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Has it ever seemed odd to you that law firm partnerships remain so obsessed with their overheads and yet are still so ill-equipped to manage them? Having sat in dozens of law firm board meetings over the last 10 years you might imagine that I no longer find this pre-occupation strange, but you’d be wrong. I find it more surprising now than ever.
The reason is simple: law firms spend a disproportionate amount of time merely tinkering at the edges of their cost-base, often with the wrong objective in mind. You know the one - it involves minor financial engineering to deliver modestly enhanced short-term profits. And it’s the one that avoids upsetting the apple cart at all costs. The only problem is that by relying too much on tinkering to improve partner profits, bad apples are left to rot in the cart.
Generally, lawyers have not approached this issue with long-term, sustainable benefits in mind. Until now that is. All of a sudden, a handful of major UK firms have discovered that the rules of the game are changing and have responded constructively and professionally to the challenge. Efficiency has now become a key driver in their clients’ decision making processes. Sure, they want the best advice, a first class service and a good relationship, and of course they want to know that their legal service providers have diversity, pro bono and other ethical policies in place, and yes they want added value (whatever form it may take), but all of these things are now common place in many firms. Taken together, they determine where a law firm lies on the overall value curve. As I’ve said many times before, when it comes to value beauty is in the eye of the beholder.
Be in no doubt, efficiency is the next “big thing”. It is the next big opportunity for law firms to provide better value for money without diluting profits. Indeed, I predict that those firms who seize this imperative will enhance their profitability significantly in the long run. In order to remain competitive and relevant to their clients, a clutch of firms have already begun to take the matter seriously. These firms know that the pressure from major corporations for superior service and value is only set to increase over the next 5-10 years and that to continue providing excellence to clients whilst maintaining high levels of profitability, they can no longer increase their charge-out rates as a matter of routine. At the same time they also know that lawyers’ salaries are not likely to remain static.
This new imperative - efficiency - has two elements: process and procurement. Process involves looking at the components of repetitive or standardised legal services and identifying ways in which they can be packaged, delivered and priced more efficiently, imaginatively and competitively. Procurement involves ensuring the costs associated with the people, systems and space (facilities) that underpin legal service delivery are managed as prudently as possible. It means buying, cost-effectively, the right people, the right systems and the right facilities to meet the expectations of clients.
Whilst lawyers are best placed to deal with the former (process), expert procurement professionals can play an important part in helping with the latter. A small number of “top 30” firms that have recently pioneered the use of senior procurement managers, either by recruiting them (this is rare) or by bringing them into the business on an interim/project basis. So what is the paradox? It is this: just for a change, a few enlightened law firms are going with the flow and aping developments within the teams of their in-house counterparts, at a time when there are still pockets of resistance among some General Counsel to the inevitable rise in the influence and involvement of procurement directors in the way they buy legal services. This is good news for law firms and their clients. It means that just for once, instead of resisting change and going into denial, private practices are embracing change in order to keep abreast of the shifting legal landscape. Corporate counsel should take heart from this, because it signals that some law firms, at least, recognise that the pressure on value is here to stay and they can see the commercial rationale for adopting good procurement practices.
There are three ways in which procurement professionals can assist law firms. Firstly, they can help to streamline procurement processes and make then more efficient; secondly, they can introduce “best practice” by transferring knowledge to line managers with regard to process planning, commercial awareness and negotiation skills; and thirdly, they are able to secure significant and sustainable cost savings, often running to hundreds of thousands of pounds and, in the largest firms, millions. However, the most enduring benefit lies in the second of these because it leaves a powerful legacy within the firm. This legacy is based on tried and tested methodologies; improved supply security; and sustainable economic efficiency (see diagrams). The lower the cost-base and the better the legal process, the better the value delivered to the client and the more scope for improving law firm profitability.
For the avoidance of doubt, let me be absolutely clear that I am not talking about Cost Reduction Analysts here. There is a world of difference between that animal and the one I am focusing on in this article. No, procurement professionals do not take a percentage of your savings; they charge a fee (typically a day-rate) for their independent, expert advice and for the lasting legacy they leave in terms of knowledge transfer.
Not unnaturally, cost savings are too often associated with reducing the specification of a product or service, but this is a fallacy. It need not be painful. And some people in partnerships worry about the introduction of “counter-cultural” practices, but these are unfounded too because procurement professionals have learned to be sensitive to the importance of different cultural nuances within law firms.
Having developed a close working relationship with specialist procurement advisers, LPS, we have seen first hand how a significant return on investment can be delivered to our law firm clients. A return of between 5:1 and 15:1 is not uncommon at all, so that an outlay of, say £75,000, could yield annualised savings of around £750,000, not to mention the repeat value of such savings in subsequent years. One such client has announced profits up by more than 25% this year, due in large part to its recent assault on efficiency with the guidance of an LPS procurement expert. However, the scale of savings or improvement in profits depends on the size of the practice.
In this article I have, quite deliberately, not insulted the reader’s intelligence by listing the most likely areas in which efficiencies can be made through good procurement; you know what areas concern you the most. But let me finish with another paradox: line managers in many law firms are still given the freedom to approve and sign poor or risky contracts on behalf of their firms. Yes, I’ll repeat that - lawyers are still allowing senior managers, competent though they may be in their own discipline, to sign legal documents on their behalf and, as amateurs without the proper commercial training, they will one day make a costly mistake.
I will leave you some pearls of wisdom from renowned management thinker, Peter Drucker, who said some 40 years ago that “buying is as important as selling”.
For many partners who don’t enjoy selling, this will of course be music to their ears. I suggest you keep it to yourselves!
© Simon Slater. Managing director of First Counsel Consulting Limited.
