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Ed Poll
  Week of May 20, 2008

Don't Cut Muscle Along With the Fat

As the reality of recession continues to sink in and revenues begin to shrink, many law firms are coming face to face with cutting expenses. It is unique to law firms that so many individuals have direct impact on overhead spending. In many firms, individual partners, even lawyers generally, can direct discretionary resource consumption, from purchasing new office furniture to charging the firm with personal meals and travel. Left alone, some lawyers would realize how much they cost the firm only after the money ceases to come in the door. However, cash flow cessation is usually the last symptom of a downward spiral that started long before, with failure to control overhead spending.
All lawyers ought to be able to assess the impact that they have on firm overhead, and thus firm profitability. The information to do that would include:

  • Their billable hours, for the latest month and year to date
  • How many hours the firm billed out for them
  • Their compensation (including bonuses and benefits)
  • Direct overhead expenses for office space, personnel, and technology
  • Indirect overhead expenses (the percentage of rent, insurance, utilities, entertainment, and education that can be apportioned to each lawyer).

The resulting equation is simple: Billings - Compensation + Direct and Indirect Overhead = Net Profit. Such analyses, especially in a small law firm, can point out those lawyers who do not generate the profit to cover their cost.
It's equally important, however, not to cut overhead too far, too fast. The news stories about law firms laying off or terminating associates and staff, and de-equitizing partners, raise the question, "Why can't these people be transferred from their current practices to other practice areas that are still growing?" After all, these lawyers are trained in the culture of the firm, are presumably good lawyers (otherwise they shouldn't have been hired), and should be capable of learning new technical skills. Cutting first, without a measured assessment of what and where to cut, eliminates muscle, not just fat. It will likely cause the firm a problem when—not if—the economy recovers and they must scramble to catch up with client demand.
Further, for each lawyer at the junior/senior associate level that is terminated, the law firm loses its investment of anywhere from $200,000 to $500,000—that's a lot of money down the drain! Cutting overhead may sometimes be necessary, but between the cost of hiring new lawyers and the ill-will generated among existing clients (not to mention the "surviving" lawyers/staff), if the firm cannot meet future demand, cutting overhead too sharply can cause the firm inestimable harm.

Ed Poll

By Edward Poll
(6x9", 143 pages + with CD of forms soft cover, ISBN: 1-59031-153-1, Published by American Bar Association, 2003)
The CD contains forms for intake, engagement letters, status report, budget, sample bills and collection letters, accounts receivable aging reports and more.
Click here to purchase the book and CD for only $79.95

Ed Poll
Ed Poll

Personal Commentary
The law firms of today are facing a series of challenges. Firms of all sizes are debating how to set their business models in order to best serve their clients—and themselves. There are a variety of factors that need to be considered when choosing a business model and strategy, and a wide array of models to choose from—so how do you make the best decision for your firm?
I'll address these issues and more in my upcoming teleseminar, "Law Firm Business Model" for Thomson-West LegalEdcenter on Wednesday, May 28, 2008 at 1 pm EDT.
To attend this teleseminar, please visit Click "Search Catalog" and type in "Law Firm Business Model" in the title field.
Best wishes,
Ed Poll

Ed Poll
Ed Poll

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Ed Poll
Ed Poll

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