When to expand your firm, when to outsource

  • September 26, 2018
  • James Careless

A growth spurt in your firm’s workload can be a mixed blessing – more work means more revenue, but it can also mean burning out your partners and associates to keep up with it.

“In my experience, there are four indicators that the firm is faced with the decision either to expand or outsource,” says Kamila Philip, president of Law Firm Marketing Canada. “The first indicator is you start turning down work due to capacity issues. The second is your staff is overwhelmed by work, which is evident by the overtime hours they are putting in. The third is delays in turning around work for clients and meeting deadlines. And the fourth indicator is that the firm already has plans to grow its business and is looking for the opportunity to do so.”

In this situation there are two obvious options: expand or outsource. But while both can solve the problem, they each come with their own downsides – for example, adding people and infrastructure can end up costing more than it brings in; while outsourcing to a third-party supplier means reduced control over the work.

So what to do?

First of all, conduct a “fiscal reality check.” Ask yourself: Will the increased revenues pay for the extra salaries and any extra facilities (leasing, utilities, hardware and software licences, furniture, etc.) AND create profits?

“Build out revenue projections for this new service or practice area,” advises Jared Correia, founder and CEO of Red Cave Law Firm Consulting. “If you do that, you’ll have a better idea of what you stand to make – and, if you’re doing it right, what it will cost.”

If the answer to this fiscal reality check question is yes, then expanding your firm is a realistic option. If the answer is no, then outsourcing to a lower-cost third-party supplier may be the best way to go.

Either way, keep in mind the axiom that “growth is only something to be looking at if it’s going to achieve particular strategic goals such as increasing profitability,” says Colin Cameron, president of Profits for Partners Management Consulting Inc.

Just because your firm can afford to expand doesn’t mean outsourcing is a bad idea – sometimes outsourcing makes the most business sense.

For example, you may be able to expand without adding staff by outsourcing your routine, least-profitable work to lower-cost suppliers.

“In a lot of law firms, the lawyers tend to punch below their weight,” says Jordan Furlong, principal at the law firm management consultancy Law 21. “I go into law firms and I see partners essentially doing associate work, and associates doing work that could be done by paralegals or clerks.” In some cases, in fact, the work could even be done by clients themselves – having clients fill out forms online can cut staff costs without sacrificing service quality.

Another time to outsource is when a law firm is taking on a fixed-term project that will temporarily cause an increase in the workload, with no guarantee that this level of engagement will be sustained once the project has concluded. Outsourcing in this case will mean that there will be no need to downsize at the end of the project.

Firms might also want to outsource when they’re venturing into new markets that may or may not pan out. “Paying less to experiment is better than paying more to experiment, particularly if it might be a coin flip as to whether your new endeavour is successful,” says Correia. “You may also find that using vendors allows you to access their existing systems and efficiencies. For example, if your virtual receptionist has a nice workflow for managing intake, just adopt it.”

Of course, not every third-party rainbow ends in a pot of gold, and sometimes outsourcing is not an option. For instance, some highly confidential and sensitive areas can be too risky to outsource. And not all outsourcing firms are created equal.

“You have to do your due diligence before hiring them, and then you need to monitor their performance on an ongoing basis,” says Furlong.

On the plus side, it’s not a strictly binary option – there’s a third way that offers the benefits of both outsourcing and expansion – virtual employees.

Virtual employees are contract employees or freelancers who work directly for the law firm, under its supervision, but because they can operate out of their own premises (usually at home), they cost less to support than in-house associates. “As well, allowing employees to work from home can help a law firm attract younger hires,” says Philip.

James Careless is a frequent PracticeLink contributor.