Best Practice: Improving law firm profitability

Asked and Answered

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

Q. I am the sole owner of a three attorney firm in San Francisco. I started the firm seven years ago. We are an estate planning firm. Everyone is working hard and putting in the hours but we are not making any money. I am only making around $110,000 net income/earnings after overhead. Should I take a meat ax to my expenses?

A. Yes, you should examine your expenses to insure you are not wasting money and resources. However, I find that in more cases than not 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.

While unnecessary expenses should be reduced - once they are reduced a repeated effort to slash costs proves fruitless as a strategy to increase the firm pie. The vast majority of law firm expenses are fixed or production-related. The percentage of costs that are discretionary is low, typically in the 20-30 percent range, and the number of dollars available for savings is small. The dollars available for reduction disappear after a year or two of cost-cutting, leaving the firm to deal with the effects of further cuts on production capacity.

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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.