Law firms address slower growth by focusing on enhanced value for money
A world of uncertainty, slower growth and plateauing profits
The last two years have been tough for many of the world’s largest law firms.
A prevailing environment of low growth, high competition, widespread uncertainty across core jurisdictions and disruptive technologies has been squeezing profit levels. Predicting future market conditions is not an easy game, but recent trends suggest that the pressures facing large national and international firms are likely to intensify.
The latest Global 100 survey suggests that conditions are becoming more challenging by the day:
- Total Global 100 revenue increased by just 2.8% in the last period
- Average revenue per lawyer (RPL) – a key measure of law firm efficiency - remained almost flat at $813,000
- Total net income growth fell to just 2.7% (down from 8.6% in 2015)
- 9 out of 12 UK law firms in the Global 100 saw revenue decline, with sluggish growth, ongoing uncertainty, considerable competition and pricing pressure from clients
Changing perceptions about the role of procurement in law firms
With profit levels in focus, attention is starting to turn to cost control – but this is not without a significant ‘mind-set’ challenge. Senior stakeholder perceptions about the role of procurement in the legal sector continue to be far removed from many of the most forward-thinking viewpoints in other industries.
Part of this mindset issue is based on the size of the numbers involved.
The global corporations that law firms support often have external spend levels that run into many billions – with large, mature and sophisticated procurement teams holding significant influence and managing big numbers.
In contrast, the world’s largest law firms are smaller - in comparison - than many of their corporate clients:
Top 10 Largest Law Firms by Revenue in 2017:
|1||Latham & Watkins||$2,823,000,000|
|3||Kirkland & Ellis||$2,651,000,000|
|8||Allen & Overy||$2,059,500,000|
With external expenditure accounting for 30-35% of total revenues, the spend numbers run into the hundreds of millions, rather than the billions. From a historical perspective, these numbers weren’t seen as big enough to merit investment in a broad and dedicated internal resource.
Consequently, internal procurement teams are often under-resourced, holding limited organisational influence and with large areas of spend not falling under effective professional management. In short – many firms are simply not achieving anything near ‘value for money’ in their external expenditure.
However, with growing pressure on profits - and ‘hundreds of millions’ being potentially influenceable by effective procurement activity - stakeholder mindsets are starting to change.
Creating enhanced value for money
For a typical large-scale law firm, big spend areas will include facilities management, IT, travel, HR, professional services, marketing and back office support. Annual expenditure across each of these individual categories will usually amount to tens of millions, with significant numbers of suppliers – often selected on a regional basis.
In industries such as engineering, retail or airlines, dedicated internal procurement teams will be targeting ongoing cost reduction – typically between 5% and 10% per annum - by implementing effective category management, supplier relationship management and collaborative activity with strategic suppliers.
Creating such enhanced value for money is becoming increasingly attractive for law firms. In a theoretical example, in a situation where £250 million of external spend was considered addressable, funds of over £12 million could be released for re-investment - or directed straight to bottom line profits - even if just the lower end of the savings scale were achieved.
The challenge for most firms today is in having the right level of internal resource to secure this additional value.
Raising the profile of procurement
Some firms are starting to get ahead of the game by taking initiatives which show what can be achieved through targeted procurement activity. Working in partnership with an external procurement specialist can be a highly effective way of demonstrating what additional value for money can be achieved prior to recruiting new people.
With opportunities to deliver significant seven figure enhancements, this can provide an excellent basis for raising the the profile of procurement with senior stakeholders – in so doing, making the case for additional internal resourcing.
As internal teams begin to evolve and grow, there are also excellent opportunities to implement procurement transformation - upskilling new members of the team through co-sourcing activity and raising the bar in what can be achieved longer term.
Points to consider
- The current legal environment remains challenging with slower growth and pressure on profits
- Many firms are under-resourced and overstretched when it comes to procurement
- There are excellent opportunities to drive enhanced value for money and raise the profile of procurement
- Working with an external partner to demonstrate what can be achieved can be a highly effective way of gaining stakeholder support for additional resourcing