Partnerships Special Report: Cutting pledge

In these tough economic times, law firm partnerships must be prepared to make decisive cuts to their cost bases. They just need to be careful where and how they wield the knife, say David Hawley and James Anderson

Partnerships Special Report: Cutting pledge
As economic and market conditions have deteriorated in recent months, firms have turned their attention to two priorities – capturing as much business as possible while at the same time applying a sharp focus to their cost base.

Achieving cost efficiency in any people business is never without pain, but partnerships that are prepared to take ­decisive action in the short term and be bold about adopting more efficient business models are likely to emerge ahead of their competitors as conditions improve.

Rethinking overheads

Almost all firms have already tightened up on discretionary expenditure, not only in central functions but also in expenses incurred by partners and staff (always a more difficult area). The current conditions give leadership licence for action – even where firms are performing well, there is greater acceptance from people of the need for ­control over expenditure. Crucially, though, firms should resist the temptation to attack costs that enable their partners to stay close to clients, pursue opportunities and sustain morale among their teams.

As firms engage in their planning for 2009-10, there is a real opportunity to lay down significant challenges on cost, but to do so in a way that causes budget holders to protect expenditure that supports revenue generation.

Marketing and brand spend should be considered carefully. So often this is an early target of cost-reduction programmes, but it can be vital in a shrinking market where the only way to maintain revenues is to take market share from other firms.

Now is also the time to accelerate thinking about transforming the cost base in the medium term. Many firms have plans around shared services, outsourcing or offshoring – and while some have acted decisively, these initiatives often drag on, with little imperative to act. That imperative is now here. Although these moves are rarely without investment cost, this could be the best time to make the change – and make it stick.

Aligning capacity to demand

Most firms recognise there is opportunity for savings in overheads. All know that getting their fee-earner capacity right – both partners and associates – will be critical in achieving good financial performance in the near term. The flow of announcements of headcount reductions has accelerated since Christmas as firms seek to ensure that teams are sized appropriately for current and future volumes of work. Even some of the most ­successful firms have underperforming areas of business that are unlikely to see a return to recent volumes in the medium term.

Asking colleagues to leave – however that is structured – is always difficult. But if carefully handled, those directly affected can move on with their dignity intact and with respect for the firm, and those who remain can renew their focus on the market.

Leadership teams face an ongoing challenge in managing headcount consistent with demand in a lower-growth environment. Firms have got used to high recruitment – offset by high attrition – and rapid promotion both to fuel growth and to meet the career goals of their people. Reshaping for lower growth while addressing people’s ­aspirations presents real challenges to ­managers for whom these markets are a new experience.

Towards a new model of service delivery

This is hardly the first time in history that there has been a challenge to the cost of legal advice. Nevertheless, we are now ­seeing much greater evidence of price ­sensitivity among clients. While adjusting rates and leverage ratios can go some way to address this, now may be the time for a more radical redesign of the provision of legal services. The implementation of the Legal Services Act will provide a further catalyst for change, as companies with a lineage from outside the law will have a much greater influence on how some firms are managed.

At the most basic level, such a redesign can mean dismantling the individual ­fiefdoms that still exist in many firms, ­thereby ensuring that client service is ­coordinated across different practice areas and that resources are used efficiently throughout the whole firm. Going a step further, it can involve pulling apart the ­delivery process and rebuilding it in a more efficient way.

This should enable partners to spend more time on the most complex needs of clients and delegate other work as far down the hierarchy chain
as possible.

Such a set-up can be supported by the range of technological tools now available to help firms manage legal process and content. The logical extension of such a transformation is the disaggregation and re-bundling of service delivery through a combination of internal and external ­specialist providers, which will enable firms to differentiate themselves on the basis of what they do best while tapping in to lower-cost, market-leading resources for other activities.

Some firms may feel they already have enough on their plates without changing the way they work. However, we would argue that current market conditions ­provide both the opportunity and imperative for change. If firms are prepared to be bold now, not only will they be ready for the market upturn that will eventually ­follow, but they can best position themselves for the underlying transformation of the economy and the legal sector.

David Hawley is a director and James Anderson a manager in the strategy ­consulting practice at Deloitte