Tag: Law firm

Trends In Restructuring Law Firm Business Functions To Increase Profitability

I’ve often wondered why so many law firms insist on keeping business functions run inhouse by lawyers, when they’d be much better off delegating or outsourcing (levering) these functions to someone who knows more about business management than they do.  This behavior can range from the Managing Partner who insists on doing the financial statements himself to the numerous lawyer-run Committees you see operating in many firms.   Many firms would get much better and faster results by having an experienced Executive Director or Administrator perform these functions for them.

Some will say that lawyers won’t listen to someone who isn’t a lawyer regarding management issues.  However, many lawyers are now realizing that they need to streamline their operations further as clients push them on the rates side and squeeze their profit margins further.  I would suggest that more lawyers need to become aware of the option to outsource these functions as well,  given the increasing demands from clients to keep costs down and provide better and faster service.  It also recognizes the need for law firms to focus on their core competency of providing legal services.

One of the main reasons to consider levering business functions is to increase profitability.  This requires that you focus on how leverage of business functions can operate in your firm to release your fee earners from administrative tasks.  Your opportunity costs can be great if you have several partners involved in management and administration functions, when they could instead be doing more productive things with their time.  Things such as getting new, highly profitable work, working on high-end files or performing high level R & D to add value to the firm’s knowledge banks and improve firm profitability.  At $400 to $1,000 per hour opportunity cost, you’d be far better off levering those admin tasks to an experienced COO or Executive Director who could do the job more effectively and efficiently.  Your “real” bottom line will grow substantially after allowing for these recovered opportunity costs .

In a recent survey I conducted with COO’s and Executive Directors of midsize and large US and Canadian law firms, I found that more firms are also looking seriously at outsourcing facilities management, document production,  systems, human resources and marketing functions.  Whole administrative departments are not only being outsourced, but are also being shared with other midsize firms.  This tactic allows midsize firms to compete for much larger files than they’d normally have  a chance at and both firms can benefit from the arrangement.  It’s just another way for firms to extend their reach to be competitive without having to merge or add extra offices, and avoid all the costs and potential heartaches that an ill-thought out merger can entail.

Orrick is an example of a firm that successfully “outsourced” all of their administrative support functions such as HR, marketing, systems, facilities management and document production to a single support center office in West Virginia.  Their global network of offices can access the admin services they need from this Global Operations Center on a 24/7/365 basis.  Through this change, Orrick has reduced administrative costs while improving the quality of these support services.

CMS Cameron McKenna in the UK is the first major law firm to outsource its entire business support function to an outside party, including IT, HR, finance, business development, communications, knowledge management, facilities management and administration services.  This is a major development/experiment and is being watched with great interest by many other firms.

Another administrative service to consider for outsourcing is the search function, such as due diligence, title search, etc.  Why firms have their paralegals do these functions is curious to me.  Paralegals should be focused on higher end legal file functions, and searches should ideally be delegated to clerical staff or outsourced to a dedicated search firm.

Another option for small and midsize firms is to outsource all of their administrative functions to companies like MCG Management Counsel Group in Toronto or Cameron Management Services Group in Calgary (no relation).  These companies can handle all of your administrative and business functions so you can focus on practising law.  I’ve heard this option works very well for some small and midsize firms.

The latest option for outsourcing administrative functions is Face2Face Solicitors in the UK, which provides franchisee solicitor firms with centralized back-office systems – including accounts, IT and regulatory compliance – and central marketing and business development, to enable lawyers to focus on the legal work.  See here for more info.

Outsourcing can done at many levels in law firms and is being experimented with in different ways by forward-thinking firms.  You can theoretically outsource any business function.  One partner I knew once jokingly suggested that he’d like to see his firm’s entire Management Committee outsourced.  Okay, that’s pushing the outsourcing concept a bit, but considering the minutiae that many Management Committees get involved with, perhaps it’s not such a farfetched idea!

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The Link Between Knowledge Management and Profitability

In the competitive landscape of legal services, Knowledge Management (KM) stands as a powerful driver of profitability—particularly at the upper echelons of the profit pyramid. While many firms acknowledge this connection, the mechanisms behind it deserve deeper exploration.

