Cost-Cutting for Sustainability: Three Areas to Target
U.S. law firms of all sizes and practice areas have had their financial foundations shaken as a result of the COVID-19 crisis. Firms that were flying high less than a year ago now find themselves scrambling to survive the economic fallout. One obvious place to begin is cost-cutting. Several other areas make likely candidates.
- Staffing Expenses
The headlines in legal media have been plastered with news of firms reducing headcounts or compensation. With staffing traditionally one of a firm’s biggest budget items, this tactic is often the first option.
It is important to take a strategic approach when trimming positions and consider all levels of your firm, from staff to partners. Look at who is the most productive, which practice areas are likely to see an increase or a reduced demand and for how long, and similar factors, rather than purely focusing on salary. Determine whether voluntary leaves or furloughs could work as opposed to outright termination. However, take care to avoid the appearance of discrimination. One firm, for example, is now facing a lawsuit filed by a 62-year-old IT manager who alleges the firm fired him because of his age to reduce costs during the pandemic. The firm claims he was fired for cause. IT, however, is one of several positions that may prove appropriate for outsourcing to freelancers and independent contractors who cost significantly less than full-time staff. Research and transcription work are also ripe for outsourcing.
Many firms seem to be making compensation cuts across-the-board of, say, 10%. You could reduce fixed salaries and add a variable pay component based on results, or you might freeze salary increases. This is also a good opportunity to reassess your benefits package. Determine which benefits are most valued by employees and protect those, while cutting the benefits regarded as simply “nice to have.” Consider increasing employees’ out-of-pocket shares of health care costs and premiums.
- Space Needs
Many firms have learned during the COVID-19 closures that remote work can be more effective than they previously thought. If you are one of them, you might be able to cut your space needs by increasing your remote work going forward. Even if you do not want to — or cannot — reduce your footprint, think about leasing your excess space or space that often sits unused, such as conference rooms.
Start-ups lacking permanent space and other local businesses might pay to use them for meetings or similar events. Be sure to check with your state’s ethics rules first. Some states have specific rules on the sharing of office space between lawyers and non-lawyers.
- Vendor Arrangements
This is a great time to reevaluate past decisions about whether to rent or buy equipment. It might have been cheaper in the past to use a shredding service or rent office equipment, but now it might make more sense to own those machines. Try to negotiate with the vendors with whom you have ongoing relationships. If portions of your staff are now working remotely, you probably do not require as many desktop computers, printers, copiers or phone lines. You might be able to consolidate services with a smaller number of vendors and obtain discounts for expanded or exclusive relationships.
When it comes to technology, remember that you do not always need the top of the line to reap efficiency benefits. Do not automatically upgrade or buy the latest models if your current hardware and software are working just fine. When computers or devices break, look for significant savings by replacing them with used or refurbished models.
Look beyond costs
In times of crisis, perspective is vital. As you look for ways to stabilize your financial standing for the long term, bear in mind that profitability is a function of both costs and revenues. Too many cost cuts can end up undermining your performance, making it more difficult to recover and seize opportunities. The better approach is to make your cuts strategically while also searching for avenues to increase revenue.
Sidebar: Watch out for occupational fraud
While cost-cutting and other survival strategies are important, law firms must not let their anti-fraud measures slip. The Association of Certified Fraud Examiners (ACFE) recently reported that the median loss from fraud schemes committed at professional services businesses such as law firms is $150,000. This means that a single employee could dramatically hurt your firm’s bottom line.
According to the ACFE, the presence of anti-fraud controls is associated with quicker detection and smaller losses. Such controls include a formal anti-fraud policy, fraud awareness training and fraud reporting mechanisms. Tips from employees, clients and vendors have long been a top method for uncovering fraud. Provide stakeholders with multiple reporting options (for example, e-mail and an online form).
In addition, your firm’s management should scrutinize expense reports to ensure claimed expenses are reasonable and related to business. Also, implement measures to prevent partners and managers from overriding internal controls — and segregate accounting duties.
For more information, contact Kalman Shiner at firstname.lastname@example.org or call him at 312.670.7444. Visit ORBA.com to learn more about our Law Firm Group.