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Outsourcing: The essential competitive advantage?
Where are solicitors today?
The Legal Services Act is a difficult challenge to face at the best of times, but with the economy in fragile recovery, banks still reluctant to lend to solicitors and publicly funded legal work declining, the changes needed within law firms are multiplied.
A great deal has been written recently about the challenges facing the legal profession. What is absolutely clear is that continuing as before is not an option. Firms of solicitors have already disappeared and anecdotal stories abound about the parlous financial state of firms both large and small. Being profitable is not a solution on its own – many firms are going out of business because of lack of cash.
The problems have arisen for many reasons, and debating them is of little use except possibly where we can learn from the past. What is needed now is a new business model for a law firm.
Embracing change
In some respects it is more difficult to make the changes because the more senior partners have been in business as solicitors for decades, and there is reluctance within most professions to change. The new entrants to the legal market place have substantially more experience of managing the delivery of products and services to customers effectively, particularly since they are also starting with a green field site. Historically the legal profession has concentrated on providing technical legal advice and assistance without a dedicated focus on speed of delivery or effective communication. Because of what was in effect a monopoly, solicitors have never truly had to face competition and pressure on prices.
It is therefore essential for there to be a clear focus on providing a service to clients that the new entrants cannot match. However, in order for that to be addressed, the first step must be to create the best business model for the delivery of legal services.
Where do solicitors need to be tomorrow?
In order to compete effectively, solicitors will need to be much speedier in the delivery of legal services, better at communication with clients, and much more caring about them as individuals. Whilst the vast majority of solicitors use great skill and care with the individual legal matters that they resolve for their clients, only a minority care for their clients in a wider sense. This is going to be fundamental to success in the future because this is the area in which the new entrants to the market place will find it much more difficult (or even impossible) to compete. It will take away the need for solicitors to provide legal services at rock bottom prices by instead providing additional value to the client.
However, there will still be a requirement to provide legal services at a more competitive price than has been the case historically, with the challenge of retaining a satisfactory profit margin on the work.
How do they get there?
In order to create an effective business model, the Partners will need to answer a number of fundamental questions. This involves Partners taking a transparent approach with each other, and answering some difficult questions in a more frank and open way than they have perhaps ever done before. The following are examples of questions that may arise.
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Which services (legal or ancillary) will they provide to the market place? Are all of the Partners agreed as to which services are the most appropriate, and are they willing to cease acting in those that aren’t - even if these fall with their own particular area of legal work? In terms of being appropriate, has there been sufficient research and analysis to identify that the services selected can be delivered effectively, profitably, and with a competitive edge?
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Do all of the current Partners add value to the firm? In which way will each partner contribute more to the business than he/she takes out by way of earnings?
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How will they provide the working capital required by the business going forward?
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Do they have the right people with the right skills within the current business to enable them to succeed in the new more competitive and demanding environment? If not, are they prepared to take the difficult decisions that in effect mean that some existing (and perhaps long serving) employees no longer have a place within the business?
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How do they learn to compete with the more sophisticated marketing approach of those who will enter the market place later this year?
Reducing unit costs
The key to achieving an effective business model is finding the right financial model – and reducing unit costs.
In order to compete effectively a business in any sector needs to manage the unit costs of providing a product or service. It is therefore not just about reducing total expenditure. There can in certain circumstances be an increase in expenditure to enable the business to benefit from economies of scale that have the effect of reducing the unit cost.
One of the most important options for managing the unit cost effectively is found in outsourcing the non-core business activities of the firm. Different legal services or products that are provided by solicitors are usually cyclical in terms of volume. Traditionally, in most financial years a law firm will have one or two teams or departments that have not been profitable and that are in effect subsidised by the other teams or departments where revenue has been increasing. If you take the obvious example of domestic conveyancing, in the last 12 months it would be surprising if the residential department of a typical law firm had increased its revenue or profitability over the previous years.
In the future, having the flexibility to upsize and downsize a particular type of work will be critical to the ability to compete effectively in the marketplace. The business model should be largely based on discretionary spending (of which the major part is likely to be salaries). The fixed overheads, such as property costs, should be kept to a minimum and reduced wherever possible.
Keeping fixed costs down
Particularly relevant will be home working and hot desking. There are already law firms that have experimented with everyone working from home, and having one central office with meeting rooms and only a receptionist/telephonist available during working hours. That’s not to suggest that this is the only model or one that should be considered in every case. It is merely an extreme example of the ability to upsize and downsize by having most of the overheads contained within the discretionary spending.
In keeping fixed property costs to a minimum, serious consideration should be given to outsourcing non-core legal activities. Core business activities for solicitors are limited to undertaking client work and managing relationships with clients and potential clients. All other activities can be outsourced. If accounts, HR, hardware, software, switchboard, dictation, file reviewing, legal costs drafting, and other non-core activities are outsourced then the business will only need to pay for the services that it uses. This enables the business to increase the volume of work without the overburdening of support services or the need to further recruit. It also enables the business to decrease the uptake of these services when the volume of business reduces without the cost of redundancies. Of equal importance, it reduces the requirement for office space and therefore enables the fixed property costs to be kept at a low level.
The focus on core business
There is of course another major benefit of outsourcing. Using outsourcing to reduce costs and create a flexible financial model also enables management to focus on ensuring excellent service delivery and good communication with clients and potential clients. There is a huge saving of management time and energy which can then be diverted to these core activities that will be the key to competing with the new entrants to the market place.
Professor Martin Read
February 2011
The Solicitors Outsourcing Association (SOA) is an independent, not for profit organisation, uniquely representing the interests of both solicitors and outsourcing suppliers. Members of the SOA are carefully selected based on their exemplary service levels and expertise in the legal sector. Outsourcing provides your business with many tangible benefits; the SOA endorsement guarantees you quality assurance and peace of mind.
www.thesoa.co.uk
www.thesoa.co.uk