Reinventing The Law Business: Low Overhead Is Great!
What are the many benefits of having low overhead? Managing partner Bruce Stachenfeld identifies several.
“Low overhead is great!” That is one of our sayings. We recite it all the time — yes, even out loud at meetings — as it is a powerful competitive advantage for a law firm. It seems pretty obvious, but if so, why doesn’t everyone get with this concept?
There is a term informally used to describe how overhead impacts a law firm called “Implied Overhead.” The “Implied Overhead” of a law firm is the cost of everything except the lawyers divided by the number of lawyers. So if you have 50 lawyers and the cost of “everything” except the lawyers is $10,000,000, then you have implied overhead of $200,000 per lawyer.
Our Implied Overhead for last year was about $165,000. Anecdotally I believe that Implied Overhead for major law firms averages about $300,000. (I admit I don’t really have this data for sure; it is just what I have heard.) If your firm has 100 lawyers and implied overhead of $200,000 and the average for major law firms is $300,000, then you have a $100,000 per lawyer competitive advantage over your major law firm competition. Multiply that by 100 lawyers and you just made $10,000,000! And this flows right to the bottom line! If there are, say, 30 partners at this firm, then each partner just got a check for $333,333!
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Yikes — did I do that math right? Was that $333,333 per partner merely by reducing the implied overhead? I just double checked and $10,000,000 divided by 30 partners does indeed equal $333,333. That’s a sizable number, so maybe you should read the rest of my article….
There are a bunch of things that go into overhead, such as malpractice insurance, supplies, storage, client development and marketing, recruiting, special events, technology, local taxes, and a bunch of other things; however, almost always the two biggest component costs of overhead are (i) administrative people and (ii) rent (and related services that go with rent).
Many components of overhead cannot be reduced that much — or the manner of reduction is obvious (e.g., you should bid out your malpractice insurance to get a good deal on it). However, the two big ones — administrative people and rent — are worth focusing on, since they are the biggest and also they are the ones you have the most control over.
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First, rent: It is a necessity unless you have a virtual law firm. You need a place of doing business and, like it or not, a prestigious Park Avenue (or Madison Avenue?) address is a boon for marketing and recruiting as it makes the law firm sound cool and enhances its brand. Also, “prestigious” offices that are clearly “expensive” imply that the law firm must be really “good” since it can afford these “expensive” offices. Giving heavy-hitter partners mega-offices and associates great space are also a plus. As I mentioned in my second article, “attracting and retaining talent” is critical for a law firm, and snazzy offices have a major effect here.
But as you think about how much you want to spend on your incredibly cool office space, keep in mind that every dollar you save goes straight to the bottom line, and having a firm with a high profit margin is a boon too. There are all sorts of creative ideas people are coming up with to make office space efficient or fun to work in but not necessarily use as much square footage. It is well worth looking at these ideas. It is also well worth it, when you consider leasing office space, to look at the concept of how many productive employees could be inserted per square foot, as opposed to solely the rent per square foot. In this regard, I refer you to a recent speech I gave on this subject.
Second, administrative staff: This one is just plain old strange to me. It seems to me that the more administrative staff you have, the more you need. It also seems to me that every law firm — and maybe every company — inexorably moves in one, and only one, direction: to add staff. This is because anyone who quits is “replaced,” so you either have the same number of administrative people you started with or more. There is no shrinking, unless times are tough, in which case you have to lay people off. My personal view, having been directly involved in this for many years, is that having more people around doesn’t necessarily advance the ball of either (i) awesome client service or (ii) a great place in which to work, which are the only balls that should really matter. Additional staff probably “should advance those balls,” but I have found that adding people often doesn’t seem to do so. It just seems as if the more people you add to the mix, the more complexity there is, the more issues there are to think about, and then more people are needed to administer the extra people. It goes on without end.
Ultimately, as you focus on this issue of administrative personnel, keep in mind that it is really bad to have to “fire” people (I am sorry, I meant “lay off” people) because you over-hired and got bloated. It is even worse to have to do this to people you have had for a long time who cannot readily find alternative employment; and, since they thought they were integral to your organization, it really hurts those people. Here, the best thing to do by far, in my humble opinion, is that every time someone quits, consider whether you need to replace him or her, or maybe you simply don’t need that function any longer — maybe it has been replaced by technology or can be replaced by creative re-use of the existing personnel. Make hiring a last resort. And do everything you can to not get bloated in the first place. This is incredibly tough to do as there is relentless pressure to the contrary. And, finally, making it part of firm culture to motivate and train super-talented staff members to excel in a lean operating environment is the final ingredient in the secret sauce.
To conclude, if my math above is accurate we have an approximately $135,000 per lawyer economic advantage over large-sized law firms with higher overhead. Right now, we have close to 70 lawyers. Multiplying, that gives us about an extra $9,500,000 per year. So what do we do with that money?
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First, all of the lawyers in the firm (partners and associates) can make an awful lot of money with reasonable hours. We target 2000 hours but we usually end up lower than that.
Second, we can also pay top salaries to our associates. Indeed, for the first three years out of law school, we pay about $15,000 more than almost all major law firms in NYC.
Third, we can pay our partners very well — comparable to or higher than many of the major law firms.
Fourth, and of critical importance, we can at the same time charge significantly lower billing rates to our clients.
Ergo, everyone shares in the windfall of lower overhead.
And there are other benefits too. We can be profitable even when our revenues fall dramatically. We are not under pressure to cut employees when times get bad. And better yet, in down times we can even expand.
This leads me to conclude this article just as I began it — with a rallying cry, “Low overhead is great!”
Bruce Stachenfeld is the managing partner of Duval & Stachenfeld LLP, which is an approximately 70-lawyer law firm based in midtown Manhattan. The firm is known as “The Pure Play in Real Estate Law” because all of its practice areas are focused around real estate. With over 50 full-time real estate lawyers, the firm is one of the largest real estate law practices in New York City. You can contact Bruce by email at thehedgehoglawyer@gmail.com.
