The Grass is Always Greener… Where the Cost of Living’s Leaner

By Dennis Boone

With coastal firms cutting costs by moving back-office operations here, could more legal competition be in the works?

A long-cherished marketing tool for law firms in this region that compete for business nationwide is what’s generally known as the Kansas City Value Proposition: Because costs of living are significantly lower here, and corresponding salary structures, they can offer top-tier legal services at rates handsomely discounted from the fee structures of coastal firms.

“We view the competitive advantage of doing business in the Midwest a bit more broadly. In some narrow law-firm related support functions, we expect there will be a short-term impact on supply and demand” — Mark Hinderks

That message has been drilled into clients nationwide for years, and with considerable success. And it has finally reached the C-suites of those coastal firms. Two of them: Sedgwick, and Littler Mendelson—both based in San Francisco—have within the past year made Kansas City the new home for back-office operations that support legal services—accounting, human resources, information technology and the like.

Sedgwick started last year with the goal of staffing 100 of those positions and the likelihood of more down the road. Littler’s intent is to have at least 275 people working in the Crown Center office that will house its global services division, with a mix of relocations for current employees, and new hires from the local work force. In a marketplace of this size, 375 or more jobs within one sector might not be considered a seismic move, but it’s one that has already had impact on firms.

Shook, Hardy & Bacon, the area’s largest firm in terms of local attorneys, saw its marketing director become Sedgwick’s first local hire. That started a chain reaction of moves within law-firm marketing offices as a new hire at one firm created an opening at another. But moves like that, said the firm’s chairman, John Murphy, are simple facts of business life.

No worries—yet
Murphy and other managing partners say they’re not particularly concerned about the impacts of the Sedgwick and Littler moves. In some cases, quite the opposite.

“I’m of the view that this is good for the city,” said Shook’s Murphy, a longtime advocate of efforts to drive regional job growth. “If you want your region to provide great jobs, have great schools and an excellent quality of life, you’re probably going to want increased wages in the region. I think that’s a good thing.”

Littler has been bringing in a significant number of San Francisco-based employees to demonstrate what Kansas City has to offer in those quality-of-life areas. It remains to be seen, said Denise Drake of Littler’s Kansas City office, how many of the jobs to be filled here will involve transfers from other offices, and how many will be filled by local talent.

Either way, Scott Kreamer, managing partner at Baker Sterchi Cowden & Rice, sees little impact on that defense-litigation specialty firm with 24 lawyers on staff.

“We do not believe the number of back-office jobs suggested by Littler will significantly impact the Kansas City market,” Kreamer said. “The  accounting, IT, marketing, and other back-office positions to be filled, which do not necessarily require experience in a law firm setting, can be accommodated by Kansas City’s talent pool.”

One reason he’s confident the changes won’t have major impact on his firm is that it has already baked competitive structures into its compensation cake. Those who haven’t done so had better start thinking about it.

“The compensation and benefit packages to be offered will likely be similar to those offered by the majority of firms in the area,” Kreamer said. “Firms not paying competitive salaries for the area
may be forced to do so to retain talent.”

The KC Value Proposition
If coastal firms can leverage the lower cost structures of running their back offices out of Kansas City, does that get a foot in the marketplace door to follow up with legal staff, as well?

“I don’t think that’s their intention at all,” Murphy said of the Sedgwick/Littler moves. “I can’t speak for other firms, but we have done well with the message that we are a litigation firm providing tremendous value to clients. Nothing changes that message; in fact, it reinforces that.”

The coastal firms are dialing into something that Kansas City firms have known about for a century, but bringing in legal staff to operate from a new base is a harder sell.

Mark Hinderks, the Kansas City managing partner for Stinson Leonard Street, sees the issue from the perspective of a firm anchored in two of those lower-cost centers, with joint operations in Kansas City and Minneapolis. The flow of qualified support staff goes in more than one direction.

“We view the competitive advantage of doing business in the Midwest a bit more broadly,” he said. “In some narrow law-firm-related support functions, we expect there will be a short-term impact on supply and demand, depending upon how many of their existing employees move to Kansas City. Over time, however, we hope that it will result in a larger pool of trained people to fill important functions, people whom we hope will view our integrated approach as very appealing.”

Mark Bluhm, CEO of Lathrop & Gage, sees that opportunity, as well. “If they can truly bring (that many) people from those two firms, it seems to me the rest of us will benefit from that.”

But if the cost savings can be maximized here with back-office personnel, doesn’t it stand to reason that far greater savings could be recouped with the higher-earning legal staff?

We won’t know the answer to that for several years, but we do know that what’s happening now is merely the next step in a nationwide dynamic affecting all firms. For the past five years, starting amid the Great Recession, firms have been under tremendous client pressure to rein in costs and deliver higher levels of service—at the same time.

“Firms have gotten very good at doing more with less and increasing work-process efficiencies,” said Kreamer. Given that, even with new competing interests in town, “if there is an unforeseen impact to firms in the Kansas City area, we would expect a smooth adjustment.”

What’s happening with outside law firms differs little from what Kansas City has seen with the Federal Reserve Bank, for example, adding 200 technology jobs over the next three years, Murphy said. “People looking from other cities, when they look to Kansas City, a lot of them say, ‘It’s a good place to be, it’s got a good standard of living and now there are jobs that sound attractive—I’m outta here.’

“That,” Murphy said, “is a very good thing for Kansas City.”

In any event, said Bluhm, one fundamental won’t change: “The legal business has become so competitive,” he said. “In certain practice areas, where you are located still matters. But in many, it doesn’t. Clients often work with lawyers in locations not in their same city, and often, those lawyers are part of a team that might span several offices.

“Cost certainly matters,” he said, “but clients are looking for the expertise from people who know your business, no matter where their offices are.”