In any business, profits equal revenue minus expenses: P = R - E. Strategies for cutting expenses and thus enhancing profits when a down economy reduces revenue are fundamental to “The Business of Law”®.
All firms have certain non-discretionary spending: the payment of debt obligations, utilities and taxes. Everything else can be considered discretionary spending - overhead, in the common term. And expenditures on overhead can always be reduced or eliminated if they do not serve a business purpose.
Here are four key areas that any firm, no matter how profitable, can examine for ways to reduce overhead.
Law firms today should ask hard questions on office space. Are costs out of line with competitors? Is rent appropriate for the geographic area where the firm is located? Are quarters and furnishings appropriate for the client base?
A firm reviewing office space should consider what it can afford, which features are most critical to operations and what it is obligated to in the lease. A firm that is not locked into its current space and terms and is considering something less expensive may be able to negotiate one or several months rent-free, as an inducement to signing a new lease. And if a firm turns to telecommuting to reduce overhead, the office space it uses should similarly be reduced.
With today’s outsourcing options any position in the firm could potentially be done by someone other than a full-time hire. Many firms for years have outsourced mailroom services and records storage, for example. Now 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.
For legal counsel, many firms, both large and small, hire contract lawyers at a rate low enough to cut costs overall.
New computers, software and database research services are significant overhead costs. In a down economy firms should look hard at the necessity of buying or updating technology because of the high up-front expense.
Particularly for new solo practices, substantial spending on new computer hardware and software may simply not be possible. 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 e-mail management program.
Do research at a courthouse or law school library rather than by using an expensive online research service.
Marketing is essential when the economy slows, but the expense should be managed. 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 brings in the most clients or referrals.
The list might encompass, in order, (1) networking, (2) seminars, (3) website, (4) advertising and (5) a PR firm.
Once the ranking is complete, cross the bottom two off the list and put your marketing money into the top three performers - the ones the provide the most bang for the buck and often involve the kind of personal contact that costs little, but is priceless.
Any of these tactics can be undertaken at any point in the business cycle. Law firms should constantly review costs and look for ways to systematically reduce them before the business turns down. But reductions should always be undertaken carefully - it’s important to know what overhead costs the firm is trying to control and reduce.
Oftentimes, firms do not know their costs of operation. Thus, efforts to reduce overhead are often done “by guess and by golly,” not based on a cost benefit analysis. A firm cannot control overhead unless it understands the cost structure that overhead represents. The steps suggested here, when undertaken with such an understanding, stand the best chance of success, and leave the firm prepared to take advantage of the next business upturn.
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