Cost Cutting at Law Firms

The National Law Journal cites some interesting statistics about law firm expenses. Here are a few:

• A firm cuts costs by an average of $250,000 for each attorney let go. For each legal assistant or other staffer laid off, a law firm saves about $100,000
• For most big law firms, about 85% of their budget goes to rent and personnel costs
• Paying severance can be costly. Every $10 million saved in compensation is offset by $7 million paid in severance
• If 30% of a firm's expenses are going to associate salaries, layoffs that trim 5% of associate costs are the equivalent of just 1.5% of revenue
• Clients are demanding price cuts. The chairman of a major U.S. firm said
  "There's less diplomacy in the discussion [with clients] about discounts". "They're not inviting you to a discussion. They're saying 'it's 10 or 15%, and if you can't help us out, maybe we'll go somewhere else.' "

In addition, the article suggests that firms have increased cash availability by "deferring partner profit distributions, reducing partner draws, making cash calls to equity partners or asking nonequity partners to provide capital".

My takeaway is that all signs point to a drop in law firm profitability in the next few years. It is very hard to cut costs in a law firm. In addition, partners and senior associates who lack portable business are in the greatest danger of losing their jobs (since they cost the most to keep in place).

While none of this bodes well for large law firms, small to mid-sized firms will probably be the winners. Large firms that find ways to deliver legal services in a more cost effective manner will also prevail. Some will adopt more creative billing strategies. Others will employ technology to do what they do "faster, better and cheaper" (at LegalTech this year, it seemed clear that e-discovery is a key area ripe for cost savings). One other area where large firms may be able to cut costs is through effective use of outsourcing (using contract lawyers and working with LPO companies).

Staying Focused in Hard Times

This morning, I took my dog Chutney to our local doggy park. It's been snowing here in Boston and unfortunately for Chutney, her owners have been feeling a lot less motivated to take her out lately. While she doesn't have quite the behavioral problems that are afflicting the yellow lab in the movie Marely and Me, it is very obvious that she is much better behaved when she gets attention. We have a much better time together when I am able to really focus on her.

Today, we were the only ones out on the field so there were no other dogs around to distract Chutney (or engage her, depending on your perspective). As soon as we got there, she couldn't wait to get off leash and start running and running. I wasn't distracted by other dog owners and kept focused on her. And to my delight, she came when called and was generally very well behaved.

It was a good reminder of the importance of staying focused. In our crazy 24/7 world of cell phones and blackberries, it is easy to think we can multi-task and get more done in less time. In truth, we accomplish more when we stay focused on one task at a time and do that well. This is particularly true when we are communicating with other people. No one likes to feel that they are only getting 50% of your attention because you are composing a text message. It is even more important to remember this in hard economic times when we all need more support from each other.

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Firms Offer Comfort to Associates

Will I have a job in six months? That is the question that many associates are asking themselves these days. Some large firms are trying to comfort the troops with "hang-in-there, your-jobs-are-safe-memos."

While it is certainly a good HR practice to keep employees informed, particularly during a time of crisis, these memos should not be an excuse to stick your head in the sand. Take a look at your own plate of work. See what is happening in your department more generally. Try to find out if other departments in the firm are busy. Get educated about the clients that you serve and understand what is happening in their industries.

Ultimately, the reality on the ground will dictate firm policy. No firm can afford to keep idle associates on the payroll indefinitely. Don't panic at the first sign of a slow down. But don't ignore the warning signs if six months have passed and you have had no billable work.