How solos and small firms can cut costs and make their money go further (podcast with transcript)
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Cost savings are particularly important for small firms and solos. What are some easy fixes for making law firm budgets go further, and what are some common mistakes to avoid? In this month’s Asked and Answered, the ABA Journal’s Stephanie Francis Ward gets some tips and tricks for stretching firms’ dollars.
Stephanie Francis Ward: Having a small law firm doesn’t necessarily mean small expenses, as some attorneys who go out on their own learn sooner rather than later. That said, what are some ways to stretch the revenue you bring in? I’m Stephanie Francis Ward, and on today’s episode of the ABA Journal’s Asked and Answered, we’re discussing small firm budgeting tips with Natalie Kelly. She’s director of State Bar of Georgia’s Law Practice Management Program, and also serves as a state bar liaison with the National Association of Legal Administrators Atlanta Chapter. Welcome to the show, Natalie.
Natalie Kelly: Thank you. I’m so pleased to be with you today, and excited about the topic we’re covering.
Stephanie Francis Ward: The first question I’m going to ask you, which I think is probably most people’s first question if they have a smaller firm: How do you figure out what you have to bill each month to meet your rent obligation, and what are some ways to come up with a rent obligation that may not—it may cause you less stress?
Natalie Kelly: Well, I think that that’s a very, very important question. And I think even it’s deserving of some background because as you might have realized, just looking around, there are a lot of firms who place themselves strategically when it comes to clients. And so therefore, being in, say, high-rent areas, in areas where their clients would find them, and where they can find a client that’s most suitable for your practices. The rent is one of the major expenses when it comes to overhead for the firm. And in a solo or small firm practice, that’s eating a good sometimes 10 to 15 percent of what’s coming in.
And so trying to figure out exactly how much you have to bill each time really is going to be dependent upon knowing what that number is for where you’re located. And so one of the very first tools that are really key to a lot of what we’re going to be talking about today is understanding or having a budget for what those numbers really actually are. And so while it can vary widely from being in a very, very high-end rental space to a shared office space where some of the expenses are not necessarily in place, to even having, say, a virtual practice where it’s maybe even almost a non-factor, other than maybe renting a conference room for a couple of—a hundred bucks or so for a couple of months.
And so knowing what that figure is going to be quite important, as well as having some form of budgeting tool. Once you’ve figured out exactly what that rental amount is, or that obligation is, how to know what you need to bill every time will probably depend on what that number is. And then actually billing to that number and having that number reach maybe the 15 to—I would say, maybe 15 percent or under of what that overall revenue would be in terms of the overhead amounts.
And so there’s not necessarily a magic formula to this; it’s really more so knowing how to do the budgeting and knowing what that number is. I think those are the important keys in a solo or small firm practice.
Stephanie Francis Ward: So you should maybe figure that your rent should be about 15 percent of your revenues each month?
Natalie Kelly: Well, I’m thinking that—and again because it’s so varied, at least having some number in terms of that. And a lot of factors is it can—when you’re talking solo and small firm practice, and you’re talking practice areas, it’s a very difficult proposition sometimes to think about that. When you’re in a metro area versus if you’re out in the suburbs or even in a home office, understanding what those amounts are going to be.
It’s such a varied amount of figure that I don’t know that you would be able to put down or say a particular percentage point, but looking at what the overall—if you look at the overall revenue from a firm, or what that production amount might be, usually the 52 percent revenue going to partner—to the lawyer income component, with the remaining portions covering overhead expenses, a good portion of that overhead expense is going to be gobbled up. And looking at that 15 percent range is probably at least a starting point if nothing else.
Stephanie Francis Ward: And do you think in terms of location, do clients really care where an office is, or is that something that perhaps lawyers are more concerned with than the clients or potential clients?
Natalie Kelly: Well, my 20 years here at the bar, I think it’s a little of both. I think the concern comes on both ends. Lawyers are very concerned that they have a very professional presence. And depending upon the type of practice, then the client has also an expectation of their lawyer being in facilities that kind of match what they are expecting in terms of level of service. And so I think it’s important to have a very professional space.
And whether that be even in a home office, where you may not even receive clients, but the whole perception that you’re at work in a professional space, and what that would bring to the equation in terms of getting work done and being productive, to actually having a physical office space, where you may be in a small firm with an office-sharing arrangement in an office suite, and then having a professional space regardless of whether it’s a industrial park or the high-rise right across the street from where I’m located in downtown is going to be important.
