Smaller firms which compete with their Biglaw brethren on cost often promote their efficiency and lower overhead. Understandably, these firms impliedly or expressly try to associate lower overhead with lower fees for their clients. Smaller firms have been so successful with this approach that overhead often seems to connote waste and inefficiency. But overhead is sometimes a necessary evil, and it behooves small firm entrepreneurs to remember the “necessary” aspect as well.
For example, forsaking a physical office in favor of a virtual shop obviously lowers a firm’s overhead and allows the firm to offer lower fees. But many people, including me, have written about the several benefits of having a physical office. I pointed to benefits such as credibility with clients and other lawyers, and helping yourself stay motivated and focused. This is an easy example of how lower overhead may impose a hidden cost on the business.
Of course, the biggest overhead expense for most law firms is payroll. Limiting the number of employees is the surest way to keep expenses under control. But is it always the right move?
First, you have to distinguish between employees who perform billable work from those who do not. Hiring an associate attorney, for example, will generally increase profits provided that the firm is generating enough work to keep the associate busy. The same dynamic applies to paralegals or anyone else whose time can be billed. So in the case of billing employees, keeping overhead low by hiring fewer associates makes little sense.
There are a variety of other employees, however, who generally do not bill their time. Administrative assistants, office managers, secretaries, word processing, litigation support and IT professionals all create payroll expenses that fall within the more classic definition of overhead. Each of these employee types can perform an important, albeit expensive, role. Deciding which of them to incorporate into a small or boutique firm requires careful judgment.
When a first-year associate first joins a big law firm, one of the more elusive skills to learn is how to effectively utilize a secretary. The gray-haired rainmaker in the corner office might still dictate his memos and need them transcribed, but most young attorneys find the practice quaint. Gone are the days when mastery of shorthand was an essential skill for a secretary. Today, kids under 12 already know a new shorthand that would make John Gregg proud, or perhaps appalled. Whichever way your pleasure tends in this gr8 db8, it cannot be denied that traditional secretarial roles are changing quickly.
When an associate leaves Biglaw to start a new firm, she often will decide to forego a secretary as unnecessary overhead that is a vestige of a bygone age. For similar reasons, she also is unlikely to hire anyone to perform word processing tasks. Younger attorneys are so adept with computers that word processing seems an unnecessary luxury. Formatting your own documents is an easy way to keep down expenses.
However sensible to some degree, this mentality can be counterproductive if taken to extremes. A former Biglaw attorney starting a new firm may be proud that the new firm doesn’t have the “wasteful” overhead of a large administrative staff. This one small point of pride can overshadow fundamental weaknesses with a business plan because it fails to account for higher value, albeit non-billable, uses of the same time.
Specifically, I have in mind business development efforts that could be undertaken in lieu of purely administrative tasks which could be delegated. I have known many solo and small firm attorneys who spend an inordinate amount of time printing their invoices and stuffing envelopes, formatting briefs, and performing all manner of administrative work. That time could be better spent engaging in business development efforts.
I have told many friends — fellow fishermen, if you will — that the biggest mistake I made in the early days of my firm was not hiring administrative help earlier. When we started our firm in 2009, my partner and I were completely on our own, with no help. We were proud of how “lean and mean” our shop was, and that our skeleton crew translated into lower fees for our clients.
But at the rate we were going, we would have spent many hundreds of hours per year performing routine administrative tasks that could have been delegated. It’s true that we were saving the expense of an administrative assistant, but by buying back that time for ourselves, we could refocus those hundreds of hours on business development if not billable work.
Once we started making money, we hired our first employee: an administrative assistant / office manager. We had a couple false starts — more about that another time — but once we found the right person the effects on our firm were immediate and profound. First, my working life became significantly more pleasant because, frankly, stuffing envelopes isn’t much fun. Neither is maintaining a sophisticated case calendar or document database, ordering supplies, scheduling depositions, or any number of other necessary administrative tasks. But more importantly, once we had good administrative help, my partner and I were able to focus on business development in a serious and committed way. The results were direct and tangible. That first employee set the stage for our future growth, expanded capacity and increasing revenue.
I understand why keeping overhead to a minimum has intuitive appeal for a new firm. But one lesson I learned early on is that declining to delegate duties related to administration, IT, wordpro, etc., only makes sense when cash is short and controlling costs is necessary for the business to survive. In my opinion, provided you can afford it, the right business move is to delegate everything that can be delegated, even at a cost of higher payroll expenses, and to convert the time saved into the only non-delegable and all-important task of business development.
Tom Wallerstein lives in San Francisco and is a partner with Colt Wallerstein LLP, a Silicon Valley litigation boutique. The firm’s practice focuses on high tech trade secret, employment, and general complex-commercial litigation. He can be reached at [email protected].