Category: Contract Law

Overstaffed? How to Fight the Battle of the Bulge and Increase Utilization

In today’s competitive legal marketplace, legal organizations can no longer prosper by just raising billing rates. Finding sustainable growth has become more challenging. In addition to providing quality legal services, law firms must provide value and cater to clients who are increasingly monitoring how they spend their financial resources. Law firm service providers, who 18 months ago were questioning if they had enough staff to generate more profits, now must question if overstaffing is causing profits to sag. This impact can be seen in other service industries such as advertising, accounting, engineering, investment banking, consulting, banking, to name a few examples. These same industries have been laying off professionals and reducing hiring over the past year. This article will explore the costs to a law firm of carrying under-utilized professionals as well the role temporary staffing can play in improving sagging profits.

To analyze the costs of excess workers, we have run several analyzes based on the average cost structure of large and small law firms compiled by national legal consultants Altman Weil and modeled by Legal Network in StaffRite and ParaStaff software packages. Legal Network developed these tools, with the support of national legal consultants Altman Weil to assist law firms in evaluating appropriate staffing levels.

In the chart below, the StaffRite model shows that law firms with professionals who are only billing 1,000 hours to 1,200 hours a year are ALL generating substantial losses when salaries, benefits and overhead are factored in.

The size of these losses might surprise some lawyers, but they are no surprise to the effective law firm administrator. This explains why law firms, just like other professional services firms described above, have been cutting staff in reaction to diminishing work needs. However, by cutting employees too quickly, law firms lose the institutional knowledge of past experiences which the displaced workers take with them. Further, the same law firms may lose the ability to quickly staff up when a large project materializes or sustainable growth prospects return.

Instead of maintaining a staff level necessary to handle these peak loads, the law firm which deploys interim staffing solutions can handle those peak periods while improving profitability. Temporary professionals in many scenarios can be a very effective strategy to obtain profit opportunities without adding costly overhead, benefits or underutilized salaries. A StaffRite analysis shows that law firms with 600 – 800 hours of work over the next five months could generate anywhere from $30,734 to $98,267 in profits with interim attorneys and $10,820 to $43,776 with interim paralegals. The ultimate profits depend on the size of the firm involved and how a law firm wants to bill for interim personnel.

II) Paralegals

There is no doubt that paralegals represent an integral part of any cost containment strategy. In addition to having lower salaries and benefit packages than attorneys, according to ParaStaff, paralegals at larger firms can generate $45,000 in profits by billing 1,800 hours annually. But can paralegal staffing on an interim basis work as well as interim attorney staffing? The answer is a qualified yes, but there are some things clients should consider with interim paralegals.

SPECIAL SHORT TERM PROJECTS

For smaller projects, it is not difficult for a staffing agency to identify a skilled paralegal to fill a staffing gap caused by increased workload. Interim paralegals on specialized projects have a strong track record for success for a number of reasons. Because this work can be more specialized, these assignments offer more interesting work for the interim worker than pure document review type projects. Another benefit in the use of interim paralegals is with a paralegal placement, temp to perm arrangements are an effective way to profitably hire new paralegals. This is because not only can the law firm evaluate the cultural fit of the candidate, they have the chance to evaluate the work product and amount of workflow in the pipeline before making a hiring decision while making a profit with the paralegal. The opportunity to be hired becomes an effective motivating factor which a law firm can use to get an interim paralegal to do the best job they can. As a result, this is an area where interim hiring makes complete sense.

