How to Reduce Overhead Expenses for 2002
by Marcia Watson Wainess
(February 2002, Vol. 22, No. 2)

 

How to Reduce Overhead Expenses for 2002

By Marcia Watson Wainess, Law Practice Management Section Executive Committee. Wainess is Director of Client Advisory Services with Green Hasson & Janks LLP, business advisors and CPAs. She specializes in helping lawyers profitably manage and plan their businesses. The views expressed are her own. She can be contacted at mwwainess@ghjadvisors.com.

As law firms enter 2002, management should take a fresh look at improving profitability. The quickest way to accomplish this is often through better control of operating expenses. Start by using the firm’s expense budget as a management tool to determine where expenses can be reduced.

To gain a better understanding of expense trends, the firm should analyze budgeted versus actual results for the last two to 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’s important to be creative when staffing. Smaller firms should consider outsourcing human resources to a staff leasing company, which assumes all human resource administrator tasks, usually at a fraction of the compensation for someone 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 healthcare benefit plans on an annual basis. Consideration should be given to raising individual deductibles to reduce overall firm premiums. An Internal Revenue Code Section 125 "cafeteria" plan should generally be implemented, which gives employees a pre-tax benefit of certain out-of-pocket medical and child care expenses.

Consideration should also be given to 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.

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, can be trained as a legal secretary by initially giving him or her overflow typing for paralegals (who might not have adequate secretarial support). The benefit to the firm is not only saved payroll expenses but also loyal, motivated employees who have been given a career path and are more likely to stay with the firm.

Library: Firms should review their libraries when looking for cost savings. A library audit containing a list of all current subscriptions should be performed. All lawyers should review the list to indicate how often they use various materials. After review of the results, a determination can be made regarding what can be cost effectively replaced online or on the Internet.

Outsource Facilities Management: If the firm is large enough, it should consider outsourcing the facilities management function. By outsourcing the photocopy, mail and possibly file departments, a firm may realize significant cost savings because the "employees" belong to the facilities management company rather than the law firm. The vendor pays salaries and benefits, while the firm is charged on a per copy basis for the mail and photocopy machines, supplies, as well as the staff to run them.

Equipment and Service Contracts: Service contracts for equipment should be reviewed annually at renewal time to ensure that all listed equipment is still being used and is in the firm’s inventory (old computers and dictation equipment often get removed from service but not deleted from the vendor’s service contract).

Entertainment and Client Development Expenses: Internal controls should exist so that someone monitors attorneys’ entertainment and client development expenses. Preferably, there should be individual client development budgets allocated to each partner, of counsel and associate who is actively involved in marketing. The budget versus actual results by person should be reviewed at least quarterly 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.

The aforementioned 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.

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