Law Firm MANAGEMENT. Is outsourcing right for your firm? For good referrals, ask good questions. How to use leverage to your firm s advantage

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1 Law Firm MANAGEMENT Is outsourcing right for your firm? Eye on associates Tips for effective performance-based compensation For good referrals, ask good questions How to use leverage to your firm s advantage Spring 2015

2 Is outsourcing right for your firm? n recent years, several large law firms have gained attention by centralizing I their back-office functions offsite usually in locations with cheaper rent and labor costs than in the cities where they base their legal services. Such setups generally are unrealistic for smaller firms. Nevertheless, you can reap similar advantages by outsourcing some of your functions. The same advances in technology that make centralization possible for big firms make effective outsourcing possible for other firms. When expertise matters Law firm administrators and managers know that running a successful practice requires much more than legal expertise. Often the most challenging aspect of the legal services business is keeping the firm s critical functions running smoothly, including: Payroll, Accounting, Human resources, Food services, Collections, Copying, Mailroom, Travel services, and IT. Many of these functions come with numerous subfunctions. Human resources, for example, includes recruiting and retention, training, leave management, benefits planning and administration not to mention an array of compliance responsibilities. All of these are labor-intensive activities where expertise matters. And that expertise frequently can be obtained in a more cost-effective manner by turning to external service providers. Outsourced workers are paid only for work performed you won t have to compensate them for idle time. Reducing costs The potential benefits of outsourcing go far beyond expertise, though. The primary draw for most firms is reduced costs, which come from a variety of sources. For example, as with the centralized back offices big firms are establishing, vendors may be located in areas with lower overhead costs, and their pricing will reflect that. Vendors with multiple law firm clients enjoy (and pass on the benefits of ) economies of scale and high-capacity utilization. They wield superior negotiating leverage when it comes to dealing with third parties like insurance carriers. And they provide early access to best practices, as well as the latest technology, without incurring the capital costs. 2

3 Software: An alternative to outsourcing Outsourcing isn t the only alternative for law firms interested in reducing their dependence on internal staff for key functions. More and more firms are implementing software solutions. Some firms have reduced their HR staff by introducing an HR information system (HRIS). HRIS represents the intersection of HR and IT, with nonstrategic, recurring and time-consuming HR tasks accomplished electronically. The program also easily generates reports. The systems typically include flexible designs and databases of employee information that can be integrated across features. Procedures such as requests for time off can be handled and tracked automatically. HRISs may also incorporate accounting and payroll functions. However, replacing several of your firm s functions at once with this software may not be the best choice. Discuss cost-containment options with your financial advisors. And if you do decide to purchase software solutions, adopt them incrementally to ensure they fit your firm. If you outsource functions, your firm may see reduced overhead and staff costs, including employment taxes, paid time off, benefits, salary and wages. Moreover, unlike internal staff, outsourced workers are paid only for work performed you won t have to compensate them for idle time sitting at their desks. Weighing potential vendors Selecting vendors for outsourced services requires careful consideration. Not every vendor will be able to provide the functions and level of service you require. Begin by soliciting referrals from other attorneys and firms. Pay special attention to the experience of firms that are comparable to yours in terms of billings, number of attorneys and practice specialties. Among other things, ask about vendors customer service how often do problems arise? When they do, is the vendor responsive and does it resolve issues satisfactorily? Also, think about fee structures. Some vendors charge a flat fee that increases as you add employees to your payroll. And, fees aside, can the vendor adapt in case you expand or downsize in the future? Liability is another significant issue. Mistakes by human resources and payroll providers in particular can lead to sticky and expensive compliance problems. Will the vendor assume liability, or will you be on the hook for resulting costs? Similarly, be sure to check out the vendor s financial stability and business culture. You don t want to park your critical services with a vendor that could go out of business without warning or with whom your firm clashes on issues such as risk tolerance and ethics. Once you ve selected a vendor, it s important to maintain frequent communication with the vendor through implementation and then regularly throughout the course of your relationship. In some cases, vendors might put one of their employees to work in the client s office. Good business sense As clients continue to demand greater efficiency and lower costs, outsourcing arrangements not only promote savings but can also provide your firm with a competitive advantage. Regardless of size, the firm might find that outsourcing makes good business sense. 3

