From Accounting and Financial Planning for Law Firms October 2017
A “hat trick” is a sports metaphor and occurs when three goals are scored by a single individual in a single game. Hat tricks do not occur often (and for some reason appear to occur most frequently in hockey games), but when they do the fans react with great enthusiasm, a lot of cheering and at least in the games I have attended, a lot of spilt beer.
I was recently reminded of this expression at the ALA annual conference in Denver. I was speaking on how law firms could provide better administrative support for their attorneys and how alternative strategies were being deployed by some law firms to achieve those goals.
After my session, the discussion continued with a group of participants and the hat trick metaphor was born. We decided that the administrative services hat trick in law firms would be:
- Higher quality plus additional services provided to a firm’s attorneys for more hours and additional days than what is now currently available.
- Improved administrative employee morale, less turnover and real career progression opportunities for the administrative staff.
- Reduced operating expense for the firm, resulting in additional funds to finance a firm’s strategic growth, upgrading of the firm’s technology platform and equipment, or additional funds to compensate superior partner/attorney performance or attract additional partners/attorneys.
To achieve all of those benefits with a single action or even a group of actions by the management of a law firm would indeed be worth losing some beer.
But, before we dismiss the idea entirely, let’s recall the old adage that says “You will never get to where you want to go by remaining where you are right now.” That statement is a variant “the definition of insanity is doing the same thing over and over and expecting a different result,” a bit of American folk wisdom that has been often attributed to Albert Einstein (although it has not been completely verified that Einstein actually said it).
So, let’s use Einstein’s wisdom to analyze our administrative services hat trick and see if indeed there is a way that will make that feat possible.
People expense (compensation, benefits and fringes) make up the largest controllable part of the administrative services expense budget, averaging between 10.5% and 12.0% of all operating expenses. Historically, law firms have sought to control this expense by limiting the size of annual increases, allowing some positions to go unfilled, and in particularly bad times, downsizing the administrative staff. However, the steady increase in benefit costs, the failure to enforce salary caps and the addition of staff has eroded the effectiveness of most firms’ cost control measures.
A recent nationwide survey of administrative staff to attorney ratios documented that, on average, a legal secretary supports 2.94 attorneys at an average annual cost of $89,000. In large metropolitan centers (Los Angeles, Chicago, New York, San Francisco, etc.), the average is much higher, often in the $125,000 range.
Utilizing the national average, the average legal secretary costs $30,270per working attorney in a law firm. That works out to approximately $17 per billable attorney hour (assuming 1,700 hours per year) or in the average support ratio of one secretary for every 2.94 attorneys at $50 per hour. As noted, in larger metropolitan areas that cost could run as high as $75 per hour.
That same survey documented the average annual compensation for other key administrative positions including; Accounting and Finance ($100,000), Human resources ($110,000), IT ($115,000), Marketing ($113,000) and Research ($97,000.) Once again, in large metropolitan areas these compensation amounts will be 10% to 25% more.
Clearly y, administrative compensation expense is a key factor in the overall profitability of a law firm, and as long as we look at it as fixed and the primary ways of controlling that expense is through limiting the size of annual increases or not filling vacant positions, we are committed to doing the same thing over and over and expecting a different result.
But there are other, more effective ways of controlling administrative expenses. Alternative strategies that many firms have employed that achieve the sought-after hat trick of more and higher quality services, improved staff morale and lower costs.
Secretarial realignment is one of the most effective (and quickest) strategies for improving service levels while reducing costs. The concept of a secretary supporting two or three attorneys is about as relevant to the current legal administrative environment as an old Vydec machine is to today’s word processing center.
Most attorneys now are very computer literate, have been preparing documents for years and apart from stylistic and formatting help need little day-to-day typing support. Large documents can be handled by dedicated word processors located in support pods or centralized support facilities located in the firm’s offices or provided by an outside vendor.
Our work indicates that attorneys today need more administrative and clerical support than document preparation assistance. Reservations, filing, copying, e mail management and other clerical tasks consume up to 40% of a legal secretary’s time. Most legal secretaries shun these activities and so they are either not performed or done in a haphazard way.
These essentially clerical activities can be better performed by entry-level employees. Employees who are just entering the labor force and trying to find a career usually work harder than those employees who dislike the repetitive clerical tasks assigned to t hem.
In secretarial realignment, support pods of four to five staff (two to three legal secretaries and two to three administrative staff) support 12 to 18 attorneys. The secretaries perform the actual legal secretarial work and the Administrative Assistants (AAs) perform the routine clerical activities and light typing(shipping labels, indexes, client list maintenance, etc.). The average annual cost of an AA is between 40% and 50% of a legal secretary, so the savings can be significant.
We estimate that a firm with 200 attorneys can achieve an annual savings of between $1.0 and $1.2mm annually utilizing this secretarial support model.
High Value Add Right Sourcing
A second strategy for improving service and reducing costs is to relocate the High Value Add (HVA) services outside of the main office of the law firm to a lower cost geographic region of the United States. Akin Gump and Orrick Herrington pioneered this strategy in the early 2000s. As the Deloitte partner who oversaw both engagements, I can say that they were very complex engagements that took a significant amount of time to complete and money to finance. However, the savings for both firms was enormous. The total initial savings was in the range of 25% and now are closer to 40% of their previous annual operating costs.
Since that time, more than 25 Am Law 100 firms have built their own captive outsourcing centers. All of those firms have reported significant savings coupled with dramatic service level improvements.
The key to successfully outsourcing HVA administrative functions is right sourcing them. Law firms are not manufacturing concerns. They do not manufacture widgets and superior quality is essential. There are no government mandated “recalls” for legal services.
Successful outsourcing of law firm administrative services requires identifying those functions and individuals who need to be immediately available to the management and partners of the law firm. The entire C suite, the pricing and analytical staffs and for some firms their billers, all need to remain in the practice offices. The remaining positions can all be moved to a lower cost area where recruitment of high quality staff is both easier and less expensive. I like to point out that in a firm with more than one office, if the attorney is not in the home office the administrative functions are already outsourced. However, they are outsourced to high-cost areas where the completion for talent and administrative expenses are much greater than in smaller cities.
Until recently, outsourcing has been restricted to larger firms that have the administrative management talent (or can purchase it by engaging consultants) and can afford the considerable investment required to build a center. Costs in the $10 to $20 million-dollar range are common for captive outsourcing centers.
However, recently a number of vendors have been exploring the concept of building a shared service center that will provide individual law firms with a variety of HVA services through dedicated staff to client firms.
This concept, as it develops, will enable mid-sized law firms to reap the advantages that centralized administrative services provides without the investment or long lead time that building a center entail.
It will move some firms a long way down the road to where they want to go.