2011

Jonny Mirkin

September 2011

Operational challenges facing the legal sector

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CONTENTS

CONTENTS

Introduction ............................................................................................................................................................ 2

What are the operational challenges facing a firm? .............................................................................................. 2

Inputs ...................................................................................................................................................................... 3

First impressions & technological systems ......................................................................................................... 3

Processes: ............................................................................................................................................................... 4

Outsourcing ........................................................................................................................................................ 4

Operational flow – office layout ......................................................................................................................... 5

Operations at a financial level ............................................................................................................................ 6

Maximising billable hours ................................................................................................................................... 7

The problem of knowedge management ........................................................................................................... 8

Outputs ................................................................................................................................................................... 9

Client communication ......................................................................................................................................... 9

Deliverables ...................................................................................................................................................... 10

Conclusion ............................................................................................................................................................ 10

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INTRODUCTION

Ever since the 1970’s and 1980’s, operations management has been extended to include the production of

services (Slack et al. 2009). Law firms across the globe are slowly realising that to survive and grow in this

changing market, they too need to examine the operations within their firms. Looking at a law firm, one could

summarise its services consist of either advice, representation or other services (for example managing wills

and trusts on behalf of clients).

Traditionally, management decisions are made by the partners of a firm. Usually they have no training in

management functions and operational performance is a ‘buzz word’ with little or no practical implications for

them. In many firms, particularly smaller firms, the entire partnership is likely to have an active role in

management (Downey 2011).

Some firms have dealt with this issue by bringing in specialised managers; however firms are still facing

increasing operational problems with consumers refusing to abide by the traditional models. As clients

become savvier with internet playing a larger part in offering information, law firms need to find new ways to

streamline their operations and maximise cost and service efficiencies.

In this article, I will explore several areas of research around operations that look at ways to get the most out

of the firms. Some of this will reveal existing approaches and techniques while others will have a particular

focus on changes required for the future.

WHAT ARE THE OPERATIONAL CHALLENGES FACING A FIRM?

There are numerous areas of operations within a legal firm, including:

INPUTS:

o First Impressions - How a firm handles clients coming in and evaluates what to do with them;

o Communication and IT systems - Identify cost saving technology to reduce overheads;

PROCESSES:

o Outsourcing - Identifying steps a firm can take to reduce unit costs to gain a cost advantage;

o Operational layout and environment - How layout and environment can impact on

performance;

o Financial Implications - Managing costs within the firm and accessing investment for growth;

o Increasing billable time - Looking for ways to increase efficiency and output of the firm;

o Knowledge management - Evaluate options to minimise delay/problems with information

sharing;

OUTPUTS:

o Communication with clients - How firms can communicate more efficiently with their clients;

o Deliverables – What clients expect from a firm in terms of speed and delivery of services.

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INPUTS

FIRST IMPRESSIONS & TECHNOLOGICAL SYSTEMS

The first area of operations to examine is the stage when the client first ‘enters the door’. Regardless of

whether this happens via an email, a phone call or a walk-in, there needs to be systems in place to effectively

manage the process from when the client enters the office to the time the problem is resolved or passed to

someone else.

I have shown this traditional flow graphically:

In a traditional firm, all enquiries are generally handled by staff at reception. If the matter is administrative, for

example giving of contact details or making a payment, this is handled by the staff there. If the client is seeking

information or advice from someone else, the receptionist directs the client to the appropriate staff member

elsewhere in the firm.

There are problems with this approach:

1. This presumes the receptionist knows which staff member is most appropriate to handle the client;

2. It relies on the appropriate staff member being available to take an appointment at a time suitable to

the client;

3. It doesn’t take into account times where there are numerous clients at one time seeking assistance;

These problems can be handled by training staff appropriately to deal with clients and particularly to

understand what staff members can helps with what issues. This will reduce the number of instances where

clients are handed around several staff members before meeting with the correct advisor. This will in turn

reduce wasted time of the fee-authors1 and increase time available for billable work. Furthermore it will

increase customer satisfaction as a result of having the file handled only once.

New IT systems are being installed in firms to handle the second of these issues. For example, when a lawyer is

in a meeting, on a call or out of the office they can toggle a visual suite that shows to other staff and reception.

This allows others to quickly assess the staff member’s availability and saves time tracking them down. The

1 Fee authors are the lawyers and legal executives who record their time against clients’ files. They are also

known as fee-producers in some firms. The majority if not all lawyers in a typical firm will be fee-authors.

Client walks-in

Client calls

Client emails

Reception

Reception

assistance

Client referred or

appointment made

Lawyer meeting

Legal Executive Advice

Advice

Other Staff Member Assistance

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digitalisation of calendars through software such as Microsoft Outlook also enables appointments to be made

directly by staff without the need to consult the staff member.

