True story: The attorney I use for various legal matters related to my income properties is a busy guy. So busy, in fact, that he hasn’t returned calls or emails for over two weeks. There are probably only about 4-5 hours of work on the table but, nonetheless, he’s not billing for them and I’m going to have to move my account to someone who will. I asked his secretary what’s up? She says he’s at capacity but won’t hire more bodies to cover the overflow, and that I’m not the only person complaining.
The problem for my attorney is that his competitors have had a lesson or two in economics, and they know that growth and increased production can drive down their production costs, thus absorbing increases in payroll or other fixed costs, while also putting extra money in their pocket.
For instance, let’s say a solo sells 2,500 documents throughout a given year. On average, he spends 30 minutes per document, a total investment of 1,250 hours of his time. He sells each hour at $200 per hour meaning he drives $250k revenue for the year. He’s doing great. But what if he could spend $10,000 this year on a document automation system that cuts his time investment in half – from 30 minutes to 15 minutes per document? He sells the same amount of hours (1,250) he just invests less of his time to produce each hour (15 minutes instead of 30). Accordingly, he now has 625 hours of his time available to, unlike my now ex-attorney, take on the overflow work he was previously turning away. Say he bills just half of those 625 hours; he’s added $62,500 in revenue but only increased his production costs by $10,000 for the year. That’s right, $250k less $10k plus $62.5k = acheiving economies of scale. So what are “economies of scale” and how can a law firm tap into them? One easy way is to engage a legal-specific Managed Services Provider.
What are economies of scale?
Economies of scale (hereinafter ‘EOS’) is a microeconomic theory that refers to the increase in efficiency of production as the number of goods being produced increases. A company can achieve advantages in EOS when they increase output without corresponding increases of input. This translates into lower production costs per unit.
EOS is benefited by learning-by-doing (LBD), which is another economic theory that states that, as we repeat the same type of action, we increase productivity through practice and self-perfection. Essentially, we all get better at the things we do frequently; whether it’s shooting a basketball or drafting a legal document, our experience serves as a knowledge base that we can tap into to prevent future mistakes, to increase the quality of our work, and to expedite the process by which we create goods.
Understanding the two concepts – EOS and LBD – is important to the business of law even though the concepts are most frequently applied to manufacturing. In manufacturing, you produce tangible products – things you can touch and feel. In the business of law, however, you produce mostly services. That said, both have calculable production costs and both stand to gain by increasing efficiencies to help reduce those costs. Accordingly, achieving EOS can help you lower your production costs (i.e., payroll, infrastructure, utilities, etc.) while maintaining the same output of goods or services, and this margin goes straight to your pocket.
How can a law firm achieve EOS without having to invest much upfront?
To achieve EOS, law firms can tap into a very valuable resource: legal-specific Managed Services Providers (MSP’s). These companies are advantaged at managing a law firm’s technology environment because of the scale of their specialty: they’ve done it for a decade or two, they’ve hired extremely specialized staff, and they have hundreds of similar clients. Accordingly, this increased scale gives them the opportunity to benefit from LBD at a scale much greater than what your firm can accomplish alone, thus giving them significant advantages over your in-house staff. Here are a few applications of EOS that you can tap into when using a legal-specific MSP:
Any business can benefit from hardware and software discounts greater than what they can achieve alone by using a MSP of some sort. This is because most small businesses only buy a server once every three years (as your law firm might); accordingly, they don’t get any manufacturer discounts or incentives. MSP’s, on the other hand, buy servers every couple of days and this volume of server sales gives them access to deeper manufacturer discounts, which allows them to sell servers to small businesses at a price they can’t necessarily achieve on their own. This results in tangible cost savings without adding to fixed costs.
That said, working with a legal-specific MSP will result in even more advantages for a law firm since the legal-specific MSP benefits from both high sales volumes and understanding of the business of law. This understanding allows the MSP to consolidate the purchasing process by choosing solutions they already know will work based on their previous experiences with similar clients. So rather than hiring someone on your staff, paying them for four weeks worth of research, then paying for deployment, testing, monitoring, optimizing, and then purchasing, you can skip straight to just purchasing – saving you significant time, resources and headaches.
A lot of times law firms adopt practices that serve their short-term needs but end up being long-term problems for the firm. Instead of dumping these practices over time, firms will spend countless resources on becoming more efficient at being inefficient. This is where tapping into legal-specific MSP will pay long-term dividends. Because the specialized IT-services provider knows the business of law and the technology that integrates into that business, they can share a wealth of knowledge of best practices to help firms ditch bad practices and improve efficiencies at the firm.
This is due in part to their advantages in EOS; ultimately, their experience with 10 or 100 or 1000 other firms like yourself provides them with a knowledge base of do’s and do not’s, and you tap into this as soon as you sign up for their management program. Accordingly, when you hire a MSP you gain access to a hundred years or more of combined experience from their specialized personnel. Their past successes and mistakes positions you to make more informed decisions, and this reduces your long-term production costs.
Obviously, we know that it is easier for large-scale businesses to invest in expensive technologies that give them access to meaningful reductions in production costs. At one of the most basic levels think about automated phone lines: dial 1 for this, dial 2 for that, and dial 3 if you calling about something else. This technology allows an organization to hire fewer receptionists, right? And assuming the technology has lower total long-term costs than hiring a number of receptionists over the same period, then the investment in technology was ultimately an investment that reduced in part their costs of doing business and costs of producing goods without reducing output (this implies it was done correctly of course). So what about small to midsized businesses who can’t fork up the same amount of cash for fancy hardware and software?
Your law firm is no different from any of these larger businesses so your decisions shouldn’t be any different – they should just be scaled differently. One of easiest ways for a small to midsized law firm to achieve EOS is to lower IT and IT management costs by managing all IT-assets proactively (this holds true for just about anything you service proactively – your car, boat, appliances, etc.). In order to do this, a law firm must acquire an IT-management console that allows them to be proactive instead of reactive. The main problem sub-250 attorney firms run into is that these consoles aren’t cost-effective to purchase outright unless the firm is a couple hundred seats large or more. Accordingly, to gain access to this console a firm must leverage a MSP who can distribute the annual fixed costs of this platform over several thousand seats, not just the seats at the referenced law office. By moving to a proactive IT-management model small to midsized law firms can now benefit from proactive IT-management services at an affordable price-point. This lowers firm IT and IT-management costs without impacting output.
But there’s more; by using a legal-specific MSP you can benefit from their experience and knowledge of similar IT-environments, meaning they can use the IT-management console much more effectively than MSP’s who don’t specialize in providing these services to the business of law. Knowing how the business of law works, when it works, and with what tools it works gives a legal-specific MSP the ability to use an IT-management console in ways that don’t impede your practice but rather complement your practice, and this, too, adds to your bottom line.
Economies of scale come in a lot of flavors. Here we’ve explored just three. The end takeaway is that if you engage with a legal-specific MSP you can achieve economies of scale very rapidly and, usually, with no added upfront costs. This will provide you with real, measurable cost savings that lowers your input (production costs like payroll, real estate, infrastructure, utilities, supplies, etc.) while maintaining or even increasing output, and this will put real money in your pocket.