And I think the conversation of “does it matter” is that I think it does in fact matter, and I think it matters to both lawyers and to the public, but just at different degrees depending on the type of clients and the type of practice.
Stephanie Francis Ward: And you mentioned office sharing, do you have advice on picking good situations? It seems like we hear a lot more lawyers are doing office sharing and it seems to make a lot of sense, especially for costs. I can also imagine situations where office sharing goes awry.
Natalie Kelly: Oh, absolutely. I think that there are situations not knowing—again back to that budgeting. I think of the experiences that I’ve had over the years come in to play when a sole practitioner, or a group of sole practitioners who may be acting in concert or individually, strike out with no sense of budgeting or a budget. And not adhering to what they’ve kind of set out for themselves in terms of expenses.
So in looking for office-sharing arrangements, those that sometimes don’t work are ones where they enter into those situations blindly, where they don’t have a sense of what their expenses are going to be. They haven’t really budgeted for the expenses for a certain period of time. They’re not anticipating increases in rent over time, as is normal in rent rules.
And also the type of share arrangement, meaning that if I’m practicing a particular area that’s not complimentary of the group that’s there, sometimes maybe I’m not in a situation where I’m getting overflow level at the level that I expected, or vice versa, I am in fact getting more than I can manage because I’m the person there that’s the only one that’s doing that work, and this is an area where it’s high traffic in a particular practice area.
So I think you have to be careful in terms of both actual costs of this space in terms of an office share, also whether or not the component or the factoring in of whether it’s a complimentary practice area to what’s being already offered from that particular local or not, and whether that has some impact on what you’re looking to do.
Those kinds of things can make a difference, the amenities aside, in terms of whether or not you had the actual clear Chinese-wall setup or clear demarcations between one practice and another, also leading into ethical implications that you have to make sure that you’re paying attention to as well.
And so again, you have to be really smart when it comes to office sharing, where you’re looking to share space. We haven’t even touched co-working spaces that are a little bit more out in the public and the like, and some of the considerations and things that you need to think about.
But in terms of saving, you know, you’ve got that cost savings, but you also have to be mindful of the ethical implications when you enter into an office share. And also from the marketing angel, what is it really that you’re getting or gaining from being in that space, and how can you manage that?
Stephanie Francis Ward: You mentioned the co-working share, I’m not sure—maybe you know—are lawyers using those?
Natalie Kelly: I think that we’re getting some lawyers to use those in some of the more metropolitan areas. And what I’m finding is that probably of course it’s going to be—or at least from my experience—newer firms, newer lawyers, more entrepreneurial-based practices, those types of firms are started—or those types of lawyers are the ones who are entering into those spaces.
And so you see the lawyer cranking out the laptop and the tablet devices in the Starbucks or the coffee shop down the street, and so they’re now starting to see some benefit to having a little bit more stability or space to meet. And so that’s where you’re starting to see some of those types of mobile lawyers entering into those spaces.
I would say that it’s not widely used. I think that probably what’s being learned is that you have to be really careful when it comes to the ethical considerations of working from spaces. And so you don’t have quite as much, but you do have some that research using those spaces.
Stephanie Francis Ward: And I’m not sure if the co-working spaces are outside of the cities, could you explain for our listeners quickly what a co-working space is?
Natalie Kelly: So, generally in metropolitan areas or some of the more urban spaces, you’ll have a facility where there are the provision of actual working stations. So if you travel say a good bit, or go to, say, an airport where you have a working space or a table where there is an internet connection, a space for you to kind of plug-in, maybe there is monitors. There are different things or different amenities that are added, but it’s a space where businesses are able to kind of come in and plug in for the day if you will.
And so that space is called co-working spaces, because again it’s a cooperative type effort of people coming in and transitioning in and out. And you may or may not have a set space for a given part of a week, or a day, or the like, and so there’s kind of an interim period. And so those spaces are generally deemed co-working spaces. And so you’ll have those more likely in metropolitan areas. And as you leave the urban spaces you’re not likely to see them.
Stephanie Francis Ward: Do you find with budgeting, are most lawyers realistic about their budget?
Natalie Kelly: I think once the process has been undertaken and they’re serious about the growth of their practice and the business aspects of their practice, then they become realistic. Because when you’re starting out it’s just a matter—it’s kind of a guessing game. After you have three—two to three months of actual expenditures, and then even beyond that once you’ve gotten to nine months to a year’s worth of expenses behind you that process can become more targeted, more realistic. So when you’re talking about budgeting, if they’re projecting income is where you may have—you know, we don’t really know exactly unless we’ve gone into practice.
