What is a Lean Law Firm? - How to Start a Law Firm
What Is A Lean
Law Firm?
By: Gary Allen
This is part of a series – read more
Chapter 1
People throw around the term “lean” — but what does that really mean? Before we dig in deep, we thought it best to define a lean law firm. It’s not an ethereal idea – we put it in concrete terms so that you can put a plan in place and measure and achieve your goals. This chapter will clearly define what a lean law firm is.
What is a lean law firm?
The easiest way to answer the question, what is a lean law firm, is to define lean in terms of overhead.
Lean = Overhead of 20% or less as a percentage of revenue.
For example, if you have $100,000 in annual revenue, you are lean if you have overhead of $20,000 or less. If you have $500,000 in revenue, you are lean if you have $100,000 in overhead or less. It may seem like we pulled 20 percent out of the air, but we’ll talk in a minute about why this number is significant.
What if you have employees who generate revenue, like paralegals? Overhead of 20% will work if you treat them as profit centers instead of overhead or cost centers, which you should. You need to know if those employees are making money for you.
You may shrug or you may wince when you compare this to your firm’s finances, but we’ve seen it done at the unlikeliest of law firms.
A few of the trends that are driving attorneys to Lean Practice:
- Google: People just don’t come to lawyers with routine questions the way they used to. Many start to address their legal questions with a Google search. When they do contact a lawyer, they already have some information — they just want the fine-tuning.
- Free stuff: People are used to getting pretty good stuff for free or inexpensively on the Internet: so the expectation of value that they’re going to get from a lawyer is much higher. As a result, the demand has been down for legal services since 2008: we don’t think it’s going to recover.
- Self-service: Websites like Rocket Lawyer and Legal Zoom, where you can create low-cost legal documents, reduce the demand for traditional legal advice. It is less likely that people will come to lawyers or pay lawyer rates for this kind of legal work in the future — filling out forms or for routine matters in litigation.
- Mediation models: for example, Wevorce, which is a different way to approach a non-contested divorce with flat fee services.
- Lean practice: There are law firms out there that have figured out how to operate at a very low cost, offering lower rates and more affordable fixed fees.
- It’s also an opportunity for them to extend their practice geographically. Law firms leverage the internet to:
- Create a statewide conservatorship and guardianship practice
- Offer routine services like collections, bankruptcy, and family law.
- Conduct business from a virtual office and only rent a conference room or office when you need it.
- Outsource resources to help staff a large litigation.
- Cicayda, an e-discovery document review company with attorneys in Alabama at $35 / hour.
- Due diligence deals outsourced to India at a fraction of the U.S. cost.
- Hire an Esquire or Legal Hero: Off-site attorneys. Same types of services are offered for outsourcing paralegals and staff resources.
- It’s also an opportunity for them to extend their practice geographically. Law firms leverage the internet to:
- Slashed Budgets: In recent years, corporations have reduced their legal budgets 30-50%
Overhead Swamp
Overhead in a traditional law firm is 35-55% of revenue. About $160 thousand each year per attorney for small firms. That is a big load to carry around every day. Traditionally, lawyers have thought there was little they could do to reduce overhead. Practices were paper-intensive and required lots of staff assistance, and technology wasn’t really helping. In the 80s and 90s, we would hear, “It is easier to increase revenue than to cut overhead.” No more.
At LeanLaw, we understand that most lawyers feel dissatisfied as their overhead goes over 20%. And the higher that percentage, the bigger the dissatisfaction. This may manifest in either not making enough money, or feeling like you are stuck on the hamster wheel.
In The Overhead:
- You may feel insecure about your date.
- Your quality of life may not be what you want.
- You may not be able to give your clients a break when you think that they may need it.
- You may have to bill a lot.
- You take cases for the revenue rather than what you’re interested in.
- You don’t have enough time tor your family or your community.
There are two ways to escape the Swamp:
- Become uber lean – 20% Overhead
- Increase production without increasing overhead (congratulations if you have this option)
Let’s say you’re the senior attorney in a small law firm. You can see the writing on the wall: Rates are being squeezed, legal budgets slashed and more often, your clients are Googling their first legal questions instead of asking you. You don’t have easy options to expand your practice, so if you can’t cut costs, you may lose partners and clients.
- How do you know your costs? Do you have the data?
In the next chapters, we’ll talk about the why and how of Lean Practice. Following is a brief introduction to get you thinking.
First, it is important to think deeply about why you want a Lean Practice. If it’s just about money, it probably won’t work. For most people, you need to dig a little deeper. Also, you need to think beyond cash flow and better understand profitability. Although it sounds drastic, you may need to become lean to save your career. Remember how fast the music industry changed? That can happen to law. In the next chapter, we’ll tell you how to do those things.
Second, don’t expect technology to be a magic bullet. Technology is a key asset, but the foundation for leveraging technology is the right mindset which leads to the behavior change needed for Lean Practice. This is important to understand because behavior change can be uncomfortable and probably is not something you can turn on like a light switch.
The most successful way to change your behavior is one small step at a time and not all at once. But over the course of several months or a year, you can transform your practice. It is easier when starting a new practice than if you are transforming an existing one, but both are possible.
Third, we will offer detailed advice about laying your technology foundation and making each of the seven core workflows in your office lean.
