Law Practice Today

“Let the good times roll” was the unofficial motto of New Orleans – and then Hurricane Katrina hit with a harsh dose of reality. It may be the turn of law firms, or at least those at the top of the food chain, to feel similar pain. For half a dozen years the talk at these firms has been about billion-dollar revenue, million-dollar profits per partner and $160,000 salaries for starting associates. Now law firm consultant Hildebrandt International (along with Citibank) is warning of “a ‘perfect storm’ in which finance, transactional, and litigation work have all trended downward at the same time,” and The Wall Street Journal runs a feature story titled “Why Big Law Is Bracing for a Leaner 2008.” Behind both reports is the dreaded r-word, recession.

Of course, small firms and sole practitioners never fully shared in the full flush of the recent good times. But even if the rising tide of legal service spending didn’t lift all boats equally, there’s the danger that a receding tide can leave any law firm boat stranded in the mud. The most prudent strategy for any smaller firm to prepare for recession is to lighten the load on the boat. And that means taking a hard look at expenses.

All law firms have one thing in common: a finite limit to discretionary spending. Non-discretionary spending (payment of debt obligations, utilities and taxes) is mandatory. Anything else can be considered discretionary spending – overhead, in the common term. All money spent on overhead can, in some way, be reduced if necessary. “Fixed cost” may be an accounting term, but it’s not a practical concept. Money may be spent for leases and staffing according to certain parameters, but the parameters can be modified (albeit painfully) if necessary. Overhead spending is that which could be reduced or eliminated if it does not serve a business purpose. Four key areas are potential targets for reduction: space, personnel, technology and marketing.

Office Overhead

Office overhead is often considered in the context of an average figure, 9% to 12% of revenue for example. But averages can mask the harder analysis firms must make. Certainly you cannot be too far out of line with your competitors and still stay in business, but there are many other issues and questions each firm should consider. Is your rent competitive for the geographic area in which you’re located? Is your current physical location one that you, your clients and prospects are comfortable with? Even if you think better quarters improve the quality of your professional life, and can you afford them?

A firm reviewing office space needs should consider what it can afford, which features are most critical to operations, and what it is obligated to in the lease. The firm that is not locked into its current space and is considering something less expensive should remember that virtually everything can be negotiated before you sign the papers. Tenant improvements and betterments (TIBs), for example, can made to the space for your occupancy, to be paid for by the landlord, tenant or both as negotiated. Depending on market conditions, a firm may be able to negotiate one or several months rent-free, as an inducement to signing a new lease. Know your market, and check to see what other law firms have done, before attempting to negotiate this.

Some firms may view telecommuting arrangements by lawyers as a way to reduce office overhead, but telecommuting must be viewed in tandem with space expenses. Should lawyers be entitled to work from home when physical office space is available? If office space is not used for at least 20% of the time, someone else must either use the space while the telecommuting attorney is absent or the firm will eat the expense and thus incur a greater cost for off-site operations. If a firm turns to telecommuting to reduce overhead, the office space it uses should similarly be reduced.

Personnel Overhead

The cost represented by people is the largest expense at all law firms, irrespective of size. There is no question that lawyers and law firms need people. Even with today’s technology, no lawyer can do it all. But with today’s outsourcing options those people need not necessarily be full-time, on-site hires on the firm’s payroll. Outsourcing is not a new principle for law firms. Many firms for years have locally outsourced mailroom services and records storage, for example. More firms are tapping into the use of virtual assistants – paralegals or other administrative specialists who work offsite and online, creating work product to the lawyer’s specifications and tailored to the law firm’s practice. High speed Internet technology makes such arrangements possible, and now the reach of such support service outsourcing has spread worldwide.

There are many other ways to reduce overhead using today’s legal support service world. Digital and electronic technology makes available the growing pool of highly educated talent where the use of English is widespread (countries such as India, the Caribbean and Ireland), allowing law firms to reduce by up to 80% the cost of:

• Transcription of voice files from depositions, trials and hearings
• Accounting support in the preparation of timesheets and billing materials
• Data entry for marketing, conflicts and contact management
• Litigation support graphics
• Legal research, including case citation summaries and patent searches
• Review, and due diligence of business documents.

For actual legal counsel, many firms, both large and small, hire contract lawyers. The arrangement between the two lawyers may be at an "attorney's rate," a standard flat rate, or any rate that is established in the engagement agreement. The rate can be high enough to cover overhead expenses such as secretarial help, paralegals and word processors used by the contract lawyer, yet still offer a cost advantage to the firm and its clients. In some instances, rules of professional conduct or case law require the client’s consent.

Technology Overhead

New computers, software and database research services are significant overhead costs – particularly when technology gurus recommend a three-year replacement cycle. Many small firm lawyers want to stay current with technology changes. But, in times of economic uncertainty, one should look hard at the necessity to buy or update technology.  Particularly for new solo practices, substantial spending on new computer hardware and software may simply not be possible.

Certain tactics can provide a high ROI (return on investment) on very modest technology spending, while still offering adequate capabilities from the standard of care viewpoint.  A small or beginning practice can use a refurbished laptop or PC, rather than a new one, or skip Microsoft Office and Outlook, and go with open source software and a free email management program.   Purchasing an expensive online research service can also be postponed by regular visits to the library at the most convenient courthouse or law school.  Any such tactics can confer the benefits of technology without the big initial expense. 

If technology spending is unavoidable, determining the optimum ROI for this investment depends on the source of funds or financing used.  Paying cash eliminates finance charges, but means a big up-front expense.  Leasing equipment provides tax advantages, but typically only covers hardware.  Bank borrowing may be feasible, but a typical technology loan is no longer than the several year depreciable life of the equipment and software. The best option may be financing from the computer manufacture, which can include items such as technology and services that are usually not covered in loans or even other lease packages.

Marketing Overhead

It’s a business axiom that marketing is an imperative when the economy slows. But increasing a firm’s marketing activity doesn’t have to mean increasing its expenses. A good strategy to reduce marketing overhead is to rank a list of five things the firm does to market itself in the order of what has worked best. Which activities bring in the most profitable new clients, develop most referral sources or generate the most enquiries? The list might encompass, in order, 1) Networking 2) Seminars 3) Web site 4) Advertising and 5) Use of a public relations firm. Once the ranking is complete, cross the bottom two off the list. Be ruthless, because this is no time for sentiment or favorites. Stop doing them and put marketing money into the top three performers – the ones with the most bang for the buck.

• More to the point, some of the best marketing tactics of all involve little or no expense to the firm. The best business development strategies are common sense ones:
• Pick up the phone and call friends, family, business associates, past clients and offer to help them with any legal problems they have; 
• Chat with the sales folk and other tenants in the office building and ask them to spread the word about the firm and its availability;
• Communicate with law school friends and see if they will serve as referral sources;
• Get out into the public eye by writing articles and attending lunch or bar association functions;
• Check the local bar referral services, which advertise with a broad reach;
• Check the local legal news for retiring solos, and offer to assist them with the transition. 

Overhead Control

These examples all illustrate that, when it comes to overhead, it’s important to know what cost the firm is trying to control and reduce. Law firms often do not know their costs of operation. Thus, efforts to reduce overhead are often done “by guess and by golly,” not on a cost benefit analysis. Worse, law firms frequently fail to connect cost elements to the revenue generated by the cost element. The steps suggested here, when taken with such an understanding, stand the best chance of success, and leave the firm prepared to take advantage of the next business upturn.