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Cost Reduction in the New Legal Market

29.01.2012

In December the Ark Managing Partner group held their annual financial and business planning conference, at which both Barry and Simon presented.

Barry's presentation was entitled "taking a structural approach to managing cost". By coincidence, a short Youtube video on the subject appeared on another blog.

The More for Less Challenge

In this short video, Professor Richard Susskind says that “the only trend that matters for 2012 is the more for less challenge,” in which lawyers will continue to try to find ways to deliver the highest quality service at the lowest possible cost. Professor Susskind noted that the pressure on in-house legal teams is enormous and they will be asking law firms to consider new efficiencies in the coming year.

Crucially, they won’t be content with 10% savings, they will be looking for nearer 30-40% and that will not be achieved just through fixed fees and discounts for volume.

It is good to be able to say that our work is up with the leading-edge, as his prescriptions were uncannily close to the content of our 40 minute presentation in which we highlighted the following main points.

• Cost-cutting in the legal profession in recent years has largely been about reducing capacity. Reducing capacity is about getting less from less. Cost management is about getting more from less – and this is what the client wants.

• Managing costs is not simply about reducing the level of cost, but getting much better results from your expenditure. All tasks and activities need to be assessed as to whether or not they "add value".

• There is an implicit assumption in most law firms that this distinction is decided by job title, often described as "fee earners" or "fee burners". This assumes that everything that fee earners do adds value, which is plainly inaccurate as anyone who monitors time recording or subsequent write-offs can testify. The converse of the assumption is that nothing which is done by non-fee earners can add value. So, for example, the activity of bringing in new clients is deemed worthless. Since no business can exist without clients this is equally nonsensical.

• There is an old saying that professional service firms "buy and sell hours". Our analysis has shown that most medium-sized firms buy three hours for every hour that they are able to sell. The crucial issue is to identify what happens with those unsold hours. If they bring in clients or work, or contribute to higher prices being achieved then they are worthwhile, otherwise they can only be justified if they are required to keep the business in existence or satisfy regulators. The task of management is to minimise "non-value adding" hours.

• This requires a review and analysis project by or on behalf of of the finance department. In larger firms this kind of project will pay for itself several times over as it can be expected to identify savings opportunities in the order of 20% in many departments, which can be translated into staff savings. Away from the largest firms, where many departments have fewer than five people, translating a 20% activity reduction into payroll cost reductions becomes very difficult – which may account for why many provincial firms have found it more difficult to realise their cost base then the largest city firms.

• Many firms of all sizes lack the internal resources and political influence to do the necessary research and get recommendations accepted. So for many firms it makes sense to outsource a greater proportion of activities to organisations which have already done the necessary analysis several times.

Changing the Balance of Presumption

Therefore the balance of presumption for many firms must be that there's a greater emphasis on outsourcing and offshoring as a route to efficiency savings or, as Richard Susskind said in his closing remarks, "you can't achieve those savings by changing the pricing structure, and that means outsourcing and off shoring".

This is a subject that we expect to return to repeatedly in 2012 and 2013, and we will be running an Ark/Managing Partner Masterclass on this subject in May 2012. 

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