LARGE DOCUMENT REVIEWS

The use of interim paralegals on larger projects can sometimes present issues for some. First, it is often hard to find a large team of interim paralegals who can maintain uniform levels of quality when compared to teams of interim attorneys on a large project. This is because paralegal projects compete with the general job market including full-time positions which give interim paralegals more job opportunities to consider. Therefore turnover can be higher. In contrast, interim attorneys are generally not as interested or distracted by positions listed in the general job market. Secondly, contract attorneys have more legal training and being licensed professionals can perform not substantive reviews. As a result, while interim attorney rates might be 30% – 50% higher than interim paralegals, the contract attorney can perform more types of reviews on documents at higher quality levels and create more value for the client. However, not all projects require higher levels of professional staffing. For instance, projects such as objective data coding and database entry, preparing filings for submission, and sorting and retrieving documents represent excellent projects for the interim paralegal. Here support staff can be very effective to control costs and boost a law firm’s profits. Further quality issues on interim paralegal projects can be minimized by (i) evaluating the coding process being followed by the coders, (ii) providing some form of quality checking and performance monitoring, (iii) considering a reward system based on the type of outcome sought, and (iv) providing a promotion path for longer projects to encourage higher levels of performance. Of course, some staff turnover should be expected as well as encouraged as these types of tasks are sometimes painfully monotonous and one disgruntled paralegal can spoil team morale and performance on these types of projects. In conclusion, while there are some risks with larger interim paralegal projects, effective project management can limit these risks and keep the project very economically successful.

II) Legal Secretaries

While legal secretaries do not generally directly add profits to a law firm, they are in many cases indispensable for law firms. Secretaries enable written work to be typed quicker, answer phones for attorneys and to help attorneys manage their time effectively. However, just like attorneys and paralegals, underutilized legal secretaries can cost a law firm money as their salaries, benefits and overhead costs can create a drag on law firm profits. Therefore, can Legal Secretaries be hired in interim positions to control a law firms expenditures? The answer is it depends but there are challenges here. For years there has been a shortage of quality legal secretaries. Consequently this has reduced the pool of available interim legal secretaries. Some firms managed the shortage of secretaries by becoming more efficient with technology and secretary sharing ratios to deal with the legal secretary shortage. Further, as a result of the recent economic slow down fewer firms have hired new attorneys and paralegals. Consequently the downsizing that has occurred may have helped some firms deal with the shortage of legal secretaries.

Based on the above, is there a need for interim legal secretaries? The answer is a qualified yes. Peaks in workflow that require periods of intense typing, staff absences and training secretaries for a position create a market for interim legal secretaries. Firms that do a good job at this can see some financial improvements that flow to their bottom line. Agencies can help if the agency has a pool of quality legal secretaries available. However, for a strong experienced legal secretary, who can work with senior partners, the more practical avenue for hiring is still traditional permanent placement which can involve hiring an agency to try and attract a top legal secretary away from an existing position.

The economic analysis, as illustrated by StaffRite for attorneys, and ParaStaff for paralegals, demonstrates a real value in the use of more interim staff. It just costs too much money for law firms to carry full-time staff in areas where the staff is underutilized when interim personnel can quickly add substantial profits.

* Karl Schieneman, Esq. Managing Director and Karen Catanzaro, Support Staff Recruiting Director for Legal Network, a Pittsburgh based legal staffing and consulting company.

The Case For Using Contract Attorneys in Pittsburgh

The Current Legal Marketplace

It is no secret that practicing law in the 1990’s has become more challenging than perhaps any other time period. The competitive business climate of Corporate America forced service providers, including law firms, to provide more for less. This economic pressure has caused many law firms to downsize, limit growth, and/or stretch out partnership tracks for many associates. Adding tension to this environment is the growing population of practicing lawyers. Recently, several articles in the Pittsburgh Business Times have observed similar difficulties exist in the Pittsburgh legal marketplace . This article, however, will not focus on the problems illuminated in the other articles, but will suggest an opportunity for law firms to acquire a competitive advantage in the current market place.

Contract Attorneys as Part of the Solution

A partial solution to the competitive demands on Pennsylvania law firms suggested in Pennsylvania Law 1994: the State of the Profession, is that “law firms will need to innovate in order to compete and survive, let alone succeed, in this new environment. The first “Innovative Solution” suggested by this analysis is to use outsourcing to reduce costs. The article states:

Costs will need to be controlled as never before. Staffing ratios must be revisited, benefits packages streamlined, part-time and temporary employment and “outsourcing” explored, with the concomitant reductions in space requirements and, therefore, occupancy costs, through heralded “virtual corporation.”

