Outsourcing as a Strategy to Manage Support Cost and Variable Demand

A slightly different version of this article originally was first published in fall 2009 as a chapter in Implementing a Successful Legal Outsourcing Engagement, by Michael D. Bell of Fronterion, an LPO analyst firm. The study is available for purchase from the web site of publisher Ark Group.

Outsourcing as a Strategy to Manage Support Cost and Variable Demand

By Ron Friedmann, Senior Vice President Marketing and Amit Shirke, Director of Operations

The economic crisis of 2009 led many large US and UK law firms to lay-off lawyers and staff. It also forced firms to confront long-standing problems that, until now, they had conveniently swept under the proverbial rug. Rampant lay-offs protected profits in the short term but failed to address fundamental problems. Outsourcing the middle office is a better way to reduce staff cost on a long-term basis by addressing the structural inefficiency of traditional support approaches.

The challenges of supporting lawyers

Law firms can rarely staff to meet the level and type of support that lawyers need; they typically under- or over-staff. During recent decades of rapid expansion and growing profits, firms could afford to ignore much inefficiency, for example:

  • Under-utilizing secretaries – law firms recruited many secretaries whether or not the lawyers they supported needed help;
  • Word processing centers run 24/7, even if there is little need to edit documents. Yet when demand is high, they have to perform triage or pay overtime; and
  • Not hiring enough specialist business researchers.

Not every example is true for every firm, but many firms struggle with these and similar problems.

Until recently, management implicitly operated with the mindset ‘better to be over-staffed than under-supported – no one will notice a 10 per cent difference in expenses.’ The economic crisis turns that thinking on its head. Now the mindset is, ‘how can we cut costs and still provide support for lawyers?’

Outsourcing middle office functions is one strategy to control cost and match support skills and levels to demand, even when that demand fluctuates daily. Working with an outsourcer can reduce the economic cost of support, i.e., the underlying amount of staff, space, equipment, software, IT, etc. required to provide it. The remainder of this chapter explains how outsourcers can reduce economic cost in many ways and offer other benefits.

Improving capacity utilization

Outsourcers serve multiple customers. By aggregating demand across many law firms, an outsourcer encounters less variability in total demand than any single firm. This means more effective resource utilization. Law firms can achieve some of these benefits by centralizing functions across multiple offices, but this approach does not achieve the same scale.

Even where outsourcers, to protect confidentiality, devote staff to a single firm in a dedicated delivery center, they have techniques that allow better capacity management. These include:

  • Cross-training dedicated staff to perform different types of work;
  • Scheduling arrival and departure patterns based on rigorous analysis of actual demand patterns;
  • Providing extra resources from a shared pool to meet peak demand; and
  • Judicious use of overtime based on real, rather than anticipated demand.

In theory, law firms can take these steps too, but in practice they rarely do. Because support is the business of an outsourcer, good providers pay close attention to managing resources with these and other techniques.

Increasing efficiency with the right tools and training

Even though law firms invest heavily in technology and training, they cannot always deploy the right software or assure that the staff person doing a task is properly trained. Staff can rarely afford to be away from their jobs for more than an hour or two for training. Outsourcers operate on a larger scale than any one law firm so find it easier to invest in specialised tools and training. Some outsourcers invest both in proprietary technology and a range of commercial-off-the-shelf software. All reputable outsourcers provide extensive training.

Accessing specialised resources

Even the largest firms struggle to manage certain high-end but not regularly used talent, for example, graphics experts or specialized business researchers. Meeting the demand for the service these individuals provides means hiring full-time staff. Specialist full-time personnel required in relatively low numbers are ‘lumpy’, i.e. once a firm fully utilizes one specialist, meeting additional demand means overwork until the second is hired and, typically, that second person is under-utilised. Outsourcers can avoid this lumpiness, again by aggregating demand across multiple law firms and by cross-training.

Managing risk by converting fixed to variable costs

Law firms have long avoided significant capital investment. Partners resist large capital contributions and inter-temporal preferences of junior and senior partners make investment decisions that much harder. Bank loans closed the gap in the past but are now very expensive. By outsourcing, firms can convert fixed costs to variable ones, avoiding the need to borrow. Examples of fixed costs law firms can avoid include lease commitments and the use of specialised equipment or software.

Delivering performance with a formal SLA and metrics

Most law firms lack the metrics and formal programs to assess internal service delivery. Many law firms find it a challenge even to administer rigorous individual performance reviews, spot problems, and take corrective action. Consequently, internal service levels vary widely.

Outsourcers, in contrast, live by metrics and SLAs. For example, in document production, an outsourcer would measure the turnaround time and accuracy of every task and employee. Of course, to benefit from this, firms must invest more in specifying SLAs and a governance process for their outsourcers.

Quality outsourcers go a step further with formal best-practices sharing and quality-improvement programmes, often based on Six Sigma. This is a method to analyze and improve processes, so that each year, efficiency improves.

Lowering cost by smart locations decisions

Labor costs vary widely by location, both within the US or UK and across countries. Many large firms operate exclusively in high-cost cities. Those that have some low-cost locations may be unwilling or unable to build and manage an operations center in such a location. By working with an outsourcer, firms can tap labor in lower-cost onshore or offshore markets. For example, the direct cost (salary plus benefits and payroll tax) for a secretary in a major US urban area is about $85,000. Making reasonable assumptions about hours worked, the hourly cost is about $50. If, however, firms utilize secretaries only 80 per cent of the time, then each hour costs $63. While some of the work secretaries do is hard to replicate, some of it is commoditized – for example, word processing. By offloading ‘low end’ work from secretaries, firms can reduce – by as much as 50 per cent the effective hourly rate of support. This approach assumes, of course, that firms actively manage the number of secretaries and their work allocation.

Assuring business continuity with multiple locations

Centralizing staff in one location, as opposed to providing staff in multiple locations, typically minimizes cost. Some law firms have done this. The downside, however, of a single central location is the risk of business disruption. The last decade has shown that no place in the world is safe from disruption, whether from acts of nature or man. Outsourcers that operate multiple delivery centres can offer the best of both worlds – either splitting production between two or more countries, or arranging a ‘fail over’ from one location to another in the event of a disruption. Of course, assuring business continuity costs more. This goes back to economic cost. Whether a firm operates on its own or uses an outsourcer, operating at two locations or providing ‘fail-over’ service has real costs.

Improving support by optimising task allocation

With the right planning, firms can do more than just save money by outsourcing. They can also benefit by re-organising how they deliver support generally. For example, firms can outsource heavy document production tasks and transcription. This frees up secretaries to do higher value tasks such as relationship management, workflow and contributing to knowledge management systems. Figure 1 provides a conceptual view of how outsourcing can lead to a new mix of higher-value tasks for secretaries. Outsourcing enables this type of workplace re-engineering but does not guarantee it; firms have to give considerable thought to such changes.

Figure 1:One way to optimise the task allocation

Future flexibility for the shape of firms to come

The legal market has yet to learn what the ‘new normal’ will be once the economic recovery is underway. Many observers argue that the era of law firms as pyramids is over. Some say associates and staff are too expensive and that firms will become ‘diamond shaped’ or ‘cylindrical’, meaning ratios of both partners to non-partner-lawyers, and lawyers to staff will drop dramatically. Especially in a time of transition, many firms will seek greater flexibility in staffing. And even if firms do not ‘change shape’ the pressure will be for lower costs – another reason that favors outsourcing.