Ten Ways to Cut Overhead

As clients become more sensitive to legal fees and law firms are hesitant to raise hourly rates, cost control becomes a primary issue for legal managers.  Of course, the largest expense for law firms is people, both timekeepers and support staff.  But another part of the equation (and a prime target for many law firm partners) is overhead cost.

We recently performed a cultural assessment for a firm that was concerned about the impact of economic pressures on the firm’s culture and employee moral.  It was fascinating to see that, despite everyone’s concern for the lawyers and staff who had been laid off, the big gripe seemed to be the declining quality of coffee and the use of powdered creamer at the firm’s coffee stations.  In the UK, the cutbacks driven by the economic crisis are tracked in a weekly law firm newsletter that is largely devoted to reviewing the quality of biscuits served with tea and the amenities offered in washrooms at large law firms in London.

This brings me to an observational conclusion about cost cutting in law firms.  Budget cuts that impact the day-to-day life of lawyers and staff, regardless of how minor the changes, will often draw greater screams than reductions that may have a much more important impact on the firm’s ability to provide client services.  Reductions in technology or in marketing programs that may have a significant impact on the financial health of the firm may go largely overlooked by employees (and partners) in comparison to issues like the quality of sandwiches served for lunch at in-office meetings.

Toward that end, consulting firms that work with businesses on a contingent-fee-for-savings-achieved basis are now focusing on law firms seeking to reduce overhead expenses.  While some of the following may appear to be common sense or even petty, they are the primary areas of cost reduction where cost reduction consultants routinely find the most low-hanging fruit in law firms:

1. Equipment Leases. Capital equipment leases negotiated several years ago may involve substantially above market interest factors.  By adjusting the term of leases or negotiating a package that includes the financing of future purchases, firms may enjoy significant interest savings.
2. Office Leases.  Occupancy leases may be renegotiable to extend the term in return for the ability to give back surplus space or reduce expansion options.  Leases that provide large space options that will realistically not be used may be tying up space that would be more valuable to the landlord if it were available for long term lease.  Lower secretarial ratios and the need for less core space for things like technology and libraries may allow for redesign to reduce law firms’ occupancy footprints.
3. Bulk Purchasing.   Reducing the number of office supply choices offered, lower in-stock inventories and contracting with national suppliers to service all of a firm’s offices can significantly lower commodity costs.  The largest savings can be achieved in office supplies, coffee services, office equipment and furniture.
4. Library. Lower costs through a combination of reduced on-line research and managed availability of services.  By aggressive negotiation with a single on-line vendor for all offices, firms can leverage lower costs for services and related subscriptions.  At the same time, firms can move toward the elimination of subscriptions and reporting services that are not heavily used or are available from other sources such as court, bar association and local law school libraries.
5. Food Services.  Reduce costs for breakfast and lunch meetings through negotiated contracts with a limited number of food service vendors.  Often savings can be achieved by guaranteeing minimum monthly purchases and agreeing to off-peak ordering and delivery times.
6. Self-insuring for service contracts.  Many law firm IT departments routinely agree to service contracts rather than take the risk of using support or maintenance services on a pay as you go basis.  Savings may be achievable by assessing the risk and only purchasing service contracts where the contract is necessary to obtain service.
7. Lower insurance policy limits and higher retention rates.  Reduce insurance premiums by engaging an insurance consultant to assist the firm in analyzing the property casualty risks and considering self-insurance in certain areas.  Frequently, professional liability limits are based on historical practices and may be greater than the risk for the firm’s current practice.  Frequently reassess specialty coverages such as EPLI to assure that the level is correct and the premium is competitive.
8. Reduce bank interest costs.  Most firms’ bank lending is used to support partner draws paid in advance of cash receipts. A revised draw policy could reduce or eliminate the need for debt.  Other options include lowering the rate by seeking competitive options for the loan and the role of the firm’s lead bank.  This requires that you have a good understanding of the amount of business referrals you receive from your current bank, both so you know what you are potentially walking away from if you change banks and to know how much business you refer to your existing bank.  If it’s substantial, it could be a major point of leverage.
9. Lawyer expense reimbursements.  Many firms have created areas of cost reimbursements to lawyers that are not competitively necessary in the current marketplace.  In many cases, expenses reimbursed for lawyers may be personally deductible by the lawyers as a business expense.  These reimbursements can range from paying for technology expenses such as at-home internet access, cell phone and Blackberry expenses, CLE registration fees and entertainment expenses.
10. Technology Revamp.  Advances may have rendered some technologies obsolete.  For example, video conferencing rooms and high bandwidth communication may be more effectively replaced by Skype or similar desktop systems that are essentially free; central dictation systems may be rarely used; and multiple telephone lines for each office may no longer be a necessary expense.

Now, even though the above cost areas may be more productive than some of the more controversial targets where law firms typically focus their budget knives, there may be something to be said for high visibility cost reductions.  During World War II, housewives were encouraged to turn in pots and pans so the metal could be melted down for the war effort.  In many cases these materials were never actually used, but they were symbolic of the actions being taken.  Equally important, they gave citizen ownership in the war by their contribution, no matter how small or relevant.

The same may be true for law firms where the belt tightening efforts of management may be driven home better by reducing the quality of coffee in the break room or the quality of legal pads provided than any of the less visible areas listed above.  But symbolism only goes so far and should not replace attention to the real areas of savings: the cost of personnel and the expenditures discussed above.