In fact, one might argue that the solution of “contract attorneys” is no longer an innovation; it is commonplace in most large metropolitan centers across the country with some of the largest law firms and Fortune 500 companies using contract attorneys. Currently there are established contract attorney services in Boston, New York, Philadelphia/Wilmington, Baltimore, Hartford, Northern New Jersey, Washington D.C., Chicago, Milwaukee, New Orleans, Houston, Dallas, San Francisco, and Los Angeles. Pittsburgh now through Legal Network Ltd joins the growing list of metropolitan areas in offering such a solution.

The Benefits of Contract Attorneys

The following is a list of documented benefits realized by organizations which utilize contract attorneys:

Enhances Profitability: The economic benefits of using contract attorneys are easily observable. The costs of contract attorneys, including service fees, is often less expensive than hiring a full-time attorney. They do not carry overhead costs such as taxes, benefits and staff support. In addition, the cost of paying attorneys for nonchargeable hours does not exist because contract attorneys are matched directly with work needs. Furthermore, unlike some associates who respond to competing demands in a law firm, contract attorneys can stay focused on completing assigned projects. Then when the work is completed, the attorney leaves with no hard feelings. The result is that law firms become more profitable and often improve client service by passing on the savings.

Quick Response: With the use of contract attorneys, it is unnecessary to turn down projects when current staffing is insufficient to handle a sudden increase in work. Contract attorney agencies can quickly identify skilled and experienced attorneys to meet staffing needs.

Fill Gaps: The staffing difficulties most firms experience when faced with a maternity leave or illness can be easily solved with contract attorneys.

Leverage Core Competencies of Partners: Attorneys who are experts in their fields sometimes struggle with how to market the their expertise, yet still get the work done. Contract attorneys free up partners’ time to review work-in-progress and concentrate on attracting additional projects. Many times a significant portion of a legal project can be delegated to a contract attorney while the partner performs the more technical aspects of the project.

Professional Concerns of Using Contract Attorneys

Quality: Similar to the national trend, the Pittsburgh legal marketplace has experienced the impact of downsizing and the desire for more free time for all attorneys. As a result, a high number of experienced and specialized attorneys seek temporary assignments as a full-time career. In fact, Pittsburgh has the second highest percentage of attorneys to the general population next to Washington D.C. In many cases these attorneys are specialized sole practitioners or members of small firms who look to contract assignments to fill out their schedules. Finally, the feedback from clients in other cities where contract attorneys have been rigorously tested is very positive.

Conflicts of Interest, Confidentiality of Information and Disclosure to the Client: Importantly, these concerns in the context of temporary attorneys have been addressed by the American Bar Association in Formal Opinion 88-356, Temporary Lawyers. The opinion observes that the use of temporary attorneys is growing and provides guidance on these issues. The opinion notes that:

The use of a lawyer placement agency to obtain temporary lawyer services where the agency’s fee is a proportion of the lawyer’s compensation does not violate the Model Rules or predecessor Model Code as long as the professional independence of the lawyer is maintained without interference by the agency, the total fee paid by each client to the law firm is reasonable, and the arrangement otherwise is in accord with the guidelines in this opinion.

Why Use an Outside Organization to Identify Contract Attorneys?

With the marketplace indicating that contract attorneys play an important strategic role for law firms to increase profitability, the final issue is how to locate contract attorneys. The possibilities are for the law firm to seek contract attorneys on their own or use an organization specialized in the area. The latter method provides several advantages. First, continuous recruitment efforts and computerized database In addition, there are tax reasons for using an agency. The employment status of contract attorneys , has been analyzed by many in the private sector who have concluded that the manner in which law is performed makes it appropriate to categorize contract attorneys as independent contractors. These arguments are enhanced when a law firm uses an agency to find contract attorneys as opposed to ad hoc individual hiring because the agencys allow outside agencies to quickly find experienced and skilled attorneys from a larger candidate pool. Furthermore, agencies pre-screen and categorize applicants based on their skill level. This essentially eliminates the concern that a contract attorney will mold his/her background to a law firm’s advertised position. Agencies have also been successful when there is an immediate demand to locate several attorneys for sudden large projects. Something many law firms would likely be unable to accomplish. In a nutshell, the agency in most cases, will find the more qualified attorney in less time.

