How Law Firms Can Meet Increasing Challenges for Profitability

Charlotte Sutton
Charlotte Sutton,
The Background
In today's complex and dynamic environment, law firms are facing unprecedented pressures on fees, billable hours and earnings. In recent years, growth in the law sector has slowed due to a decline in Mergers & Acquisitions and a reduction in existing and potential clients. This has resulted in increased competition and has forced law firms to identify new ways to drive profitability.

For some, the response is to focus on the easiest target - the cost of external council - and the reflex is to increase hourly rates. However, a better resolve for law firm management is to take closer inspection of the systems, processes, and controls for indirect spend. Research suggests that organisations need to reduce just £1 of indirect costs to have the same impact on shareholder value as generating £5 of new business revenue.

In many law firms, current approaches to managing indirect spend falls short, especially when compared to those of their corporate and institutional clients; particularly in sourcing, purchasing and settlement for commodity spend areas such as IT, temporary staff, outsourced-services, travel and marketing etc. Indirect expenditure represents a hidden and largely untapped area of potential savings.

The result, law firms have an opportunity to achieve operational and bottom line benefits:
  • Consistent obtainment of "best value" for goods and services
  • Improved financial control and compliance with organisational policies
  • Reduced cost of the procurement process
  • Improved management visibility
  • Increased organisation-wide productivity
The Major Challenges Facing Law Firms in Managing Indirect Spend

Increase purchasing visibility
In order to minimise costs, optimise the use of available funds, and maintain essential financial controls, law firms must have a greater degree of control and visibility of the purchasing process. At the same time, their employees must be able to quickly locate and request the goods and services they need. This must be supported by intelligent routing and approval of transactions to ensure purchase collaboration with approved suppliers and compliance with buying rules.

If the purchasing process is unstructured, lacks proper controls or is too cumbersome in an attempt to control it, valuable productivity is lost, critical purchases are delayed and the cost of the process grows. What is needed is a Spend Control solution to support the day-to-day purchasing process in a way that ensures compliance with organisational sourcing and authorisation rules and offers full cost-pipeline visibility.

Optimise Accounts Payable
Most spend management issues will surface in a law firm's Accounts Payable department. For example, many firms don't insist on an authorisation signature or approval process before goods or services are purchased. Consequently, invoices turn up unannounced - after the firm has been fully committed and the money is spent. Accounts Payable then has to chase down the originator, determine if it is an internal charge or disbursement, and code it accordingly. Needless to say, this is extremely inefficient. Worse, there is no control over what is spent, exposing the firm to downstream processing issues, maverick spending, budget overages, and fraud.

Many Accounts Payable issues can be resolved by implementing an automated purchase/cheque request process utilising workflow for approvals. Employees and administrators can select items or services for purchase online. Requests are percolated up to management electronically where they are approved online or via PDA. Automating the front end of the process is critical to controlling costs. It prevents unauthorised spending and streamlines Accounts Payable processing.

Streamline and Automate Invoice Management
Relying on paper-based processes to handle inbound invoices drives up costs. Law firms need to address the time and resources Accounts Payable teams spend inputting invoices, validating and matching invoices with purchase orders, handling supplier inquiries, and dealing with discrepancies and approvals.

They require increased capabilities to consolidate and simplify the receipt of invoice details regardless of format directly into their Purchase-to-Pay system, facilitate the capture of paper invoices to eradicate labour intensive processes, automate invoice coding and matching to enable straight-through processing, and create self-invoices for trusted suppliers based on agreements they already have in place etc.

With invoice management solutions, law firms can drive out cost from the bottom up. They can validate invoices at the time of submission to minimise errors and rework, eliminate most of the invoice handling costs by receiving invoices via direct integration with back-end systems, gain real-time visibility and control into the status of all invoices and optimise working capital.

Eliminate Unnecessary Write-Offs
Nothing is more frustrating than writing off legitimate client expenses, yet many firms find themselves in this position. One cause can be the log jam of "mystery" invoices handled by Accounts Payable at the end of the month. Lost, miscoded, or delayed disbursement invoices can miss the billing cycle and, therefore, the billing window.

Spend management systems eliminate this problem by identifying reimbursable costs and the associated client matter before a purchase is made. When the invoice arrives, the disbursement coding is automatically pulled through to the invoice. Accounts Payable can easily perform a match and expeditiously forward it for disbursement.

