Summary: Although many firms are nervous to take on the expense of a consolidated services center, others embrace the opportunity to cut costs in the future.
At the beginning of last year, Bingham McCutchen reported dire financial circumstances. Jay Zimmerman, the firm’s chairman, noted a significant expense weighing on the firm: its “Global Services Center” in Lexington, Kentucky. According to Bloomberg, two floors of a building were leased for the center, and many of Bingham’s administrative employees were relocated to Lexington, costing the firm $22.5 million.
Before the end of 2014, the firm collapsed after many of the firm’s partners left for a competitor firm. Ultimately, the services center cost each equity partner roughly $100,000.
Ironically, the services center was slated to save around $25 million in overhead expenses by 2016. The firm closed before it was able to enjoy such savings. Realtors are now searching for new occupants to rent the floors where the services center once operated. It will be officially open to rent on July 1.
Bingham demonstrates the risks of funding an administrative system, which include costing the partners significant amounts of money. Such a move may weaken a firm, and, additionally, most administrative staff is less than enthusiastic about moving to a new city.
Many firms note that their labor expenses account for up to 90 percent of their overhead costs. Therefore, they seek to reduce expenses by combining multiple departments, such as information technology, accounting, knowledge management, and finance, into one center. Typically, the center is opened in an area with a reduced cost of living and lower tax rates.
Littler Mendelson announced in April that it would be opening an administrative center in Kansas City, Missouri. It filed a WARN Act notice and noted that 113 staff members would be laid off on July 1. Co-President Jeremy Roth said, “The goal is that most of the jobs will be up and running in Kansas City by the end of the third quarter of this year.” Sedgwick, another firm, will operate a services center in the same building, according to KansasCity.com.
Roth added that the firm has a ten-year lease on its main office space in downtown San Francisco. In March 2016, the lease will expire and rent is expected to increase “very dramatically.” After surveying 942 markets, Kansas City was chosen for a number of reasons, such as its Central Time Zone that would serve offices on both coasts, as well as its locations in Peru, Honduras, and Guatemala.
Only around 25 employees will relocate, which is roughly 10 percent of the 275 member workforce in the new office. The combination of reducing the administrative workforce and hiring local personnel for lower salaries will no doubt save Littler significant amounts of overhead.
Of the 25 most profitable law firms, Latham & Watkins seems to be the only one that has initiated the launch of a back-office to move support staff in Manchester, England. Last year, White & Case, the 26th most profitable firm, opened a second back office in Tampa after its first was launched in Manila in 2007. According to the American Lawyer, the Manila office offers the firm’s 1,895 lawyers technical support, billing, human resources, risk management, and marketing services. Such practices are popular in global firms or those that occupy major money centers while they practices in the middle market.
According to Mark Klender, a principal at Deloitte Consulting and one of the leading consultants in establishing law firm back-offices, said that firms should not let Bingham’s fate deter them from opening such offices. He is surprised that more firms have not moved and consolidated their staff in a low-rent area. Many firms are wary of the costs up front.
Morgan Lewis & Bockius acquired most of Bingham’s assets in the fall, including the services center. It has decided to close the office instead of using it as a services center. Instead, it has invited some employees to relocate to Philadelphia to join its administrative staff. Some employees, however, have said that the terms of relocation were not great and that relocation expenses were not covered.
In December, Morgan Lewis took 500 pro bono cases from Bingham.
A new services center can cost tens of millions of dollars, when severance packages, relocation expenses, office space, infrastructure, and technology are taken into account. The firms save the most on labor.
Mark Seeley, the Senior Managing Director of Labor Analytics Group at CBRE who advised Littler Mendelson on its services center, said that labor usually eats up 70 to 80 percent of a firm’s operating cost for shared service centers. Seeley added that roughly 10 to 50 percent of the total staff end up relocating, and that the workforce is typically between 100 to 300 people, depending on the firm’s size.
Pillsbury Winthrop Shaw Pittman is a firm that has enjoyed the benefits of a services center. It opened a 175-member services center in Nashville that reduced the real estate costs of the firm by more than $10 million per year, according to Richard Donaldson, the firm’s chief operating officer.
However, not all have enjoyed the perks of the services center. Eline Isaacson, a telecommunications manager who moved to Nashville from Washington, D.C., commented, “If someone said, ‘Let’s move somewhere new, where is it going to be?’ Nashville would not have been on my list. I am a city girl, so it was a challenge for me to come here and dial it back.” Isaacson has been with the firm for close to three decades.
A merger was sealed between Bingham and Morgan Lewis in 2014.
As for the Lexington space that was once used by Bingham, it is not clear whether another law firm will take over. Jones Lang Lasalie, a commercial real estate firm, has placed the office on the market with a lease expiration of April 2023. The 45,376 square foot will be available for around $1 million per year, or $22.50 per square foot.
Josh Gerth, the Vice President at Jones Lang Lasalie in Cincinnati and Northern Kentucky, said, “I’d say it’s still in the honeymoon phase of marketing.”
Gina Greathouse, the Senior Vice President of Economic Development at Lexington Commerce, Inc. added that the local chamber of commerce is also searching for tenants and has certain targets in mind. “We are actively seeking businesses and professional services firms, and other global service centers,” she said.
Bingham struggled to stay afloat in October 2014.
David Koschik, the chair of White & Case’s innovation and efficiency council, said that although a services center is not for all firms, White & Case’s “global footprint” made the offer hard to turn down. He commented, “For us, it’s really been about how we can operate efficiently. Some firms that I have come across in my travels wouldn’t consider doing this, and it may just be that they aren’t ready for it… I think it’s probably for each firm to decide for themselves.”
Source: Bloomberg
Photo credit: crainsnewyork.com