In addition, there are tax reasons for using an agency. The employment status of contract attorneys , has been analyzed by many in the private sector who have concluded that the manner in which law is performed makes it appropriate to categorize contract attorneys as independent contractors. These arguments are enhanced when a law firm uses an agency to find contract attorneys as opposed to ad hoc individual hiring because the agency’sattorneys are clearly making themselves available to work for the general public.

Conclusion Contract attorneys and the agencies which supply them are a fast growing tool utilized profitably by many law firms. The trends which have driven the emergence of this field are projected to be long term factors in the legal marketplace in Pittsburgh. Therefore, law firms should expect their use to proliferate. Consequently, the law firm which learns to use contract lawyers most effectively, will clearly have a cost advantage over those which do not.

Legal Staffing for the New Millenium

The article highlighted how large firms have been substantially increasing starting salaries to attract top law school graduates. In fact, salaries across the country rose during the past year due to keen competition for new legal talent. This is great news if you’re a recently-minted associate with top grades. The news is less rosy, however, for many junior associates or partners at these firms, and attorneys looking to break into the legal market without Law Review credentials. What often happens when salaries escalate is that the rate of expenses exceeds the increase in revenues. To reduce expenses many law firms and companies have turned to the strategy of hiring contract attorneys for specific periods of time to staff labor-intensive projects and then evaluate some of those attorneys for full-time positions.

Current Staffing Model Hurts Law Firm Profits

Traditionally, a large law firm will hire a group of associates at $85,000 – $90,000 a year based largely on law school grades. The associates work on the less sophisticated projects, such as document review projects and their time is billed to clients at $125 to $150 an hour. The unsophisticated, labor intensive work generates large legal bills that can upset clients because they do not perceive its value. In addition, when more sophisticated work is performed by a young associate, it often requires substantial reworking by a more senior attorney.

Over-hiring new associates at high salaries results in substantial losses for law firms because they are unable to generate enough paid billable hours to justify these salaries. In fact, attorneys at large Pittsburgh firms have confirmed that their firms lose money on entry-level associates. Several partners at Pittsburgh firms independently estimated that their firms lose in excess of $100,000 in an attorney’s first year for time write-offs, training, and redoing work. Who pays for these losses? First, partners bear the losses in the form of lower profits. Second, experienced and profitable mid-level associates bear the brunt of the losses in the form of negligible raises that leaves their salaries close to that of the entry level attorney. Third, clients incur losses if this work is billed to them at rates exceeding the value of the work performed.

Large firms often do not realize a profit on a new attorney until that attorney’s fourth year of practice. By that time, the fourth-year lawyer may be disenchanted because he/she is doing the significant work and being paid a salary not so different from a new associate. That same attorney may also be open to offers from other firms looking for a profitable attorney and either be recruited away from the firm that has borne the costs of training, or the law firm will be forced to counter the recruiting firm’s offer. If the lawyer leaves in response to an offer, the first firm incurs a tremendous loss and such a defection can cause other mid-level associates to become disillusioned with their salaries putting the law firm in an untenable position.

Illustration of Different Staffing Options

An alternative hiring strategy is: (i) to locate contract attorneys with good academic backgrounds for the less sophisticated work; (ii) hire them at hourly rates that equal a $45,000 – $50,000 salary per year (hourly rate $30 – $50 per hour); (iii) bill the attorney’s work to clients profitably at hourly rates of $50 – $100 or higher. Firms save money on salaries but costs are further contained if the contract attorney is hired through an agency because such an agency will pay the wage-related taxes and benefits and the majority of the recruiting costs.

