The war on costs. Manage the cost base properly and the profits will rise. It sounds simple. And on paper, it is.
Each year in The Lawyer UK 100 Annual Report we rank the top 100 by cost per qualified lawyer (CPL), ie not including paralegals, trainees and other unqualified fee-earners. It may not be as glamorous a list as the profit per equity partner table, but it is equally important.
If the costs are low then in boom years profit will flourish naturally, while firms will be in a much better position to ride out any fallow periods when the work is not there. Let the costs spiral and profit will fall, talent will leave and a once robust firm may find itself with a costs crisis on its hands.
‘Costs’, though, is such an impersonal term. What it means is people, jobs and often redundancies. But in the harsh world of today’s legal market, that may be what is necessary to improve margins and make the business run more efficiently.
A visiting Scandinavian managing partner recently expressed his astonishment to The Lawyer at the levels of support staff in the UK’s top law firms. True, his firm had just 10 partners, but his belief was that the ratio between support staff and fee-earners at even the largest firm in his region was no more than 0.5:1. At most UK firms it is closer to 1:1 or above.
It does not sound a lot, but if you are Clifford Chance, with some 3,000 support staff, that is a lot of salaries. Any reduction, if it can be made using a proper business case, is going to help the bottom line.
The use of technology rides high as a major factor in reducing costs. All of the firms highlighted here have identified IT as a way of making more efficient use not just of their fee-earners, but also of their support staff. In some cases, Dundas & Wilson for example, that has meant bringing the management of IT back in-house; while in others, such as in Allen & Overy’s case, it has meant offshoring work to India. The end result is the same – lower costs.
It is no surprise that the technology companies that supply the legal market with labour-saving devices are evangelists for cost-cutting tricks. And there are gizmos for every stop on the work in progress (WIP) journey.
Canadian technology provider Hummingbird Legal Solutions, for example, offers a system called LegalKEY, which clears much of the internal new matter checks, including for conflicts and money laundering, which can account for days or even weeks of unbillable time. Hummingbird claims that its product can perform the same checks in hours.
“We have more interest in this particular area than any other, as firms are increasingly feeling the heat with regards to compliance and conflicts,” says Hummingbird UK marketing manager Sally Bellwood. “There’s a great deal of emphasis now on risk management in law firms and this goes some way to covering their backs, and more importantly gaining efficiencies.”
Once work has started, anything that can speed up the process and reduce WIP is likely to be welcomed. Richard Bate, general manager of Voicepath, believes that even the record performance reported by some of the firms in this year’s The Lawyer UK 100 Annual Report could be bettered. “The news that profit per equity partner [PEP] levels are up among several big London firms has been taken by the profession as a sign that the UK legal sector is finally emerging from the doldrums,” he says. “Yet is the profession missing a trick here? Most managing partners would agree that the largest limiting factors on any firm’s PEP are efficiency, dictated by how much work can flow smoothly through the system, and fixed costs in the form of non-fee-earning support staff. Workflow efficiency is frequently determined by the speed at which documents can be turned around. A case which can’t progress because of a typing backlog is a case that can’t be billed.”
Bate’s company offers firms outsourced document transcription. It claims that 95 per cent of the documents it produces are back with the fee-earner within two hours. It is not hard to see how saving time on that scale would feed straight back to the bottom line.
An innovative use of IT is the common thread between the three firms profiled in these pages. For any firm that has a costs crisis on its hands, there are also some handy tips on how to deal with what can develop into a nightmare spiral.
Ian McAndrew, Clyde & Co
Clyde & Co has achieved a reduction in costs by a combination of initiatives, although according to finance director Ian McAndrew, the most important has been properly managed growth over a series of years.
“Partly there’s simply been more work around recently resulting in growth, but we’ve also cracked down on fee-earners by making sure they record time accurately. Fee-earners can sometimes make judgements about what should and shouldn’t be recorded. The important thing is to record what they do and be accurate about it.”
In the support areas, McAndrew says the important thing is to capitalise on the growth of the business by spreading the work among fewer staff. The headcount in McAndrew’s finance team, for example, has remained static, while Clydes’ turnover has grown 50 per cent since his arrival in February 2001.