With increasing time constraints, and reducing costs of implementing such systems, it is becoming more

common to see these systems in firms today. The introduction of ‘cloud systems’ and ‘software as a service’

systems is giving firms more flexibility, access and reliability than ever before (Murley, 2009).

With more and more clients moving to digital systems, email is becoming a common communication method

for enquiries. Firms are also now including online appointment requests on their websites. These kind of

improvements improve the operational flow for both clients and the firm.

These improvements help however when numerous clients turn up or call the firm at the same time, there is

potential for a problem. A missed call could mean missed business so it is vital that all clients are dealt with

promptly. To address this, firms have introduced office juniors who work mainly on clerical/admin functions

and are available to handle calls and messages during peak times. They are generally cheap to employ and

useful for the firm. Today, more and more firms are introducing additional phone systems to handles peak

calls including automated machines, call-waiting options and call forwarding. All these electronic options allow

the firm to take peak calls and retain clients efficiently.

Burke (2010) argues that by using a transaction-cost approach, firms can link their shape to the relative costs

of internal production versus market transactions. According to the authors, technological change is perhaps

the greatest influence on such costs. “It therefore potentially affects the shape of all firms, and the very

existence of some. This point is as famously associated with Joseph Schumpeter as transaction-cost economics

is with Coase.” Firms looking to take advantage of these technological changes will see a number of changes

such as cost-advantages, improvements in customer service and consistency of service.

PROCESSES:

OUTSOURCING

Perhaps one of the biggest problems facing firms moving into the future is the increasing availability of

information online. This is having a flow-on effect to firms, particularly in the fees they are able to charge.

Clients are demanding more work for less money, and to keep-up firms have to explore new operational

strategies to help reduce their unit costs.

Bernard Burk, the Assistant Professor of Law at UNC (2010) explained that although law firms provide their

clients with an integrated package of all the services necessary to produce what the client needs, it is not

logically or legally necessary that they always do so using only their own personnel and resources. This line of

thinking is developing rapidly and operationally firms are realising quickly that sometimes it is a good idea to

look for cheaper alternatives to their traditional business model.

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One of the more recently accepted changes to legal firm operations is the notion of outsourcing; paying

someone else less money to do part of the work then it would cost to keep in the firm. For example,

outsourcing dictation, research and other routine tasks are common practice in some of the large firms

worldwide today. This is becoming more popular with the emergence of reputable and trustworthy

organisations, particularly in India (Ryan, 2011). The Canadian Bar Association (2011) believe there can be a

cost advantage of about $25 US an hour for firms who look at outsourcing some of their legal processes.

Along with the reduced unit costs, firms can offer faster service. They can take instructions from a client one

day, outsource the work that evening and return the next morning to the completed documents or research.

This service drastically improves client service and as long as quality control is maintained it should be a win-

win for both the firm and the client.

Firms generally increase their level of outsourcing to the outsourcing company over time as trust and

relationships develop (Ryan, 2011). What normally begins with simple dictation, leads to more and more

complicated matters as the firm handling the work proves themselves to be reliable.

Typical rates for these services are around $25US per hour (Ryan, 2011). Compared to in-house rates that

typically vary between $150 and $350, the potential here is obvious. According to Forrester Research, an

independent research firm, revenues in this areas will grow from an estimated $640-million in 2010 to more

than $4-billion by 2015 (Canadian Bar Association, 2011).

OPERATIONAL FLOW – OFFICE LAYOUT

A recent study (Mak, 2011) looking at productivity across 38 offices in Hong Kong has shown there are several

factors that have detrimental effects on productivity in an office environment. The results show that among

the five environmental and office design factors examined, a strong and significant correlation was found

between changes in office productivity and sound, temperature and office layout. In that study, the three most

distracting noise sources were conversation, ringing phones and machines. The results also indicated that low-

productivity participants were easily influenced by noises such as background noise, closing doors, and human

activity, as well as those coming from both inside and outside the office.

A recent 2010 study (Kekaelaeinen et. al, 2010) looked at these factors in closer detail. The authors found that

when the temperature rose above 25 degree C, neurobehavioral symptoms and the percentage of those

dissatisfied with the indoor air quality increased, and self-estimated work efficiency decreased statistically

significantly. They went on to show that after the renovation, thermal indoor comfort was achieved, and the

percentage dissatisfied with the temperature and indoor air quality remained at a low level, i.e. 2-4 per cent.

Objective productivity measurements conducted with a few employees performing solo work showed a 4.4

per cent improvement of work efficiency in the summertime.

Despite these results, there are still some benefits of contact between employees in the workplace. Other

authors (Wolfeld, 2010 and Rashid et. al, 2006) found a significant positive relationship between accessibility

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among employees and productivity. Therefore it is important for a balance to be achieved where staff can still

interact with each other yet hamper down in a quiet space for the most of their time.

