Controlling Law Firm Operating ExpensesPublished by Dennis Duitch, CPA, MBA, Advisor, Mediator

By Dennis Duitch & Marcia W. Wasserman
Los Angeles Daily Journal California Law Business January 18, 2000

As most law firms enter their new fiscal year, management should be taking a fresh look at improving profitability. The quickest way to accomplish this is often through better control of operating expenses, and the place to start is by using the firm’s expense budget as a management tool to determine where expenses can be reduced. If a firm does not currently budget for expenses, this is an imperative starting point.

To gain a better understanding of expense trends, the firm should analyze budgets in comparison to actual results for the last two or three years, on a line by line basis. Then, the firm should re-examine every line item to look for ways to reduce operating expenses.

Some expense areas merit particular attention on a regular basis, including those below:

• Human resources. Since payroll and benefit expenses comprise the largest percentage of firm overhead, it is important to be creative when staffing. Smaller firms should consider outsourcing human-resource functions to a professional employer organization, also known as a staff-leasing company, which assumes all human-resource administrator tasks, usually at a fraction of the compensation cost for such person in-house.The staff-leasing company becomes the employer for payroll, workers’ compensation and employee-benefits purposes, which often also enables the firm to provide health and benefit plans with more options –at much more affordable rates –than are typically available to smaller firms.

  All firms should review health-care benefit plans on an annual basis. Consideration should be given to perhaps raising the individual deductible to reduce overall premiums for the firm. Benefit utilization should be studied so that benefits that most people do not use can be eliminated. An Internal Revenue Code Section 125 “cafeteria” plan should generally be implemented, which gives personnel a pre-tax benefit of certain out-of-pocket medical and child-care expenses. Also, insurance programs like dental and eye care can be converted to optional plans and placed within the cafeteria plan to save the firm money.

  Where possible, firms that still have a two-to-one attorney-to-secretary sharing ratio should consider going to a three-to-one sharing ratio. This strategy can save considerable salary and benefit expenses for each eliminated position. Today’s attorneys and paralegals are much more comfortable preparing first drafts of documents on the computer themselves, which frees up highly paid legal secretaries to do more administrative tasks and assist more people.

  The firm should consider using part-time employees to reduce the cost of benefits. College students make excellent part-time workers and can be effectively used to perform filing, office services, paralegal and reception functions.

  Another strategy for reduction of secretarial overtime is the use of a “cyber secretary” service. This type of service enables attorneys to call an 800 number, dictate documents into the telephone, and cost-effectively receive a document back via e-mail in either Word or WordPerfect format within several hours.

  Additionally, firms should negotiate lower fees with one or two headhunters and employment agencies in exchange for using them exclusively. This approach can significantly reduce costs associated with recruitment.

  Finally, in-house training programs can be used to create career paths to retain existing employees and are a way to reduce payroll expense. The firm receptionist, for example, initially can be trained as a legal secretary on the overflow typing from the paralegals, who might not have adequate secretarial support. The benefit to the firm is not only saved payroll expenses, but loyal, motivated employees, who have been given a career path and are more likely to stay with the firm.

• Office supplies. Local and national bar associations frequently provide vendor discounts to members. For example, the Beverly Hills Bar Association has a member agreement with a national office-supply firm “Association Members Only.” This program guarantees the lowest price available on any product, with discounts of 49 to 82 percent. In addition, members receive a four-percent cash rebate on every dollar spent.Firms should also take a look at the number of different brands, sizes and shapes of supplies that may have evolved on the firm’s purchase list. Attorneys are notorious for demanding different types of paper, pencils, computer accessories, cell phones and other such supplies. The firm may be missing out on purchase discounts and optimal pricing if this is the case.
• Vendors. Law firms frequently allow individual attorneys to use a favorite travel agent or court reporter without realizing the impact on expenses. By consolidating vendors and using the same messenger service, office supplier, travel agent, cellular-phone provider, court reporter and other service providers, most firms will generally receive better service and better pricing.
• LIBRARY: According to Cookie Lewis, principal of Infomania, firms should conduct a “library audit” when looking for cost savings. The audit should contain a list of all current subscriptions and ask lawyers how often they use various materials — ranging from “daily” to “weekly” to “monthly” to “when desperate” and “never”.The firm should review the cost of annual upkeep for the subscriptions that are on the “when desperate” and “never” lists and determine what be replaced online or on the Internet more cost effectively. Perhaps these subscriptions should be entirely eliminated from the library collection.

  Lewis also suggests that firm libraries should be “weeded” by making a list of outdated books, old journals or law services. Those that are available online can be discarded, although she recommends keeping two years of current journals on the shelves. She also advises that “firms are no longer subscribing to hardbound reporters that eat up space and are worth nothing on the used book market should your firm want to downsize its library holdings at a later date. You may, however, want to keep your subscription to the advance sheets to circulate among the attorneys.”

• Marketing materials. It usually pays to inventory marketing materials, like brochures and article reprints, that get spread around in partners’ and associates’ offices and briefcases before assuming that reorders are required. This may forestall expenses for months.
• Facilities management. If the firm is large enough, it should consider outsourcing the facilities management function. By outsourcing the photocopy and mail departments, a law firm may realize significant cost savings because the “employees” belong to the facilities-management company, rather than the law firm. Salaries and benefits are paid by the vendor, while the firm is charged on a per copy basis for the mail and photocopy machines, supplies and personnel to run them.

Moreover, as Anthony Arrigo, Regional Sales Vice President for Pitney Bowes Management Services, has observed, “the use of outsourcing can reduce overall costs, increase service levels and introduce new technologies to law firms by allowing experts to do the placement of equipment, personnel and the selection of appropriate technologies, since they will be service oriented versus product oriented.”

• Internet. Reduce postage, messenger and overnight-mail charges by e-mailing documents to clients over the Internet when possible. This can also save significant time at the desks of legal secretaries and assistants.
• Equipment and service contracts. Service contracts for equipment should be reviewed annually at renewal time to be certain that all listed equipment is still being used and is in the firm’s inventory, since old computers and dictation equipment often get removed from service, but not deleted from the vendor’s service contract.Also consider engaging “cost control consultants” who will audit vendor bills for equipment, products, services, and service contracts on a contingency basis, that is, they only get paid if they save the firm money.
• Printing. If the firm still uses engraved letterhead, it should consider using letterhead macros on the computer, which can substantially reduce the cost of printing stationery. Business-card “masters” can significantly reduce costs of engraved cards in an expanding firm.
• Entertainment and client development expenses. Internal controls should exist so that someone monitors entertainment and client-development expenses of attorneys. There should preferably be individual client-development budgets allocated to each partner, of counsel and associate who are actively involved in marketing and generating business for the firm based on their historic business-development performance.The budget versus actual results should be reviewed at least quarterly, by person, to ensure that monies are spent wisely and result in new business for the firm. Further, each lawyer should be held accountable for monies spent.

  Many firms have adopted cost-control programs that require partners to personally absorb “excessive costs” of entertainment including bottles of wine above a stipulated dollar level, limousines and ticket “scalper” premiums which are not tax deductible.

These suggestions are a good place to start a review of the firm’s operating expenses. If these, and other cost savings are implemented, they should result in an increase in the firm’s profitability.