“I’ve improved the ratio in finance partly by the automation of straightforward jobs and by improving the skillbase of the people in the team,” he explains. “That also has the effect of making the team happier, as they’re doing less of the dull jobs and have more responsibility for more demanding tasks.”
Improving the ratios means making better use of technology. McAndrew says that Clydes has done this gradually. “There’s been no big bang approach to clearing everything and everybody out and replacing them with IT.”
Can a similar approach be taken with other support areas? “It may be less obvious that you can do this in HR, business development and IT itself,” says McAndrew. “These are areas that require a significant investment in professionals.”
McAndrew’s tip to firms that find their costs are rising is simple. “You just have to manage things very carefully,” he says. “If things are going well, it’s very easy to take your eye off the costs. You can then find yourself in a costs crisis. That’s when you cease to grow and your costs are out of control. The trigger is when the profit per equity partner starts to drop. If that starts to go down, then by that time it may be too late.”
Ian Dinwiddie, Allen & Overy
Ian Dinwiddie, Allen & Overy’s (A&O) finance director, agrees that for most large City firms, fee-earner to support staff ratios are too high. “It’s true,” he says. “For most large and magic circle firms, the ratio is about 1:1. Over the last three to four years we’ve been working on our support staff ratios. We’ve seen big improvements in the PA-to-lawyer ratio, but overall there’s also been a general reduction in support staff. It doesn’t sound that dramatic, but in the last year we’ve reduced it from 0.95:1 to 0.93:1.”
A&O is among the most progressive firms in using technology to shave the ratios even lower. The firm already sends a large chunk of its document production to India (since 2003 it has had a deal with William Lee), although it maintains a core service in London.
“This is simply law firms catching up with industry,” argues Dinwiddie. “Generally, this is the way the market is going and I’d be surprised if it didn’t drift down more.”
Does that mean more offshoring for A&O? Not immediately, according to Dinwiddie, but the firm is naturally always going to be on the lookout for the most efficient way of doing things. “[Offshoring] is likely to increase in the legal market, as it has across industry generally, and will become the accepted norm,” he says. “For example, most firms now outsource their catering – it’s an established part of life.”
All of A&O’s ratios for internal purposes are based on all fee-earners, solicitors or not. In other words, anyone who fills in a time sheet.
Dinwiddie offers some sound advice for any firm that finds its costs are spiralling too high. “Have a good look at the sort of activity people are doing,” he says. “Question whether or not you need to be doing this, or whether you can do it in a different way.”
Neil Cochran, Dundas & Wilson
The main reason for the reduction of costs last year at Dundas & Wilson, headed by Neil Cochran after the exit of Chris Campbell to RBS, was IT. The firm brought its IT support back in-house, saving it around £300,000.
Computacenter had been Dundas’s supplier for these services, but the firm eventually felt that it was not specialist enough. According to the firm’s finance director Joy Middleton, Computacenter had not been offering a complete outsourced system anyway, so Dundas continued to use specialist legal IT providers such as Hummingbird for more complex, legal-specific systems. “And we continue to do so,” she adds.
Dundas has also reduced its secretarial ratios, saving more than £100,000 in the process. “Overall, we’ve reduced the number of secretaries we have and broadened the range of skills that the remaining secretaries have, including via the use of IT,” adds Middleton. “In addition, we’re now fully utilising the resources in London. In other words, the office space we have is now full – bursting at the seams, in fact. So much so that next month we’re taking another floor. The key to property is that it’s a fixed cost, but it needs to be fully utilised.”
|Top-spending law firms|
|Rank||UK 100 rank||Firm||Costs per lawyer (£K)|
|2||59||Russell Jones & Walker||356|
|4||8||Slaughter and May||283|
|10||14||Denton Wilde Sapte||217|
|11=||45||Ince & Co||216|
|13=||20||Berwin Leighton Paisner||215|
|20||28||Bird & Bird||199|
|21||29||Barlow Lyde & Gilbert||198|
|22||4||Allen & Overy||197|
|23=||12||Simmons & Simmons||192|
|25=||78||Mishcon de Reya||191|
|28||88||Cripps Harries Hall||187|
|34||13||CMS Cameron McKenna||183|
|43=||38||Field Fisher Waterhouse||174|
|45=||21||Clyde & Co||171|
|Source: The Lawyer UK 100 Annual Report 2005|