50-Cent Dollars Are In Vogue Again

Now, I know I am speaking to a certain demographic when I recall the heady days when law firm expenses were equal to only 50 cents of every dollar of revenue. Since then, firms have been struggling with escalating operating ratios—that is, all expenses before any payments to partners divided by revenue—that are now in the 60-cent to 70-cent range.

This erosion has often been blamed on escalating rents, increased salaries for attorneys and staff, and the burgeoning cost of marketing and technological investments. Yet it would seem that under the tutelage of the national certified public accounting firms' consulting arms, law firms are being advised that a return to the past glory days is indeed possible and worth doing.

Reconceiving Expenditures

Given the perceived fixed nature of some of the costs associated with running a law firm, a firm will not achieve this return by a simple mathematical cost-cutting exercise. Rather, it will require a real philosophical change in how expenditures are viewed by the partners. I would anticipate that over the coming months you will hear about a lot of cutbacks and outright elimination of expenditures that may previously have been treated as a birthright by the owners of law firms. The reasons for taking steps to pursue a 50 percent operating ratio include:

An increased ability to handle client rate pressures without sacrificing the desired levels of profitability. Client rate pressures are not abating, as evidenced by a recent Altman Weil survey that indicated nearly 30 percent of the respondents felt that between 21 and 40 percent of their billings were now based upon discounted rates. It enables partners to not only draw more money without working harder, but also to do so in a more timely fashion as a result of the lower operating ratio. Enhanced resiliency allows firms to take advantage of any entrepreneurial opportunities arising from the constantly shifting legal landscape. The Means To An End

Firms that have embarked and are embarking on this quest are using a variety of measures to pursue the goal, including:

Zero-based budgeting. On a line-item-by-line-item basis, firms are not starting with how much they can cut an expense but rather, before determining the appropriate total amount (if any), they ask, Why do I need to spend this money at all? Rethinking the space they really need. In more prosperous times, space was taken to meet immediate needs rather than determining what usage would be...