A number of other benefits accrue to both law firms and individual attorneys. In the traditional setting, a firm must pay associate salaries whether it is boom or bust. With the use of contract attorneys, the firm can staff up for a big project and then release these temporary hires when the project is finished. Also, for less sophisticated work, it makes perfect sense for “quality” reasons to hire a contract attorney rather than a new associate. Contract attorneys hired for a specific project understand what they are there to do from the outset. This is in contrast to many new associates who harbor visions of being the firm’s next “big litigator” or “deal maker” and are disappointed to find themselves doing less glamorous and often mundane document review work. New associates who resent doing low-level work may not do the best job. But when you hire a temporary attorney to do document review work, you’ve hired a document review attorney — they know it and you know it; there are no illusions. In addition, if that temp is experienced, he or she will require far less training than a new associate.

The lower salary of a contract hire has another benefit: it gives the law firm the ability to hire, on a contract basis, an attorney they think may have long-term potential, but who does not meet the firm’s law school academic standards. The employer is thus given the opportunity to evaluate the contract attorney’s work product, work ethic, and ability to work with other members of the firm — factors not knowable from a law school transcript or a resume — before making a final decision.

Lastly, and especially for those interested in full-time work, the contract period provides great incentive to perform extremely well. Babst Calland Clements & Zomnir, P.C. has successfully used contract attorneys as a hiring tool. Says Ted Wesolowski, a member of the firm’s Operating Committee: “We have had very good success with the use of contract attorneys, and have actually hired some of these persons on a full-time basis. The contract attorney assignment system allows us to preview the quality of a person’s work, and to determine whether he or she is a good Œfit’ within our organization.”

Corporate clients that have hired contract attorneys for document review work have also been very pleased with the financial results. Michael D. McDowell is an in-house attorney with Allegheny Energy, Inc., and has litigation management responsibility for large, complex litigation. He estimates that his company has saved over half million dollars in legal fees in the past several years by utilizing contract attorneys to review documents in several large cases. McDowell says, “Given my experience with the availability and competence of the contract attorneys we have utilized in the past, contract attorneys would be my preference for basic document review in large document-intensive cases. Not only does this practice save money, since the contract attorneys’ fees are not as high as most law firm associates’ billing rates, but you get much more value from the lawyers in the law firm when they are free to focus their attention on the strategic components of the case.”

This new staffing paradigm is not appropriate only for large firms; but also for the small to mid-size firm. The small to mid-size firm will not have to detract from billable work to recruit, interview, or train a new attorney. They also benefit from hiring a temporary attorney, with experience and references, to handle a sudden surge in business, and when the business is gone, the firm does not have to worry about “letting go” a wonderful attorney – it hired a temporary attorney.

If this model strikes readers as New Millenium Science Fiction, they are wrong. Training young professionals at reasonable salaries on a temporary basis, has been used for years in the engineering field as a means of controlling costs and improving quality. National legal statistics also support the model, showing that, in 1998, 11 of the 250 largest law firms in the country had hired at least 5% of their lawyers on a contract basis.

Staffing Impact On Attorneys

Contract staffing makes sense for new attorneys as well. Rather than having a career largely determined by your first-year law school grades, contract work enables attorneys to build a track record and train themselves in more than one area of the law and at different organizations. Their careers can be determined by “on-the-job performance” instead of classroom performance. Working as a temporary attorney allows young associates to build skills and develop resumes with large-firm experiences while they search for permanent employment. It also gives attorneys the opportunity to work while they are between jobs. People can choose their assignments, and work as little as they want allowing attorneys a flexible lifestyle. They can act, paint, write, or raise a family instead of billing over 2,000 hours each year.

Use of contract attorneys will also benefit mid-level associates. Rather than using firm resources on hiring money-losing associates, the firm can focus on giving profitable attorneys raises.

Conclusions

Interim legal staffing is a proven and valuable strategy. It allows law firms to hire an attorney for a specific project at a lower salary and without benefits or taxes. This in turn lets the firm focus its resources on high potential “rookies” while staffing up on an interim basis for big projects and paying experienced, loyal attorneys the wages they merit and reducing costs to clients. Finally, it permits both the firm and the contract attorney to see each other on-the-job, allowing potential decisions about permanent employment likely to be more realistic.