4 Eye on associates Tips for effective performance-based compensation f your firm still uses a lockstep model to compensate associates, I you may be undermining your profitability and competitiveness. An effectively implemented performance-based system can increase the satisfaction of both clients who don t want to pay high rates for baby lawyers and associates, many of whom are now more interested in work-life balance than achieving partnership. Why lockstep is lacking Under a traditional lockstep system, associates are essentially rewarded for their tenure. The longer they stay with the firm, the more they and other attorneys in their class year are compensated, and the more clients pay for their services. With a performance-based system, associates advance within the firm and receive compensation based on a range of factors, such as: Billable hours, Profitability, Client satisfaction, Business development activities, Professional development, Pro bono work, and Technical skills. The multifactor approach encourages associates to work strategically rather than simply piling up billable hours. And it helps law firms recognize and reward their highest performers, as well as move toward strategic goals, such as developing new practice areas or cross-selling to existing clients. Performance-based compensation isn t new, but some of its early efforts failed and turned off early adopters. Instead of prompting associates to develop and demonstrate key competencies and specific behaviors related to becoming successful lawyers, earlier systems placed too much emphasis on acquiring technical skills. Technical skills such as strong written and verbal communication, research, and analytical abilities are important, of course. But effective performance-based compensation also recognizes soft skills such as autonomy, teamwork, client relations and work ethic. Defining good performance To begin, your firm must define specific performance levels that mirror the logical steps in an associate s career and corresponding competencies. It then should assign associates to the various levels based on their contributions. Many firms use a three-level system, with a different salary assigned to each. On top of their base salaries, associates earn bonuses or merit-based compensation awarded only to those who exceed the goals for their respective levels. Associates should receive a clear explanation of your firm s expectations and how their 4

5 contributions help the firm achieve its strategic goals. Allow associates to direct and assess their own development along the way. Not surprisingly, associates need a more individualized and detailed business plan than they would under a lockstep compensation model. Plans should include specific goals that align with both the practice group s and the firm s objectives, such as acquiring specialized knowledge by taking continuing education classes or attending conferences. Keys to success If you decide to switch to performance-based compensation, be sure to get off on the right foot. To encourage associates to embrace the new arrangement, first ensure that partners fully buy in and communicate their support for the idea. Also distribute clear written guidelines about how the system works and explain why it s superior to a lockstep model. A fair and consistent system is essential. Evaluations should assess the appropriate competencies to determine associates progress toward firmand client-relevant objectives. Understand that your firm must provide adequate opportunities for associates to work on challenging cases and grow professionally. Zero-sum games in which associates are pitted against one another is generally bad for morale. Plus, it can harm the quality of client work. Instead, associate workloads and professional development opportunities should be distributed equitably. Pay-for-performance pays A well-implemented performance-based compensation system can improve your firm s profitability, motivate associates and boost client satisfaction. If you re still using a lockstep system of compensating associates, bring up the idea of switching to a performance-based model and enumerate the benefits at your next partner meeting. For good referrals, ask good questions ou can never have too many referrals, right? Not exactly. While referrals Y from satisfied clients and legal and financial colleagues are gratifying, they don t always lead to engagements you want to or can accept. The key to making referrals pay off is by promoting quality over quantity. Who are your clients? If you want clients that are right for your practice, you need to define who those clients are. Whom do you usually work with? Whom do you best serve? When you talk to potential referral sources, describe your ideal client, as well as your firm and its practice specialties, size and location. This helps a CPA, for example, know that a real estate investor client with a small contract 5

