Preparing for the next economic cycle: Why law firms are looking to centers of excellence to increase operational efficiency
Although the predicted time frame varies, most business economists suggest that a recession is on the horizon within the next two years, according to a survey by the National Association for Business Economics released in late February. At the end of the year, many CFOs were predicting a recession in the U.S. by the end of this year, and The World Bank lowered its projections for global growth in its ominously titled January report, “Darkening Skies.” We cannot predict when or whether a downturn will occur, but we know from experience that those who maximize their operational efficiency are better prepared to succeed, regardless of the economic situation.
In response to these forecasts, law firms are readying for a potential downturn and the next economic cycle. The Citi Private Bank Law Firm Group’s 2019 Client Advisory noted that law firm leaders’ outlook for the global economy dropped by 15 points to 92, well below its neutral score of 100. Moreover, nearly 1 in 10 law firm leaders expect their net income to decline in the year ahead.
In the event of a downturn, the number of levers which law firms have at their disposal likely will be more limited than in the 2008-10 recession. Then, law firms reacted by laying off attorneys and administrative staff, making significant cuts in overhead expenditures and streamlining their operations. In today’s environment, those same approaches will likely not be as viable. While headcount has grown since then, law firms have been cautious about controlling that growth. Much of the low hanging fruit in operations has been cut, so decisions may be much more difficult in the next downturn.
Some law firms are opportunistically beginning to use the impending downturn and continued client pressures as an impetus to tackle some of the remaining “sacred cows” – things like office space/occupancy and the labor pool in terms of compensation and how work is performed, as well as leveraging technology and workflow automation. Savvy law firm leaders are preparing for a potential downturn by taking a fresh look at their operations now and exploring options for how they can become more efficient in the way they deliver legal services, a smart strategy regardless of the direction the economy takes.
One approach is for law firms to leverage centers of excellence (CoE). CoEs can differentiate firms in a competitive marketplace in a scalable way that especially makes sense in an uncertain market. CoEs are teams of experts that provide leadership, research, insight and best practices for a business focus area. A CoE delivers enhanced service at lower costs than traditional business models and offers a scalable and nimble approach to changing market and business conditions.
In HBR’s whitepaper, “Centers of Excellence,” we outline several strategies law firms can pursue.
- Centralization/shared services. For law firms, back-office centralization, which has been proven to optimize costs by 5-15 percent, has become a common practice for organizations looking to streamline operations and cut costs. This is often done through offshoring or nearshoring by leveraging service centers in low-cost domestic offices. Large global law firms have fully embraced shared services, particularly in Europe. Organizations including Baker McKenzie, Hogan Lovells, Latham & Watkins and Linklaters have opened shared services centers to manage everything from IT, marketing and HR to finance and business development. Firms are also hiring attorneys in these locations to support things ranging from conflicts clearing and discovery to supporting specific practice groups and legal matters.
- Outsourcing/managed services. Embraced by corporate law departments, law firms have been slower to adopt this strategy, but they would be wise to pay attention to the example being set by their clients. As law departments mature and bring on legal operations professionals, many realize they no longer need to handle every aspect of contract review, research or document management in house. Law firms, too, can outsource not only aspects of legal work. For example, the 2019 Report on the State of the Legal Market, issued by the Center on Ethics and the Legal Profession at Georgetown Law and Thomson Reuters Legal Executive Institute, identified office expenses, technology, marketing and business development, and library as expense areas seeing notable uptick in 2018, collectively accounting for more than one-third of law firm indirect expenses. Several of these functions, such as procurement, library services and IT, are ideal candidates for managed services arrangements.
The recent market conditions discussed in the whitepaper would likely change in a downturn. For example, in a downturn it would probably be easier to hire good talent. While there might be fewer competitors, competition would presumably be fiercer. But a key benefit of CoEs is their scalability, providing law firms the flexibility to adapt more readily to whatever market changes may occur.
No one can know with certainty when the next recession will take place, but we can rest assured that the global economy runs according to inevitable cycles. With a growing number of economists forecasting a potential downturn in the next year or so, forward-thinking law firms are taking steps now to improve their competitive position in the marketplace.