Best Practice: Law firm overhead

Asked and Answered

By John W. Olmstead, MBA, Ph.D, CMC

Q. I am the managing partner of an 8 attorney firm in Carbondale, Illinois. Recently I was talking with the managing partner of a firm in the area and we were discussing overhead ratios and we seemed to have different definitions of overhead and I am wondering if we were trying to compare apples to oranges. Can you share your thoughts?

A. I consider overhead to be the operating cost required to support the producers in the firm. This is a different statistic than expenses. Typically in a law firm overhead is all expenses except for attorney salaries (associate and partners) and benefits. Often overhead is used as various benchmark surveys. However, when determining net income or profit (the profit pool) expenses would include associate salaries and associate and partner benefits. In a professional corporation where officer salaries are expensed we typically add shareholder salaries back to the net income figure to determine the profit pool for benchmarking purposes.

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John W. Olmstead, MBA, Ph.D, CMC,(www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at jolmstead@olmsteadassoc.com.