Best Practice: Improving Law Firm Profitability - Revenue vs. Expense Control

Asked and Answered

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

Q. I am a recently elected managing partner of a 14 attorney firm in Orlando, Florida. For the last three years, our financial performance has been stagnant and my partners are asking me to cut all overhead expenses possible in order to improve profitability. Suggestions?

A. I am often asked to help law firms design and implement profitability improvement programs. In most of my engagements, the real problem is insufficient gross income, coupled with insufficient investment in 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.

Many law firms waste considerable time trying to find different ways to cut a pie that is too small by implementing new compensation systems or increasing the size of the pie by decreasing costs. Although unnecessary expenses should be 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.

The lesson here: get control of runaway expenses, but focus on revenue generation.

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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.