As firms face busier, faster and more crowded office spaces this will be an increasing problem for staff. The use

of modern building technologies including sound-proofing and advanced heat-pump technologies could help

to mitigate work productivity issues. Moving forward into the future, planning should be put into how the

office will be laid out and particularly to where foot-traffic and high-use areas are to be placed.

OPERATIONS AT A FINANCIAL LEVEL

Even with outsourcing and proper office layout, firms are going to have other operational issues to deal with,

particularly financially. Firms should constantly be assessing whether they are managing their costs, such as

staff costs, effectively.

Traditionally firms have tied salary to performance and budgets. This has been a good move as budgets are set

to cover the overheads and profits of the firm in equal portions with salary. This is commonly referred to in

practice as the ‘third-third-third’ principle.2

Productivity can generally be increased by offering performance based bonuses. It is built on the fundamental

assumption that staff are motivated to be more productive by higher wages. Some firms bank on this principle

totally, by offering higher wages; some firms in return expect longer hours and higher productivity. On a

cautionary note, those higher salaries do not necessarily equal higher levels of job satisfaction or retention.

This was confirmed in a study of Indiana Law graduates which showed that job satisfaction is not directly

linked to salary (Stake et.al, 2007). Noting that both income and job satisfaction were desirable, the authors

found that those lawyers in the types of practice with higher average income were trading job satisfaction for

higher income, while those in the types of practice with lower average income were trading income for higher

job satisfaction.

Junior lawyers often lose money or only break-even for the first year of practice. Therefore, a firm needs to try

to retain staff as long as possible. Because the purpose of the incentive bonus scheme is to encourage and

reward efforts, it is necessary to have some way of linking the rate of work to the level of output (Henderson,

2008).

One answer is to pay enough to motivate the employees and provide a good work environment. This is the

approach taken by many booming Silicon Valley companies who all aim for retention of their valuable staff (e.g

Google).

Traditionally the growth of a firm has been limited to internal investment by partners. Vetula (2009) pointed

out that recently, the global legal profession has seen some relaxation of its traditional prohibitions on

nonlawyer investment and partnerships with nonlawyers. Australian firm Slater & Gordon became the world's

2 For example $120,000 budget = 40k salary, 40k overheads, 40k firm profit

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first publicly-traded law firm in 2007. Later that year, passage of the Legal Services Act opened the door for

law firms in the United Kingdom to avail themselves of nonlawyer investment once regulations have been

implemented (Vetula, 2009).

Debtor management is a huge issue for law firms. From an operations stand-point, a lot can be done to

improve collections and management of outstanding accounts. Lawyers often continue to work despite clients

owing money to the firm and even when the clients do pay, no interest is charged.3 By simply stopping work

on client’s files until payment is made and charging interest on overdue fees, a firm could considerably reduce

its liability and increase its revenue.

MAXIMISING BILLABLE HOURS

Perhaps the most obvious way to improve operations is by increasing turnover of the company. Put simply, the

more billable hours a firm produces, the more money they make.

One way to do this is to hire more staff. Often, firms will have empty offices in their building which are not

making any money. Aside from a heater and a workstation the costs are minimal at most to have an extra

person in the office. Therefore, operationally speaking it makes sense to use the office for some purpose (even

if that means leasing it out).

Over the years, the operational nature of firms has changed to a point where there are generally more support

staff and support lawyers than there are partners. Firms have realised that by delegating effectively, the

majority of work can be handled by others, leaving the most important legal work to the top tier of the firm

(Galanter et. al., 2009).

Some firms have taken this even further, offering new technology-based services, leading clients and firms to

substitute less credentialed lawyers, and some nonlawyers, instead of elite lawyers in providing these services

(Burke et. al, 2009).

One common operational problem that all firms have to deal with is the issue of missed appointments. Law

firms, like most firms suffer from late appointments and no-show clients. Unless the client shows up for a

meeting, on most occasions the firm will not charge. Again, if the client is ten minutes late for an appointment,

that is ten minutes of billable time lost for a fee-author. One approach to address this issue would be to charge

for missed appointments. This is common practice in other professions such as dentistry and it seems

reasonable that the same applies to the legal sector. This would result in an annual increase. However that

figure could be offest by clients who do-not return to the firm again in a protest against the charge. These

issues would need to be addressed by the individual firm, weighing in the pros and cons of such a system. A

3 This is based on personal experience in the industry where interest was waived on the vast majority of

overdue fees.

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question of policy might arise for the firms: “Do we even want to continue acting for people who don’t show

up for appointments?”

Another technique could be to stagger clients and waiting times. If a client wants a 10:00am appointment,

book them in 10 minutes early. This will reduce the chances of the lawyer having to wait for a late client and

could have significant impact over a full-year.