Enable Quick and Easy Budget Checking
As legal engagements have become more project-based, budget tracking has grown in importance. Most firms operate blindly against budgets until month-end close. Spend management systems can check budgets before expenditures are committed and before invoices arrive. This lets partners know where they stand on an engagement at any time and prevents budget overages.

Improve Cost Visibility by Employee and Client Matter
Closely related to budget checking is the notion of accountability. Many firms have difficulty attributing costs accurately to specific client matters or employees. By implementing a formal authorisation process, it becomes clear where expenses originate. Spend management systems also help by using coding mechanisms that ensure accounts are charged accurately and appropriately. Additionally, this saves accounting from having to research, recode, or reclassify entries.

Reduce IT & Telecommunications Expenditure
IT is often the single largest spend area in law firms and requires close scrutiny. Too often IT expenses are buried in employee expense reports, hardware and software is purchased when similar items already exist elsewhere in the organisation, and there is limited visibility of potential assets. In addition, service and maintenance agreements are poorly managed.

A Spend Control system enables the IT team to define standard IT configurations and ensure the correct suppliers are engaged and appropriate corporate standards are applied when employees make purchases. IT experts can be included in the authorisation path for all IT requests giving them better control of sourcing the most appropriate configuration of equipment from internal inventory and/or suppliers. In addition, logging of IT equipment serial numbers and asset tags upon receipt enable law firms to track inventory on hand.

Manage Disbursements
Law firms have significant costs tied up in disbursements; monies which they have to pay to third parties to help prepare for client cases e.g. court fees, stamp duty on property purchases, fees for medical or other expert reports. Often when a cheque payment or BACS is raised on behalf of a client it is inappropriately managed and ultimately suffers from not being recovered. In order to eliminate write-offs, this process is automated by Spend Control systems with disbursements booked to the correct client account and against the appropriate matter and including controlled authorisation workflow and security of sensitive client information.

Leverage Aggregated Spend
In most law firms, purchasing is dispersed across the organisation and fragmented across numerous suppliers. A well-deployed spend management system will consolidate all the firm's spend activity to preferred suppliers. This allows the firm to leverage quantity discounts and preferred contracts, a major source of instant savings.

Better Control of Outsourcing Agreements
In spite of the trend towards outsourcing and sub-contractors, few law firms have formalised procurement processes when selecting services and even less run a similar process when renewing agreements. Effective process controls must be established to structure, streamline, and track the entire sourcing process from requirements specification, through to the publishing, response and evaluation of requests to suppliers/contractors, and ultimately, to the award and management of contract.

Keep Track of Contract Compliance
Contracts and Supplier Relationship Management are key spend control areas for law firms. Nothing is worse than one of their many high value contracts tripping over into the next financial year and missing the chance of review and renegotiation; nor when supplier qualification is too subjective, providing little visibility of risks.

What is needed is a well-structured set of tools to support efficient, consistent supplier recruitment, qualification, on-boarding, and performance appraisal. Equally, a platform for central management of all supplier contracts, providing clear visibility to buyers at purchase time, automatic capture of activity and reminders for key dates and events.

Move Towards Sustainable Procurement
Many law firms are now looking at sustainable procurement as a legitimate strategy and assessing the impacts of products or services they buy on the environment. The objective is to increase competitive advantage, as both public and private sector clients assess the environmental credentials of competing law firms, strengthen their brand, enhance employee and community relationships, and achieve cost savings in lower consumption of energy and resources.

This requires a comprehensive Spend Control solution that can support all key procurement processes, provides built-in controls to ensure corporate compliance and offers flexible deployment options to fit any law firm and business model.

Address Greater Business Complexity
A number of law firms have become truly international, with thousands of employees operating in dozens of countries. Others have entered into partnerships across geographic territories to grow a virtual international division. Creating seamlessness between teams and systems is a significant challenge in the context of disparate architectures and operational practices. What is needed is a comprehensive solution that streamlines the Procure-to-Pay process, while integrates with core operational systems, is easy-to-use and readily adopted by end-users, and offers fully internationalised support for global business.

PROACTIS' experience of working within the legal sector to improve Procure-to-Pay initiatives with cutting edge technology makes us extremely well placed to help leaders and managers address the challenges of controlling indirect costs and optimising efficiencies. Organisations in the legal sector who have selected PROACTIS include:
  • Herbert Smith
  • Begbies Traynor
  • Eversheds
  • Clifford Chance
  • The Law Society
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