Trimming Expenses to Fatten the Kitty

Recently I have been getting a number of questions about reducing overhead in law firms, so this article will give you some tips. For a strong first step, get a clear picture of the existing expenses, and determine which of them are necessities, and which are luxuries.

Do you review your firm’s monthly financial reports? Do you really know what the specific numbers on your financial statement represent? Are there some categories that fluctuate pretty dramatically from month to month or year to year? If so, that might indicate some discretionary spending items, and it may be worthwhile to review the expenditures represented by those numbers. It may be appropriate to develop some approval procedures within those categories. Establish a budget and follow-up on over-expenditures to get a real handle on expenses.

By investigating the facts underlying financial reports, lawyers I know have discovered seriously overdue accounts receivable, employees using firm services and accounts for personal purposes, courier services used daily for routine non-urgent transmissions, unnecessary equipment service contracts for nonessential or infrequently used equipment, infrequently used season tickets, and downright embezzlement. (Lawyers are rather common victims of embezzlement.) Some of those expenditures sound deminimus, but with frequent repetition, they add up.

Don’t be fooled into thinking that you are stuck with the expenses in categories that don’t fluctuate much, however. Historically, there wasn’t a lot a firm could do to reduce fixed expenses such as rent or staff and associate salaries. Today, however, with the benefit of technology and lawyers and staff who value work/life balance, creative law firm managers have new options. Even though firms complain about the never-ending capital expenditures required by evolving technology, usually equipment and software are a lot cheaper than employees. Further, firms with tech-savvy lawyers and staff tend to have an advantage. They can produce their work quicker and cheaper, making them more attractive to clients. Efficiency can open the door to alternative billing methods that provide a premium to the firm, while making clients happy. To learn more about the technology available to law firms and how to use it, consider attending the video replay of the Bar Tech conference sponsored by the Computer and Technology Section of the State Bar and TexasBarCLE in Houston on December 13, 2006. For more information, go to www.texasbarcle.com/CLE/AABuy1.asp?sProductType=EV&lID=6125

Today firms can reduce lease expense without downgrading the quality or location of their offices. They hire virtual associates or staff who don’t actually have an office on premises. Virtual employees work from home primarily or at clients’ offices and connect to the firm’s computers remotely. Law firms can also follow the lead of investment banking firms and consulting firms that use an office “hoteling” concept for employees who travel extensively. The firm has several offices with appropriate support staff assigned to them, which a virtual associate can reserve. Lawyers who occasionally have a need to work on premises, for a closing for example, reserve the use of the office like they would reserve a conference room. The firm can thus accommodate four associates while leasing space for only one office. Often employees that desire flexibility or reduced hours in their schedule for family or lifestyle reasons love the virtual arrangement. Similar arrangements can also help the firm staff up in peak periods using contract lawyers, without incurring ongoing obligations or expenses for benefits and employment taxes. To get some ideas about how to operate virtually, check out the May 2006 issue of The Practice Manager at http://www.texasbarcle.com/CLE/site/LawOfficeMgmtNewsletters/06_05_08.pdf

Many firms now assign three lawyers to an administrative assistant. They expect lawyers to efficiently create rough drafts of documents on their own, leaving the formatting and final touches to the admin. The lawyers usually maintain their own calendar using Outlook or other software that permits appointment setting with a minimum of phone or email tag. They answer their own phones or let them go to voicemail.

Many firms have practically eliminated lease space for libraries and document storage by going digital. They retain only the executed copies of agreements and scan all drafts, correspondence, pleadings, notes and other routine papers. They transmit documents to clients and other counsel by email, avoiding the expense involved in stationery, postage or courier fees, as well as the staff costs for copying, filing and addressing envelopes.

Staff and lawyer turnover creates a huge drain on most law firm coffers. In large firms, the cost of a departing lawyer has been estimated to be $200,000. When a lawyer leaves, the firm loses a significant investment. The firm has made out of pocket expenditures for hiring bonuses, moving costs, firm travel costs to interview at law schools or for the candidates to interview at the firm office, recruiting functions, wining and dining and sometimes legal recruiter search fees. Additionally, the firm lost the billing time of productive lawyers for reviewing resumes, traveling to law schools, interviewing candidates, recruiting, providing orientation and training, and supervising subordinates. The firm incurs similar, though less extensive costs and losses when staff person leaves. To reduce these kinds of expenses, firms can use assessments to better match the candidates to the positions, and train lawyers and management level staff how to be more effective managers. Many lawyers are rather oblivious to the impact they have on those they supervise. Firms can use 360 degree feedback surveys to help both the firm and the lawyer get a better picture of how effective their interactions are with subordinates. It has been said that employees don’t leave jobs. They leave bosses.

Employees can provide excellent ideas to the firm on cost-cutting measures. From the ground level they can see wasted resources that the firm management can’t see. Many of them carelessly or even knowingly waste firm resources because they do not have an incentive or motivation to conserve firm assets. Consider awarding a monthly or quarterly prize to the employee who makes the best suggestion for improving efficiency or cutting costs. Make the award ceremony fun, and encourage all office members to attend. The winner might be announced over coffee and bagels in the morning for a large firm or lunch for a small firm. The prizes might include an acknowledgment certificate and a gift certificate to a popular restaurant, the use of the firm’s coveted season tickets, a housecleaning or handyman service for a day, tickets to a family entertainment venue, an MP3 player, or other items the staff would enjoy using. While you may spend a little on the prize and the event, you will gain more motivated employees who take some ownership in the firm’s success, in addition to ongoing cost savings. Further, employees are much more likely to comply with cost saving procedures that they helped design.

These are just a few ideas for reeling in expenses that firms and legal departments have used as they experience competitive pressure to keep legal costs down. What has worked for your firm?