by Edward Poll, J.D., M.B.A., CMC
Attorneys have a limited number of approaches to reducing the expenses -- also called overhead -- of a law office. Some areas are obvious (rent, labor, education and marketing) and readily come to mind. Moving beyond these, an attorney could pare down even more, but the impact wouldn't be significant on the practice because the number of dollars relative to the overall expenditures is not large. Let's look at the four, big-ticket expense categories and see how reductions can be made.
- RENT: One of the most significant costs for law firms, and the one most often ignored once the lease is signed, is the leasing or occupancy expense. Besides the obvious -- relocating to less-expensive digs -- here are a couple of ways to reduce the rent.
To Lower Your Basic Rent: While real estate values fluctuate dramatically, many lawyers are locked into leases that were made years before. One strategy is to try to restructure your existing lease by asking for a lower rent. How? Landlords generally do not want to see an interruption in rent; they would rather see a reduction than a cessation. Simply ask for the reduced rent. If you're nearing the end of an existing lease, your negotiating leverage over the landlord is the possibility of your moving out and leaving him or her with an empty space. Landlords will do almost anything reasonable to prevent losing a tenant and losing the resulting cash flow.
Another approach is to request an extension of the lease term at the current rate. Since all rents do eventually go up, you can effectively lower your average annual lease cost by extending the lease term at the existing rental rate.
To Lower Your Pass-Through Charges: In most office leases the tenant pays a fixed base-rate sum plus an additional amount usually called an "escalation" or "pass-through." The extra charge is based on a pro-rata share of the building expenses each year of the lease. Your goal is to reduce these pass-through charges, and a lease audit is an effective way to review them. Analyze the charges carefully and either try to reduce them or use the lease audit for lease-bargaining leverage.
- LABOR: This is the biggie in overhead reduction. Labor is separated into two categories: staff and associate-lawyers, and cost-cutting strategies can be applied to both.
One approach that some firms are taking to limit staff expenditures is to have more than one attorney assigned to a secretary. In some firms, the goal is to have three attorneys per secretary. One well-trained secretary, coupled with the necessary technology, can produce a substantial amount of work product. And many more attorneys today can type and give a secretary work that is almost in finished form.
Some firms are also outsourcing their temporary associate attorneys needs. Consider hiring a "contract attorney" who will work for you on a designated assignment as an independent contractor. The pricing is set in advance, usually on an hourly basis, but without fringe benefits. Another option is to hire a legal research firm; there are several now around the country (e.g., Legal Research Center in Minneapolis or Legal Research Network in Los Angeles). You simply describe the nature of your requirement, and the research company will deliver a finished product prepared by a qualified attorney on their staff.
- EDUCATION: is always a tempting category, but my advice is to never give up on continuing legal and other education. Attending conferences and learning about the latest developments in your area and related areas, including electronic media, is important; this is what will keep you in the forefront of your profession and enable you to represent clients with the requisite skills to keep them coming back for more.
- MARKETING: There is no magic percentage of revenue that will either be the limit to spend or the most effective level of spending to produce the best results. In a new practice, it may sometimes seem that you are spending most of your time, and certainly a large part of your revenue, marketing for new, additional business. Marketing in this context includes entertainment (e.g., prospective client lunches, bar association meetings to develop your network, etc.), advertising (e.g., yellow pages), new brochures and similar forms of "spreading the word" about your skills and availability. Reducing this area of expenditure may be required by reviewing your cash flow, but a severe reduction will also reduce your visibility in the community. On the other hand, when your practice and reputation is established, a reduction of marketing expenses may reduce your overhead without harm.
Most attorneys are concerned, and rightly so, about keeping costs under control and reducing overhead. While this article is focused on reducing costs, a mentor long ago taught me that it is the revenue side that must be grown more than expenses controlled. The theory is that there are only so many expense areas that can reduced. Spending on the big ticket items such as rent ("don't get too fancy"), equipment ("buy only what will help you make money") and salaries ("don't take home so much that you have to borrow to meet payroll") should be made judiciously. But other expenses are not that important. The emphasis should be on getting more revenue, getting more clients, and developing greater legal skills that will allow you to attract better clients with the ability and need to pay higher legal fees.