Best Practice: Improving law firm profitability through cost reduction

Asked and Answered By John W. Olmstead, MBA, Ph.D, CMC Q. As the managing partner of a 12 attorney firm, I have been asked to see what the firm can do to improve profitability by reducing costs. Do you have ideas or recommendations in this area? A. In most law firms the real problem is insufficient gross income and lack of sufficient investment (spending and time) on marketing and initiatives designed to stimulate client and revenue growth. For most firms increasing revenues is the most effective way of impacting the bottom line. However, we do find that there is waste and unnecessary overhead that eats away at profits and a cost control program is also recommended and implemented. During recessionary times such as we are currently facing – drastic cost control are often the only option. Reducing overhead can immediately and effectively improve a firm’s bottom line. The first step in an expense control program is to identify those areas where potential savings exist. Review your profit and loss statement. Resist the temptation to arbitrarily cutting costs which could cut the muscle with the fat and result in revenue loss as well. You have to spend money to make money – so if cost cutting is the appropriate strategy – cut the right costs. Think strategically about cost reduction. After you have identified areas where savings can be made prioritize and develop specific strategies and implement action plans to achieve the savings. Here are a few ideas: STRATEGY #1: Reduce Headcount This is the largest area for potential savings. Downsizing is a strategy that has been used by many firms this past year. However, it can have long term negative consequences for revenue and talent management. Consider all levels – non-productive partners, associates, paralegals, and staff. Be prudent and sensitive in implementation. STRATEGY #2:  Reduce Compensation Obviously one way is to cut salaries – a strategy to be used as a last resort. A better approach is to reduce fixed salary (paying people for showing up) and add a variable pay component which will allow employees to earn additional compensation in the form of bonus for results achieved. Another approach is to freeze salary increases. STRATEGY #3:  Benefits A major area for cost savings – especially health insurance. Determine which programs are most important to employees. Do your best to protect those and reduce or eliminate programs that are less important. Consider offering more than one health insurance plan. Pay the premium for the lowest cost plan and provide options for employees to “opt up” to the better plans by paying the additional premiums. Consider increasing deductibles and requiring employees to pay a portion of the base premiums. STRATEGY #4:  Outsource Examine potential for outsourcing – from copy services – IT management – to your legal team. STRATEGY #5:  Occupancy Review your lease invoices and question increases and escalators for which you have been charged. Consider renegotiating your lease and ask for a lower rate. Reduce excess space either through a renegotiated lease or through sub-leasing. STRATEGY #6:  Telephone Service Scrutinize your bills and examine rate tariffs as well as items that have been tagged to your bill by third parties. Negotiate and ask refunds for any discrepancies or abuse found. We have seen firms receive thousands of dollars in refunds. STRATEGY #7:  Virtual Office Do you need an office at all? Many solos are working out of virtual and home offices or a combination of same. Some larger firms are reducing the size of their primary expensive downtown offices by having some attorneys work from home offices or other locations. STRATEGY #8:  Marketing Many firms actually need to spend more money on marketing. However, this does not mean that it should be wasted on sacred cows. Review marketing investments, eliminate feel good items, and insure that they are producing results. Reallocate funds. STRATEGY #9:  Supplies and Other Purchases Eliminate waste and unnecessary expenses. Consolidate with fewer vendors and solicit discounts for exclusive relationships. STRATEGY #10:  Develop a Budget and Financial Plan If you don’t have one – develop a budget and financial plan and work the plan. Click here for our blog on financial management Click here for articles on other topics 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.