outsourcing may not always yield significant annual operating savings. Factoring in often hidden costs, however, including recruiting fees, management distraction and now especially severance costs, can easily demonstrate big savings.
For law firms though, cost may be besides the point. The bigger issues are the psychological, cultural and PR toll associated with lay-offs. It is much easier to adjust capacity with outsourcing and many contracts have pre-determined provisions for scaling up or down based on pre-negotiated triggers. How do you value the non-quantifiable benefit of avoiding lay-offs?
The flexibility of an outsourcing deal is under appreciated except by those that have identified and implemented these initiatives and now have shifted the risk of an unforeseen downturn to their outsourcing partner.
We read with interest Orrick’s Ops Center: One Small Town’s Salvation (The Recorder, 9 May 2008), which describes law firm Orrick, Herrington & Sutcliffe’s Wheeling, WV Global Operations Center (GOC).
Orrick’s GOC and Integreon’s Fargo, ND delivery center share similar histories, economics, and demographics. Both delivery operations started in the last few years. Both started with administrative tasks and are now expanding to higher value works. Orrick has saved millions in operating costs; so have Integreon’s clients. Both are top notch employers in small cities in rural areas. Moreover, both Orrick and Integreon understand that improving operations by streamlining processes and applying technology is as important as labor rate savings.
Of course, there are differences. Fargo is flat and Wheeling is mountainous. More seriously, the biggest difference is ownership and scope. Orrick is a major, US-based, international law firm. Integreon is a privately held company focused exclusively on high-value, knowledge-intensive outsourcing. We take the GOC idea a big step further with a global platform, operating delivery centers similar to Fargo in India and the Philippines. Integreon’s global scope provides a deeper talent pool, richer business continuity options, and access to even lower cost labor than is possible in a single location.
Law firms and other organizations face three important questions about how they operate:
- The threshold question is, “should we centralize middle office functions?” If yes, then
- Where should we operate our central function and
- Should we own or outsource it?
We think it’s just a matter of time before most large law firms centralize the middle office. Other large-firm early-adopters are Baker & McKenzie (A recent article, The compelling case for insourcing in Managing Partner magazine, Mar 2008, describes the firm’s Global Services Manila center) and Clifford Chance (an Integreon press release and the recent Financial Times article Diligent and a long way from Chancery Lane describe the firm’s centralized India operations).
When contemplating a captive operation, ownership is a key question. Are law firms prepared to own and run a captive operation in a lower cost US or off-shore market? Orrick apparently initially thought that its Wheeling facility would become a shared service center attracting other law firms to co-locate their back-office functions. The scale they have created may make sense for Orrick at this time but their original business plan needed to be significantly adapted to face the reality of Wheeling’s marketability to competing law firms. A captive business plan needs to stand on it’s own as a back-office operation and show an operating advantage versus partnering with an expert in the field that has both domestic and off-shore options.
We may be biased, but we think the majority of law firms will elect to work with a third party, either Integreon or one of our competitors, to outsource or create hybrid scenarios. Few firms have the management bandwidth, capital, and experience to set up their own centers or to achieve the necessary scale.
Once a firm decides to centralize and decides the ownership model, it must still choose location(s). When evaluating domestic options, don’t underestimate emotional ties. In Orrick’s case, Chairman Ralph Baxter hails from West Virginia; in Integreon’s, the founder of our Fargo operation had attended law school and practiced law in North Dakota. It so happens both of these regions have compelling business climates for locating a captive or KPO/BPO business. Objective factors law firms should evaluate include:
- Overall size of the region
- State and local government support
- Underemployment versus unemployment rates
- Depth of the local experience pool and ability to train locals in new skills
- Cultural and language fit
- Business environment: economic and political, infrastructure (IT/telecom), IP laws
- Talent: length and breadth of experience in BPO/KPO/LPO, labor pool, language, attrition
- Cost: wages, infrastructure (rent, transport etc), regulatory costs (or incentives)
Later this year, Integreon will release a white paper that explores in more detail the considerations for where to locate a delivery center.
The recent release of the AmLaw 100 report suggests that rapidly growing BigLaw profits may be endangered. We think large firms will remain healthy if they take the right steps. The last two decades in the legal market have seen a drive to consolidate firms and professionalize law firm management. The next decade likely will see a focus on rationalizing the delivery of internal services. A big part of that will be centralized facilities, most outsourced.