Lean Law Firm? So, how can you measure whether your Law Firm is practicing Lean?
(Hint: Your Overhead as Percentage of Revenue)
You hear it all the time now. If it weren’t so critical, it would be a cliche. Your law firm needs to be lean. Here are four good reasons:
- Overhead cannot dictate what kind of cases you accept.
- Lean workflows increase productivity and efficiency.
- Being lean helps you maintain your ethical duties as an attorney.
- Lean gives you greater job satisfaction because you’re not wasting time or money on inefficient business practices.
After talking with hundreds of small practice lawyers, I consider 20% overhead as the mark of a lean law firm. Some law firms have as much as 50% of overall revenue getting eaten up by overhead. This is not necessary and it hurts your business.
So, how to measure lean: the measurement that I like best is the overhead as percentage of revenue. This formula is scalable to the size of any practice. Whether a lawyer earns $100k or $500k, we can still use the same benchmark. I consider 20% to be lean: it’s my own definition based on observing how firms operate. It’s not only economical, but also where people feel the happiest — they have support for the administration of their law firm, but not so much that it becomes a burden. 20% is a good target for everyone.
Once you understand your overhead, you’ll have some decisions to make about how to lower the number. My advice is to take a look at a specific workflow and create a practical measurement of what it costs. Timekeeping and billing is a favorite first step of mine because it’s mission critical and is often the most manual and inefficient workflow in a law office.
Take a look at what the inputs are: how much time does each step of the process take?
- Time entry: Many firms’ workflows fall down here because too many lawyers don’t use the electronic practice management or timekeeping tools that the firm offers. This is understandable given the antiquated tools out there, but it comes at a high cost. How much time does it take the lawyer to draft from their yellow pad notes and then explain to the assistant and how much does that cost, fully loaded, for both people?
- Drafts: Most law firms create paper draft invoices that are reviewed and manually edited by the attorney, and returned to billing staff for input and mailing.
- Mailing: If you mail your invoices, it takes a significant amount of time to print and stuff the envelopes, make copies, etc., in addition to the cost of the printed invoice, the envelope, and the stamp. Not to mention the obvious slowness of snail mail.
- Receipt: Law firms usually receive paper checks which need to be deposited manually and recorded into your accounting software. This takes more expensive administrative time.
The point is that when you look carefully at these steps and figure out the costs, most law firms would be shocked. When we go through a typical analysis, these steps cost $15k-$20k per year per attorney in an average firm (not counting the lawyer’s time). That’s 10% to 20% percent of overall overhead. This cost is high enough you might pass on billing $50 to a client because it costs more than that to produce the invoice. Automating the process can save almost all of that administrative cost.
There are terrific inexpensive, cloud-based software solutions that can radically save you money on your timekeeping and billing workflow. This is one of the easiest workflows in which to increase efficiency and reduce cost.
After you’ve leaned up your billing, you can look at other key workflows like scheduling, file and document management, document production and hospitality. Overall, a traditional firm should be able to reduce its overhead by 50% or more from its current status.
If all of this sounds great in theory but you still don’t know where to begin for either measuring or taking a first step, give me a call or shoot me an email. I started LeanLaw with the mission that every lawyer should have a lean practice. We stand ready to help your solo practice or small firm get lean.
Join the LeanLaw Movement!
Gary Allen, Founder and Practicing Attorney