6 matter probably won t be a good fit for your firm s team of litigators. Also consider what personal information you want referral sources to disclose about you for example, your law school affiliation or favorite hobbies. This kind of information can help referral sources refine their recommendations. Who are your referral sources? Not every banker, accountant, financial advisor or real estate broker is the right referral source for your firm. While it s true that you never know where your next referral is coming from, the chances of getting a qualified referral from the wrong source are slim. Just as you did with clients, define your ideal referral source. Usually, these are professionals who serve your target clients or have business or social affiliations with them. This group may include attorneys who work in different practice areas and don t feel qualified to accept all of an existing client s business. Now is a good time to look at your referral contact list. If you can t remember the last time you had a face-to-face meeting with one of these individuals, perhaps it s time to either reconnect or strike them from your list. Setting up an active and inactive referral list can help. That way you can channel most of your energy into the active list. How good are you? Referrals will only come your way if your sources believe you can help their clients solve their problems. When talking with referral sources, use actual case histories showing how you helped similar clients resolve matters. Consider partnering on an engagement with a referral source to demonstrate your capabilities. Finally, because referrals are based on trust, referral sources need to know that you re honest and reliable. That means not only providing referred clients with the best service but also recognizing that referrals are a two-way street. Be sure to refer clients to your referral sources whenever you think it s appropriate. Finding new sources What should you do if your referral network is too small or you re unhappy with current referral sources? Get out there and talk to people. Use business and social events to introduce yourself to other professionals and to ask about their practices. You never know where a few questions might lead. How to use leverage to your firm s advantage everage is a familiar concept with both positive and negative L connotations in the financial world. But leverage is less frequently found in law firm management. That s unfortunate because, when properly implemented by legal services providers, leverage is less about risk and more about improved efficiency and greater profitability. It takes a team For a law firm, leverage means allocating work to the right people at the most cost-effective level possible. For example, instead of having a partner research a relatively simple legal matter, ask a firstyear associate to do the work instead. This frees up the partner s time for business development work or complex, full-realization-type matters that ultimately are more financially remunerative. 6

7 budget? Was the engagement staffed correctly? Could the workload have been distributed more cost-effectively? In other words, teams should be held responsible for allocating their workload to the most efficient and cost-effective levels. By analyzing and correcting past mistakes, your firm can achieve better results on future engagements. Many firms find that the most efficient way to allocate work and create leverage is by building client teams. Teams should be made up of people with complementary skills including partners, associates, paralegals, admin staff and nonlegal experts who are focused on a common goal for which they ll be held accountable. Whether your firm currently works this way or is new to the team approach, successful leverage depends on several factors. First, your firm s culture must encourage team-based results and rewards. Firms that compensate primarily for billable hours will have a hard time convincing attorneys to share their workload with colleagues. Second, teams should be guided by clearly stated goals that the team members have agreed upon in advance. Goals might be project-based such as reviewing documents for privilege or longer-term, such as prevailing in a litigation matter. To ensure goals can be reached, draw up an action plan with specific assignments that take into account each team member s qualifications, work load and billing rate. Continuous improvement To ensure your firm is using leverage successfully, the managing partner or firm administrator should meet regularly with team leaders to analyze their work from a variety of perspectives. For example: Were the team s total hours and dollars within A systemic view If you re going to use leverage to your firm s advantage, client teams are only a starting point. No matter its size, every firm has certain systems in place that affect the efficiency and profitability of its operations. How clients are accepted or rejected, how matters are assigned and how bills are processed and collected are all examples of important systems. Each of these functions should be assigned to the most costeffective, appropriate-level people, and all routine responsibilities should be documented. The managing partner should meet regularly with team leaders to analyze their work from a variety of perspectives. If you need to reassign attorneys and staff, be sure to consult with them about their professional goals and interests first. Otherwise, you risk losing good people. And know that, in some cases, the most cost-effective, appropriate person for a function may be someone who doesn t even work in your office. (See Is outsourcing right for your firm? on page 2.) Embrace the concept Leverage isn t something that law firms can implement half-heartedly. The more broadly you embrace the concept, the more profitable your firm is likely to be. To better understand the potential savings associated with leverage, talk to your financial advisor. This publication is intended to provide accurate and authoritative information on the subject matter covered. It is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice on specific facts or matters and assume no liability whatsoever in connection with its use LFMsp15 7