By James
Courtis-Pond, Director at Rosslyn Analytics, and former City lawyer and
general counsel… Could Halliwells have avoided administration if it had a stronger handling on its finances? Probably not but it’s worth exploring for a moment because Halliwells is a microcosm of what could happen to just about every business falling on harder times after rapid expansion, commoditization of services and finally consolidation.Now, I don’t claim to be privy to all the internal details at Halliwells – and clearly the main components of this sad event are on the debt/revenue side – but, perhaps, generic to most in the legal industry, the cost side has not been as deeply understood and managed as well as it might have been. Why do I say that? Two years ago I offered Halliwells our spend analytics and integrated contract management service. The response at the time was politely “Thanks but no thanks.” The reason given was that most of the firm’s costs are salaries. You do not have to be a rocket scientist to appreciate 70% of a law firms spend is on salaries, usually followed by rent and professional insurance. But the major focus of spend analysis is directed at that tail of 20% to 25% of indirect spend, which is spent on running a firm. It is here where spend visibility has been traditionally weak and money is left on the table. Whether your indirect spend is £1m or £100m, a proven toolkit to help you cut up to 20% of that spend has to be taken seriously. For example, a law firm with a profit margin of 30%, cutting just £100,000 of spend is equivalent to £300,000 of new revenue. This may explain why forward-looking law firms take spend analysis seriously, but more on this later. So when I hear a managing partner tell me “we think we have our spend fully covered,” after only a little questioning it often becomes clear to us both that “We actually have little visibility of spend outside our top suppliers, that is exponentially complicated if you want a global or parented view, and we have very little idea where our physical contracts are, when they terminate or when we should receive volume rebates.” Case in point, a procurement officer at one of the largest law firms recently told me that “if I want to know how much I spend with a supplier I have to phone and ask that supplier. I am lucky if I get an answer by the end of the month.” This is a waste of negotiating/bargaining power. It is not all dire, though. Law firms are increasingly taking steps to better understand and analyze their spending patterns. Through spend visibility comes better cost side decision-making that results in plugging cash leakage and making additional savings through improved sourcing opportunities. At the end of the day, it’s a competitive advantage to understand and manage your costs better than the firms you are competing against for business. Information systems cannot stop firms going into administration but I do strongly believe spend analysis does help executives better manage their bottom-line.