Five ways for mitigating pressure on law firm profits without compromising service delivery

October 13, 2022

While 2021 was a profitable year for law firms, as 2022 progresses, a more challenging business climate is emerging. According to a survey, expenses across a sample of almost 200 US law firms increased by 14.7% in the first half of 2022, far outpacing revenue growth[1]. The Thompson Reuters Law Firm Financial Index fell for a fourth consecutive quarter[2], the longest period of decline in the index’s history. This was caused by reduced demand for law firm services by 0.5% compared with a year ago, M&A demand declined 4.9% over the same period, while expenses surged more than 12%.

In the current climate of economic uncertainty and inflationary concerns, the pressure is mounting on law firm operational leaders to maintain high service levels while controlling costs. Law firm leaders know all too well the challenges of this difficult balancing act. Fortunately, there are ways to be more efficient without sacrificing service levels to fee earners and clients. These five tips can enhance law firm operations while protecting the bottom line.

Build a culture of innovation within your internal support departments

Clients are under pressure to reduce their own costs, which in turn is leading to greater scrutiny of their law firm panel. One of the key criteria in this analysis is service delivery quality. Outdated and poorly managed support processes can frustrate legal teams and impact work product quality. Law firm leaders are increasingly recognizing the importance of innovating across their support processes. One way to increase innovation is by establishing dedicated teams whose sole purpose is to identify and implement new ideas. These teams can be charged with exploring new technologies, processes, and ways of working that can improve the firm’s overall performance. Taking such a proactive approach to innovation can ensure that a firm is well positioned to meet the challenges of the future.

More law firms are considering third-party consultants and experts to help look under the hood of their existing operations and provide crucial advice to plug the gaps in operational inefficiency. This enables law firm leaders to maintain control and still gain input from experts who know how to enable technology and strengthen operational processes. This helps reduce costs and builds more connected support services that ultimately keep clients satisfied.

Talent acquisition and retention is a firm-wide issue: don’t let staffing gaps negatively impact your fee earners

Talent challenges extend beyond partners and associates. Many law firms are struggling to attract and retain support staff. In the US, a survey from the Pew Research Center revealed that in 2021, low pay, a lack of opportunities for career advancement and feeling disrespected at work were the top three reasons people quit their jobs.[3] In the UK, a survey from PwC found that almost 20% of workers said they expect to leave their current job in the next 12 months for better pay and job satisfaction.[4] There has also been an upsurge in early retirement since the start of the pandemic.[5]

Abnormally high attrition combined with the rising cost of talent leads to role vacancies that can cause unintended consequences. Understaffed teams, particularly in administrative roles can impact fee earner productivity, service quality and delivery times, leading to frustrated lawyers and clients.

One way to reduce this impact is harnessing technology to automate repetitive tasks. Automation can increase the speed and accuracy in handling and completing requests. Rules-based technology, combined with the right people automates some repetitive tasks that significantly reduces mistakes and saves time.

Working with experts who understand how to offload process-driven work using automation technology, can reduce operational expenses and free up strategic resources to focus on high-value client activity.

Think outside the box by thinking outside your office

One of the post-pandemic challenges for law firms is repurposing their real estate to meet the demands of a more virtual workforce. As more law firms reconfigure office space for more collaborative activities, or reduce their footprint to accommodate fewer in-office workers, they have an opportunity to look at office space for support activities too. Does support staff need to work in high-cost offices? Could those teams work outside major cities, or even offshore? Real estate needs combined with an environment of high turnover, are leading more law firms to consider using onshore or offshore support centers, or a blend of both. Not only does this allow for better allocation of expensive real estate, it also provides broader access to talent.

For example, prior to the pandemic, secretaries were expected to be a few steps away from a lawyer’s desk. However, now that support roles are more virtual and secure technology is enables connectivity, secretaries can easily handle tasks remotely without the need to take up expensive real estate.

Rightsize your support team

With law firm operations under greater pressure to do more with less, it’s essential to make sure that your support teams are structured to maximize productivity. There is a greater need for tools that provide data to help understand staff-to-productivity ratios and harness data analytics to get a clear picture of team and individual productivity. Having access to this data helps leaders make informed decisions, build the right balance of support staff for each function, and ensure that these lean teams are working at maximum efficiency.

Build processes to get paid faster

In an environment where expenses are up and profits are down, more law firms are facing cash flow pressures. Improving processes to help your firm get paid faster can make a significant difference. Faster payment starts with accurate billing. This is an ongoing challenge for firms that must create complex invoices that differ by client. Most law firms have established billing processes that rely on multiple decentralized teams who liaise separately with a partner or the client’s legal operations group. This often results in disjointed activities, inconsistent management and missed compliance with outside counsel guidelines; which is a recipe for bill rejection and delayed payments. Firms that have successfully improved their billing process are those that use a client-centric model tailored to support each client’s billing narratives and outside counsel guidelines.

One example of building processes to get paid faster can be found in our work with an AmLaw 100 global law firm.  We helped transform their existing billing process to a client-centric model with measurable results. We looked at current billing workflows, benchmarked them against law firm peers and formulated customized best practices to identify process improvements. We created a centralized team with the right skill sets to match the myriad of billing systems and outside counsel guidelines required. This centralized team established an accurate narrative and rate checking process and the results were that the firm was receiving payments faster: the billing cycle was reduced from over 45 days to 11 days with DSO reduced by over 60%. Read our AmLaw 100 firm case study.

In conclusion: leaving key support areas to the experts can reap long-term benefits

While there is no one-size-fits-all answer to striking the right balance, there are ways to improve processes that can simultaneously reduce operational cost and improve service for clients. Building a foundation through an innovation-focused culture and thinking outside the box can help identify pain points in your operational processes. Automating repetitive tasks, rightsizing support teams and their real estate requirements, and improving processes connected to productivity and cash flow will boost revenue while helping lawyers deliver to clients faster. Partnering with proven experts is the fastest way to pull these levers.

Find out more on how we help law firms evolve for the future and focus on core activities.

[1], The Pressure is on: Demand Dip, Rising Expenses Squeezed Profits in First Half of 2022. Gomez-O’Rourke and Gretta Rusanow, August 15, 2022

[2] Thomson Reuters, Thomson Reuters Law Firm Financial Index flashes warning signs amid fourth consecutive quarter of decline. Scott, August 11, 2022

[3] Pew Research Center, Majority of workers who quit job in 2021 cite low pay, no opportunities for advancement, feeling disrespected. Parker & Menasce Horowitz, March 9, 2022

[4] Bloomberg UK, ‘Great Resignation’ in UK Shows 20% Planning to Quit Soon, Survey Shows. Saker-Clark, May 24, 2022

[5] People Management, Brexit exacerbated UK labour shortages, but causes are ‘more complex’, research says. Cholteeva, August 15, 2022

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