Cost Savings As a Risk Management Strategy

By Nina Cunningham

Since the active use of the term risk management, perhaps sometime in the 1980s, I have thought of the confluence of risk and management as an oxymoron. Management is the art of getting control of things and making them orderly and easier to understand; risk defines the flowing river of uncertainty. One may be able to foresee or anticipate risk, if enough pieces of information are available, but risk management can only occur when the risk is known and takes on visible properties. This is a technicality, perhaps, but since most applied risk management falls to the technical staff of law firms, the IT department, it is worth looking at an area of risk that contains some attainable management opportunities by reducing its unknown quantities.

Common to all risk is the failure to foresee. Projecting and predicting are possible, but only if risk is anticipated and the specific cells in the mental spreadsheet, so to speak, are not yet real numbers. Based on what we know from the past and the proper identification of variables, risk can be anticipated and the effects of anticipated risk can then be quantified as well.

Personnel Cuts?

Periodically, a prestigious company or law firm will announce a massive layoff of personnel. Even when the layoff ostensibly is for good and constructive reasons or follows a merger, massive layoffs nudge the market in the wrong direction. They give the impression there is big trouble brewing. The action has a chilling effect on clients and investors. Smaller layoffs with numeric significance also have negative repercussions and leave remaining employees dislocated and distracted. They become unproductive. This is not good for firms merely wanting to right size and make some strategic moves to save money rather than trigger an employee exodus or tempt desertion by clients.

Layoffs, massive or otherwise, need to be thoroughly considered and should become part of a reasoned approach to managing costs as part of their continuous improvement. Many firms panic at the first sign of trouble. They take a radical approach when hoping for the best fails to produce a solution to business downturn. Understanding that good cost management takes time, they choose to cut what they believe to be the lowest-hanging fruit — users of resources. In other words, employees are the first to go. However, who looks at the low-hanging resources themselves?

Certainly, a lot of money is committed to personnel, possibly the largest investment a law firm will make. But in order of significance, the employees may actually be more valuable than the space they take up and the resources they use. Few firms make the same time commitment to employees as they do to leases, even though employee expectations may be otherwise. There are formulas for managing all kinds of costs, but one thing is sure: If an organization plans to grow, the costs of hiring and training are high. Catch-up is a hard game to play when face-to-face with growth opportunities, especially where there is strong competition. And the competition for legal services is quite high.

Regardless of how periodically it is done, costs should be reviewed regularly. They often contain potentially low-hanging fruit that can be leveraged for the long term without cannibalizing the human resources that may be necessary for growth when things turn around. Turning around is a concerted effort; hope is not enough. Most contracts contain elements that do not contribute to client value and these elements can be mined and modified.

In a 2006 benchmarking study, Bryan Ashenbaum attempted to provide an understanding of various types of cost reduction and how each can be applied to a company’s operating budgets and P&L measures. Generally speaking, cost reductions appear as cost savings or cost avoidance. Bryan’s report admits that neither has a universally accepted definition, but these two are relevant for law firms. The bigger and more bureaucratic the firm, the more relevant they are. A former client sought refuge in an overseas merger, only to double the number of directors worldwide by adding Global as an adjective to their titles. Bureaucracy wastes time and money. And since law firms often express their growth in terms of new lawyers added to shore up their knowledge base, they can avoid costs by hiring to longer term market trends that can help grow revenue and avoid crises that result in layoffs.

Look At Contract Renewals

Experience shows that it is difficult for management to focus on projects designed for cost reduction. The tasks are boring and especially tedious when it is difficult to know where to start. For stressed managers, low-hanging fruit is alternatively defined as fast and easy, not specialized or strategic. Objectively, it seems as though anyone should be able to cut costs. But in a world where numbers do not always speak for themselves, the opportunity costs of passing up other low-hanging fruit through strategy may be too great to ignore.

In the world of contracts, the lowest hanging fruit resides in annual renewals. The longer the contract, the more costs are built in, often just to obfuscate. These are ignored opportunities, because signing a contract is the easiest way to get tasks off to-do lists. Many of them come out of the IT department, as they are renewable contracts for information services, software upgrades, equipment maintenance, and new services requested by lawyers or administrators from trusted companies already having contracts with the firm.

Opportunities to attack agreements are abundant and, with the right approach, they should not have to take executive time or effort, other than the approval to move forward. One has to know what to look for. Each contract needs to be addressed by importance. Which are the most expensive, for example, or commit the firm for unreasonable periods of time, or for unnecessary ancillary services, or tack on complex renewal terms? Unwieldy contracts suggest it may be time to look for alternative services.

Contract renewals can be challenging. Many are even too dense for lawyers to penetrate. Some are agreements with client companies, so no one wants to challenge them. Some are both, as is often the case with insurance or telephone services. These are commodities and everyone wants them. Still, there is low-hanging fruit in the line items. Reaching them is the art form of some specialty consultants. They relieve the firm and meet the challenge. What could be better? What is better is for the firm to understand these elements themselves.

Few firms can attack the proper line items or understand what the numbers mean or how to effect a negotiation on specific contract terms. Lexis-Nexis and Westlaw are excellent examples, as are telephone bills. These contracts may be multi-year and include sizable annual renewal costs. Terms that ostensibly include discounts are another. In a discussion with account reps, discounts seem clear. But it is not always clear how the automatic increases are applied or how discounts have been credited. These are opportunities.

Very often, the firm will have contracts for similar services. Again, Lexis-Nexis and Westlaw are good examples. While there are important differences between the two services, the vast majority of databases included in both their monthly guarantees are similar. Both include items in the public domain that are available through other sources. While other sources may be less convenient, the cost of convenience should be set aside. Since competition increases leverage in the negotiation process, knowledge of the competition is the important element of strategy.

Conclusion

Risk management is no longer just about insurance programs or strategies to cover cybersecurity or floods, rarely about inflation or otherwise escalating costs. Risk is much broader now. Suppliers of critical services disappear through mergers or companies eliminate maintenance and upgrades. These are not always foreseeable. Is there a Plan B? The search for a replacement and the required changes are enough to disrupt a firm’s critical activities. We have seen that mergers and acquisitions among information service companies generally result in cost increases. There is insurance for breaches in privacy, but who takes out the insurance against these increases in cost?

While it may be clear that downsizing targets employees, it is not as clear that right-sizing might address contractual costs. Letting go of a practice group may be a good move, but it requires a real understanding of the marketplace. In the end, the marketplace may be more difficult to understand than contract terms. Contract terms are also impersonal, another reason for attacking them first. The loss of a practice group may pose a risk not only to the firm’s smooth operation, but to its reputation as well. Analyzing costs by their effect on quality and not merely on the bottom line will provide much needed justification for the practical decisions law firms have to make in both contracting for services and improving hiring policy. They should take the leap.

Nina Cunningham, Ph.D., is an affiliate of Altman Weil, Inc., and President and CEO, Quidlibet Research Inc., a global strategic planning and cost management firm founded in 1983.