THE PROBLEM OF KNOWEDGE MANAGEMENT

The last operational area I would like to touch on is that of knowledge management. Lawyers are in the

business of information; therefore rely heavily on having efficient access to and use of the same. The problem

currently for the majority of firms is that their files are hard-copy such as letters, faxes, documents and notes.

This makes it difficult to access information quickly, yet alone share it with the rest of the firm. Even with files

there are still telephone calls, emails and conversations which do not get put on the file and instead remain,

unfiled, with the fee-author. The operational flaws in such a system are clear and firms today are beginning to

realise that a change is needed (Moon et. Al, 2010).

Moon and Desouza (2010) said that many organizations spend millions, if not billions, on knowledge

management. Tools, processes, techniques, programmes and even technologies for knowledge management

are in abundance today as opposed to even a few years ago.

Jon Beaumont (2010) wrote an article about his experience implementing a knowledge management scheme

at his 250 employee, UK law firm, Harvey Ingram. He found that the inability to quickly access information

across the firm was holding back progress on files. Beaumont realised the potential benefits in visiting a new

approach for handling the information: “With large time and resource constraints a familiar occurrence in

many organisations, especially in information departments, such a challenge from the Operations Board was

initially rather terrifying, but also a fantastic opportunity.”

Beaumont explains that one modern approach to address the operational issues related to this area, that is

becoming popular amongst some large firms, is to employ a ‘Professional Support Lawyer’ (“PSL”). A PSL is a

qualified lawyer who undertakes work that is not directly related to fees. Instead, it is their responsibility to

help integrate and manage the operational side of the services. According to Beaumont, this may include all or

some of the following (although this list is not exhaustive):

Current awareness

Investigation into new collaboration tools and technologies

Legal, business and client research

Marketing and business development

Pitch and tender work

Precedent creation and management

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Transaction management

Training.

Firms can spread each PSL across several areas, for example family law, wills and trusts are related enough to

justify just the one employee and one salary. This further increases the operational efficiency by increasing

communication within the firm and reduces the salary costs (Beaumont).

Authors like Diane Murley (2009) are stressing the importance for firms to look to the ‘cloud’ for their software

services. Now firms have access to cloud applications for practice management, document management,

payroll, human resources, tax systems, accounting, timekeeping, e-mail spam filtering, litigation support, data

hosting, and office productivity. As firms step away from traditional systems, we will see these online options

becoming more common place amongst firms.

These ideas have high traction with firms today and if firms want to compete in the future it is likely they will

need to adopt these or similar systems in the future.

OUTPUTS

CLIENT COMMUNICATION

The most important aspect of the service (for the client at least) is the output or the advice. Currently firms

communicate in a variety of ways to the client. Each letter needs to be dictated, drafted, reviewed, edited, re-

typed, proofed and sent. Then a copy needs to be made for the file, stamped and archived. Similar processes

exist for all other methods of communication also. The reason for this is risk management and protection of

the firm. Through law-school and professional bar studies, young lawyers are constantly told to record

everything as it may ‘save their skins’ in the event of a complaint later on.

The time and resources involved in producing the documents in such length are inefficient to say the least.

Some simple steps firms can take are to encourage email communications, early discussions and agreements

to reduce the need for back and forth communications and sit-down meetings with clients to save on

correspondence. By simply directing time into these activities, time, resource and money spent on files could

be significantly reduced, improving operations from both ends.

The introduction of new software for the management of trusts and commercial properties will also allow for

client interaction without the need for correspondence. Clients can be granted access to the software so they

can check the progress of their legal matter without having to use more time and resources of the firm.

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DELIVERABLES

With the emergence of on-line law services4, the speed in which clients can receive advice is constantly

increasing. This is putting pressure on firms to improve the speed at which they provide deliverables. In the

case of representation this is not such an issue, but for general advice firms need to be switched on to this

change in demand.

Some ways to do this may include sending interim updates to clients, keeping in regular email contact and

looking at ways to add to the service experience in other ways for example quality of advice as opposed to

speed.

As a result of these changes in the industry, some firms are incorporating general advice and statutory updates

onto their websites so that clients can quickly understand their problems from a legal perspective. The idea is

then that clients will contact the firm to handle their matter.5

CONCLUSION

I set out to explore the operational issues threatening traditional firms as we move into a digital future. I have

shown that there are a series of steps that firms will need to make across their entire operations (inputs,

processes and outputs). Some firms are already showing the way in terms of cost-saving operations for

instance outsourcing, while others are upgrading software and IT systems to handle client expectations.

The changes that firms can and should make will impact their operations with reduced overheads, reduced

unit costs, increased revenues and increased customer service. Firms who refuse to change will quickly find

themselves struggling to find a competitive advantage in a sector where operations are changing on a daily

basis.

4 For examples, see: www.law.justanswer.com; www.Worldlawdirect.com

5 For an example, see: http://www.russellmcveagh.com/_docs/BLUApr2011_382.html#Hickman

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