In Part 1 of this post I looked at law firm productivity, why we are great at increasing income but poor at increasing profit, and why professional services are not driving the UK’s long term productivity ascendancy.
I identified the “Big Three” issues that we need to review now, before the widely predicted downturn in the economy begins to bite; overheads, a potential head office relocation outside the UK, and a change in business structure.
In Part 2 I am looking at the overheads that make a big dent in our profits and how we could be reducing or mitigating the effect of them now, before the harder times ahead require us to take more drastic measures.
Law firms: Big Fees, Bigger Overheads
Law firms have a triple high-overhead problem; premium rent, high staff costs, and a business structure which is tax inefficient. All that before we start even talking about insurance, IT, interior decor, etc.
However the biggest problem of all is how these overheads are managed; law firms take these three overheads as “fixed” – a situation that comes with the territory of running a law firm which they can do nothing about.
We’d all like to stay positive, but the virtually unanimous long term economic forecasts point towards us needing to identify new ways we can take responsibility and initiate fundamental changes at our work place that could carve out some big holes in our overheads. What follows are some suggestions and opinions on how we could be going about that process.
Law firms ability to invest in the future is limited due to much of the profit from each year being drawn down by Partners.
Let’s say our top rain-making lawyers deserve these rates of pay – but it’s the Inland Revenue who gain the most from this; over £1,000,000 worth of tax from a single top lawyer every year.
There are now alternatives to the traditional partnership law firm; we can operate as an Alternative Business Structure or as a Limited Company. Our accountants may tell us that both have advantages with reducing tax burdens. For a detailed overview of the pros and cons of the Company v LLP structure for law firms, see Chartered Accountant Andrew Allen’s the Pros and Cons of Incorporation, Law Society Gazette, 13 July 2015. He also assesses the option of using an LLP as the core trading vehicle, with partial incorporation of appropriate elements of the business.
A Company structure could enable a law firm to provide more investment in the future without the need for shareholders (who were equity partners under the LLP structure) to take home less pay net of tax – there could be tax advantages if they receive dividend income as shareholders.
Premises: Could we be reducing our costs by 70%?
Most law firms remain walled within very expensive town/city centre premises which serve a multitude of purposes, requiring a vast amount of premium space.
We have office space, meeting rooms, a plush reception area, a mail room, access and canteen/catering areas, all slap bang in the best area.
Whether we need this may be more debatable than we think. What elements of our business absolutely require centre space – is it mainly to meet clients? Or might they prefer a more convenient motorway junction location? Could we work out of town, or even at home?
A law firm could work with a small retail style “client hub” in the town centre with their lawyers, support staff and office administration based within a suburban low-rent area office block near main transport links for staff and client convenience. This is easier for clients and staff – less time spent stuck in rush hour traffic.
If our working/office space is in a less premium area, that could move 70% of the space we need to much cheaper premises. Review this link for the maths on the cost savings of a move to a front end/back end premises model.
For clients who want to meet us in city-centre locations, we could either use meeting facilities in our “retail hub”, or we could use serviced business meeting premises that are rented by the hour, such as that provided by Regus. Doing so could even be an upgrade on the standard and location of our existing premises, but at a fraction of the cost.
Why have top 25 law firm Addleshaw Goddard told the majority of its staff they can work regularly from home? There are cost savings, as well as enabling staff to work more efficiently and preventing wasted time and energy in rush hour traffic.
Allowing for a percentage of staff to work at home means that desk space can be shared, and we don’t need one desk per person. Lawyers who work at home have the potential to get up earlier and do huge chunks of work before the rest of us struggle in through the traffic. It’s great for clients and good for us – we can make our way to the office after 10am in half the time.
Usually this causes a sinking feeling in our hearts because we think that to reduce our staff cost overheads, we need to remove the cost by making people redundant – but this is actually a very poor method of reducing our costs, due to the effect of redundancy packages and the need for others to absorb the lost labour, which can require lawyers to do more non-chargeable work.,
A far better alternative, which needs to be planned and implemented early and before a recession places immediate pressure on the finances, is to invest in the training and development of both fee earning and support staff. When I say “invest” I actually mean verbal encouragement rather than large sums of money; most of us are keen to invest our own time and money to gain new skills that will benefit us for life – we just need to be encouraged.
Training and developing staff (such as through a legal apprenticeship or CILEx course) means that instead of needing to loose a staff member who is a cost or not profitable to the firm, we gain one who is generating income – so that by the time the predicted recession comes we have more staff who are paying their way.
We could be thinking now about training staff in key areas of legal practice which are recession resistant, such as insolvency and litigation. The conduct of litigation is a reserved legal activity under the Legal Services Act 2007, but that does not prevent legally trained support staff from assisting with the preparation of small claims and fast track debt recovery actions, so long as all their work is checked, managed and submitted by solicitors or legal executives.
So why are law firms not keeping up? We know that lawyers are busy and productive people. Most private lawyers also quote a premium hourly rate to their clients of £175 an hour+. What goes wrong is the process of converting individual effort to profit.
This is down to our high overheads, which become very problematic during times of recession and require us to shed staff at short notice. Making the right long term changes now could both prevent this, and potentially allow us to cope with a reduction in income whilst maintaining or even increasing profit margins and earning levels for all staff.
Finally, to complement the above, two further online articles are well worth a read:
Nick Jarrett-Kerr’s words of wisdom and experience in the Law Society Gazette article “How To: Turn your firm around”
Also, Robert C. Pozen’s (of Harvard Business School) article “They work long hours, but what about results?” looks at how to improve efficient working practices by lawyers during normal working hours