Effective Rates: The Profitability Cornerstone

As David Maister emphasizes in his book,”Managing the Professional Service Firm,” increasing effective rates represents one of the most influential factors in boosting profitability. This increase typically stems from three sources: specialization, innovation, and enhanced value delivery. A robust KM system catalyzes improvement across all three dimensions.

By functioning as a centralized information repository, KM systems enable attorneys to develop deeper expertise within specific practice areas. They provide the platform for innovative service delivery models and significantly elevate the value proposition presented to clients.

Transforming Legacy Knowledge into Profit Centers

The strategic reuse of legal work product represents perhaps the most dramatic opportunity KM offers. By capturing and systematizing past work, firms can substantially reduce service costs while recapturing the true value of their intellectual capital. This approach shifts the paradigm from time-based billing to value-based compensation.

Contrary to some perceptions, value billing for knowledge assets isn’t unethical when implemented transparently. Clients who are informed upfront about this approach and understand how it reduces their overall legal spend often enthusiastically embrace it. Meanwhile, firms benefit from expanded profit margins through higher effective rates, creating a genuine win-win scenario.

Client-Centric Economics

KM delivers precisely what sophisticated clients increasingly demand: increased value. Simultaneously, it allows firms to enhance their effective rates for knowledge products and services. By transforming legal databases into reusable assets, KM enables law firms to invest in future growth similar to other industries, moving beyond the traditional partner-centric fiefdom model.

Overcoming Compensation Challenges

The most significant obstacle to KM adoption often lies in partner compensation systems that prioritize short-term results. Many partners struggle to accept temporary impacts on current compensation for long-term organizational benefits. Forward-thinking leadership teams address this by explicitly rewarding contributions to knowledge systems.

Even modest initial steps, such as recognizing partners who make substantial KM contributions, can begin shifting the culture.

The Missing Link

Knowledge Management fundamentally drives profitability by supporting higher effective rates—a major  determinant of law firm financial performance. As client pressure for alternative billing models intensifies, KM offers the perfect solution: helping clients reduce overall legal expenses while simultaneously increasing firm profitability.

In this capacity, KM truly represents the “missing link” for law firms seeking dramatic profit enhancement in today’s evolving legal marketplace.

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The Top 5 Things Law Firms Need To Do Now To Increase Profitability

Here’s some issues that are common amongst small and midsized law firms that should be addressed now to increase profitability.

1. Management

Too many firms try to run as democracies where partners have full say on which clients they work for and the type of work they do.  They’re not accountable for their actions and effectively act as solo practitioners.  This is a sure recipe for mediocrity and substandard profitability. You need to centralize management with a Managing Partner assigned the authority to screen all significant new clients for potential profitability, say no to high credit risks, and impact partner compensation to ensure all partners are accountable for their actions and performance.  The Managing Partner will also direct strategic planning and execute the Firm Plan.

2. People

You need the right people. Many firms have ill-defined partnership entry criteria and even less understanding of what it takes to remain a partner.  As a result, you end up with mediocre people and risk losing your best people to your competitors.  You need to have high-performing people to move the firm forward and achieve your firm goals and profitability targets.  Ensure your top performers are paid what they’re worth. Define partnership entry and retention criteria and enforce these criteria regularly.

3. Clients

You need to be constantly pruning your client base and upgrading your clients.  Studies show that  80% of your profits come from 20% of your clients.  You need to figure out who these high profit clients are and how to get more work from these clients. At the same time, you need to review and replace low profit clients with better opportunities.  Get a list of your top 50 clients and start reviewing them for profitability and ask them if they’re satisfied.  Do some client satisfaction interviews and you’ll generate more work from your most profitable clients simply by going through the interview process.

4. Vision

You need the “right” vision and a process for initiating strategic planning on an ongoing basis.  Start with a strategic planning process involving all partners and facilitate the creation of a new Vision and Firm Plan.  This will help direct your efforts in the most effective way and will help  increase profitability dramatically if you get all  partners to “buy in” to the new Vision.

5. Systems

You need to reward partners for cash in, not billings.  Many firms focus on volume without looking at the quality of the work being brought in and worked on.  You need to examine realization and profitability of all your clients.  To do that, you need a system to quickly determine profitability of clients and practice areas and services provided.  You also need to determine your cost per billable hour and create strategies to reduce costs and increase your profit margins.

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