Chris Vaughan 2014-09-03 01:27:10
As managing partners of various sized firms will attest, the pressures for fundamental change in the legal industry are here to stay. Clients are increasingly focused on reducing legal fees for most of their work, and these demands surface in both the fee-setting, initial phases of a representation and in the increasing insistence on write-downs of bills that are actually sent. Realization rates in most firms are now in the 82-83 percent range, down almost 8 points from the end of 2007. Firms that fail to respond appropriately face the loss of future business. According to Acritas’ Sharplegal research, “33% of clients dropped a law firm in the last year,” with 22 percent of those clients noting “too expensive” as the number one reason they fired the firm, eight points higher than the second biggest reason. Given this situation, law firms must reduce their own costs in order to maintain traditional (or even similar) profit margins while continuing to provide effective representation. Fortunately, doing so is not an impossible task; it merely requires a focus and discipline that were not heretofore prerequisites for a successful lawyer. Here are some ways for a firm to manage its overall spend. Note at the outset that the first two tips directly address what are, by far, the largest categories of expense for all professional services firms – people and space. PEOPLE MANAGEMENT – As a general proposition, a law firm should be staffed by highly effective, efficient personnel (attorneys and staff), each of whom has plenty of work for which clients will pay reasonable rates. Sounds simple, right? Actually, almost all firms have excess capacity – people who are not fully utilized – which means that the firms are paying salaries and not receiving in return the full value of what those salaries should produce. Furthermore, firms' personnel typically include individuals who are not as efficient in doing their jobs as the new marketplace requires. Both of these situations erode overall profit margins. Similarly, firms sometimes staff matters with individuals whose skill sets and rates diminish the firms' ability to be profitable on the particular matter. Although there are a variety of reasons why a law firm might retain or even overpay an individual, each firm doing so must recognize the impact that those decisions have on the firm's profit margin. Beyond this consideration is the fact that firms must evaluate the strengths and necessary skill sets of their attorneys in the context of the firms' practices. A larger firm may need staff who are very specialized and extremely efficient in performing a discrete set of tasks, whereas a smaller firm may need individuals with more generalized skills and thus greater flexibility. SPACE MANAGEMENT – As technology continues to advance, firms are finding that oversized offices and multiple, large conference rooms are not as necessary. Each firm should determine its space requirements on the basis of its long-term goals. If a firm can renegotiate, or is considering renewal of its lease, it should first determine the appropriate location from a standpoint of its current and perspective clients. For some attorneys, proximity to the courthouse is extremely important. For others, it is more cost-effective and beneficial to be located a little outside of downtown. The next step is minimizing the amount of necessary space. The more a firm utilizes digital files, the less storage space it needs. Those huge offices you see on television shows look grand, but they really hurt the bottom line of the firm when it comes to analyzing the functional use of the space. BACK OFFICE SUPPORT MANAGEMENT – If a firm outsources support to various vendors, it should find companies that can provide multiple services for your firm. Such companies will frequently provide a discount for firms utilizing multiple services, and the law firm will then not have to pay retail for every service needed. Firms with multiple offices should place back office support in one location or even in a remote location with a lower cost of living. SOFTWARE MANAGEMENT – Too often, firms, especially small ones, invest in software that provides the same services as software that they already own. When considering new software, the firm should be certain that it integrates with existing software to minimize setup costs and ongoing maintenance fees. It is also important to analyze whether a cloud-based platform is appropriate for the firm. Not every firm should drop its servers just yet. Most of these platforms require firms to increase bandwidth in order to maintain efficiency, which could increase overhead. Faced with significant fee pressure, law firms must find ways to operate more efficiently and reduce their costs. Doing so can be difficult, but the rewards are increased profit margins and happier clients. Chris Vaughan is the managing member of Firm Transitions, a full-service solution center for law firms. For more information, visit www.firmtransitions.com, call (336) 415-3476 or email email@example.com.
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