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Getting the Right Cost Structure: First Steps

29.09.2009

As the economy starts to emerge (slowly) from recession, it would perhaps be understandable if managers took the opportunity to return to ‘business as usual’. But in the new legal market, there will be no ‘business as usual’ – firms need to wake up to the new commercial reality, and accept that their business model has to emphasise efficiency and profitability.

The issue of costs in law firms is complicated, and I shall be returning to the subject in the coming weeks to give further opinion – but getting your cost structure right, measuring returns and spending wisely is an absolutely essential part of the approach.

Structures

Broadly speaking, law firms can be described as ‘fixed cost operations’. In some areas these costs can be made more variable, using flexible contracts and outsourcing arrangements, but on the whole there is little room for change in the main outgoings. These costs can be broken down into staff costs, property, IT, professional indemnity, marketing, and ‘other’ (including, unfortunately, write-offs).

People

Without doubt, a law firm’s most substantial outgoings are people-related – salaries, bonuses, drawings, and related taxes. It therefore follows that, as difficult as it may be, the most substantial savings will also be people-related. The tough decisions must be taken early and openly, as remaining staff must be kept ‘on-board’. It may be possible to keep some people on part-time, but your cost structure absolutely must fit with your income profile – and if this means fewer property or commercial fee earners, then this is unfortunately the new market reality. By the same token, there will be potential growth areas that ought to be considered for expansion. Improving profits is not just about cutting costs, and firms must be prepared to invest where it would make commercial sense.

‘Other’

Once the big potential savings have been identified, and action taken to get the ball rolling (bearing in mind that severance costs will create a short-term hole in the cash flow), then other less substantial outgoings can be considered. Major savings can be made by reassessing the firm’s property requirements (especially if there are now a few more empty desks), refocusing marketing efforts on existing clients (see below), and even through some mild investments in technology.

Where the Money Is

However tough the decisions will be, the firm’s survival prosperity while upturn gradually reappears will depend upon swift and decisive action – and a determination to ‘go where the money is’, focusing on the most substantial potential savings, emphasising returns on outgoings and flexibility where possible.

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