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).

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