The Procurement Paradox
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Just when you thought General Counsel were getting into bed with their Procurement Director colleagues, some law firms have embraced the concept themselvesHas it ever seemed odd to you that law firm partnerships remain so obsessed with their overheads and yet are still so ill-equipped to manage them? Having sat in dozens of law firm board meetings over the last 10 years you might imagine that I no longer find this pre-occupation strange, but you’d be wrong. I find it more surprising now than ever.
The reason is simple: law firms spend a disproportionate amount of time merely tinkering at the edges of their cost-base, often with the wrong objective in mind. You know the one - it involves minor financial engineering to deliver modestly enhanced short-term profits. And it’s the one that avoids upsetting the apple cart at all costs. The only problem is that by relying too much on tinkering to improve partner profits, bad apples are left to rot in the cart.
Generally, lawyers have not approached this issue with long-term, sustainable benefits in mind. Until now that is. All of a sudden, a handful of major UK firms have discovered that the rules of the game are changing and have responded constructively and professionally to the challenge. Efficiency has now become a key driver in their clients’ decision making processes. Sure, they want the best advice, a first class service and a good relationship, and of course they want to know that their legal service providers have diversity, pro bono and other ethical policies in place, and yes they want added value (whatever form it may take), but all of these things are now common place in many firms. Taken together, they determine where a law firm lies on the overall value curve. As I’ve said many times before, when it comes to value beauty is in the eye of the beholder.
Be in no doubt, efficiency is the next “big thing”. It is the next big opportunity for law firms to provide better value for money without diluting profits. Indeed, I predict that those firms who seize this imperative will enhance their profitability significantly in the long run. In order to remain competitive and relevant to their clients, a clutch of firms have already begun to take the matter seriously. These firms know that the pressure from major corporations for superior service and value is only set to increase over the next 5-10 years and that to continue providing excellence to clients whilst maintaining high levels of profitability, they can no longer increase their charge-out rates as a matter of routine. At the same time they also know that lawyers’ salaries are not likely to remain static.
This new imperative - efficiency - has two elements: process and procurement. Process involves looking at the components of repetitive or standardised legal services and identifying ways in which they can be packaged, delivered and priced more efficiently, imaginatively and competitively. Procurement involves ensuring the costs associated with the people, systems and space (facilities) that underpin legal service delivery are managed as prudently as possible. It means buying, cost-effectively, the right people, the right systems and the right facilities to meet the expectations of clients.
Whilst lawyers are best placed to deal with the former (process), expert procurement professionals can play an important part in helping with the latter. A small number of “top 30” firms that have recently pioneered the use of senior procurement managers, either by recruiting them (this is rare) or by bringing them into the business on an interim/project basis. So what is the paradox? It is this: just for a change, a few enlightened law firms are going with the flow and aping developments within the teams of their in-house counterparts, at a time when there are still pockets of resistance among some General Counsel to the inevitable rise in the influence and involvement of procurement directors in the way they buy legal services. This is good news for law firms and their clients. It means that just for once, instead of resisting change and going into denial, private practices are embracing change in order to keep abreast of the shifting legal landscape. Corporate counsel should take heart from this, because it signals that some law firms, at least, recognise that the pressure on value is here to stay and they can see the commercial rationale for adopting good procurement practices.
There are three ways in which procurement professionals can assist law firms. Firstly, they can help to streamline procurement processes and make then more efficient; secondly, they can introduce “best practice” by transferring knowledge to line managers with regard to process planning, commercial awareness and negotiation skills; and thirdly, they are able to secure significant and sustainable cost savings, often running to hundreds of thousands of pounds and, in the largest firms, millions. However, the most enduring benefit lies in the second of these because it leaves a powerful legacy within the firm. This legacy is based on tried and tested methodologies; improved supply security; and sustainable economic efficiency (see diagrams). The lower the cost-base and the better the legal process, the better the value delivered to the client and the more scope for improving law firm profitability.
For the avoidance of doubt, let me be absolutely clear that I am not talking about Cost Reduction Analysts here. There is a world of difference between that animal and the one I am focusing on in this article. No, procurement professionals do not take a percentage of your savings; they charge a fee (typically a day-rate) for their independent, expert advice and for the lasting legacy they leave in terms of knowledge transfer.
Not unnaturally, cost savings are too often associated with reducing the specification of a product or service, but this is a fallacy. It need not be painful. And some people in partnerships worry about the introduction of “counter-cultural” practices, but these are unfounded too because procurement professionals have learned to be sensitive to the importance of different cultural nuances within law firms.
Having developed a close working relationship with specialist procurement advisers, LPS, we have seen first hand how a significant return on investment can be delivered to our law firm clients. A return of between 5:1 and 15:1 is not uncommon at all, so that an outlay of, say £75,000, could yield annualised savings of around £750,000, not to mention the repeat value of such savings in subsequent years. One such client has announced profits up by more than 25% this year, due in large part to its recent assault on efficiency with the guidance of an LPS procurement expert. However, the scale of savings or improvement in profits depends on the size of the practice.
In this article I have, quite deliberately, not insulted the reader’s intelligence by listing the most likely areas in which efficiencies can be made through good procurement; you know what areas concern you the most. But let me finish with another paradox: line managers in many law firms are still given the freedom to approve and sign poor or risky contracts on behalf of their firms. Yes, I’ll repeat that - lawyers are still allowing senior managers, competent though they may be in their own discipline, to sign legal documents on their behalf and, as amateurs without the proper commercial training, they will one day make a costly mistake.
I will leave you some pearls of wisdom from renowned management thinker, Peter Drucker, who said some 40 years ago that “buying is as important as selling”.
For many partners who don’t enjoy selling, this will of course be music to their ears. I suggest you keep it to yourselves!
© Simon Slater. Managing director of First Counsel Consulting Limited.