And what I’ve typically seen is at about two years a lawyer can comfortably say, you know, baring economic forces that are acting contrary to the marketplace, they can comfortably say, “Well, our market tends to pick up over these months,” or “Practice tends to be down in these particular months.” And so when you’re budgeting they can be mindful of those kinds of interactions or those reactions in the economy.
For their practice though individually, to know what the rental rates are, to know what they’re expending in overhead, those types of things are a little bit more static and tend to be in place, so after three or four months they can say, “We know that this a set cost for us.”
And one of the wonderful things about solo and small firm practice is the ability to kind of predict and be a bit more flexible in terms of what the budget is going to be overall. Where it can be a little bit tenuous again is back to the initial question that we had, about “what do we need to bill in order to pay the rent or to meet the rental obligations?” And it’s not just the rental obligation, but it’s going to be kind of all of those, that whole pie in terms of overhead. What can we do to maintain or keep our overhead costs at a level that are manageable for whatever our situation happens to be.
So when you’re in practice and you’re in a smaller firm, it’s a little bit easier to predict what those kinds of set costs are. And what’s a little bit more harder to predict of course is going to be the income and what those numbers might turn out for you.
Stephanie Francis Ward: And if you feel like you have the revenue to hire someone, does it make most sense to hire an assistant or another attorney as your first employee?
Natalie Kelly: I think in terms of first employee it’s not a really a question of should it be an assistant versus a lawyer, I think it depends on the work that’s there.
Usually you’re looking at the volume of work and, or how you are individually working. If I’m a sole practitioner and I’m hung up with a lot of the administrative tasks, because one of the challenges—one of the main challenges that you hear from solos is that it’s wearing all of the other hats. It’s the billing; it’s the minutia of the day to day, ordering and maintaining the supplies in the office. It’s managing all the phone calls and returning the phone calls. It’s those types of things that can sometimes be done by other individuals and not the lawyer; those are the things that can really hold a lawyer back.
There may be another situation where there is a lot of opportunity within a particular practice niche, and I’m seeing—or niche. And I can actually see a lot of work being brought in and a lot of opportunity. And in that scenario, as opposed to the former, I’m able to bring in another attorney as employee to manage that and to grow my practice if you will, based on the type of work that’s going to be—you know, the legal work that’s being produced in the firm, versus someone brought into actually manage some of the administrative tasks that might be well suited for an assistant.
So it really depends on where—what the placement of the practice is at the time, and what type of work or situation the lawyer is facing. That’s probably going to drive that decision more so than, “OK, I’m ready to hire someone,” or “I’m a position where I’ve got enough money to bring someone in.” And what’s going to be the best spend for me with those funds? Is it going to be another lawyer, who may of course, having to think about benefits for that individual, what their expectations and goals are in terms of coming into the practice?
Yeah, great partnerships are often started that way. It’s a little bit easier to get to hire the third person being an assistant for the two of them, or a paralegal for the two of them. And that situation may lend itself to that. However, it might be the one where they’re doing all the administrative things, and just to clear me up to manage better the work that I have is going to be a better situation and positions me more effectively for growth, if that’s what I’m looking to do.
Stephanie Francis Ward: And do you have thoughts on whether it’s better to use an outsource in-service for staffing or hire people yourself?
Natalie Kelly: I think that question like the others are a little bit—it kind of depends individually on what the situations are. One of the benefits of having virtual assistants now, and virtual services that are available, is it provides a little bit more flexibility for solo and small firms in terms of their options. And so where before you might have been, you know, I could go to a temp agency and hire someone on a temporary basis, I could go outside the firm, an associate counsel in on a case if things got a little bit too large for me in terms of what’s on my plate.
But now you have virtual assistants, virtual services that are available, and it provides a little bit more flexibility. I don’t know whether it’s a right or wrong thing to go one way or the other. I think it’s depended upon what work needs to be done and what needs to be managed, perhaps for how long? What that budget is again, we’re back to budgeting again, what the budget or reserves happen to be to manage that work, and so all of those things kind of play into the costs. And when you start to look at whether to use a virtual service or a virtual assistant perhaps, is that going to be something that you can afford to do and for how long?
And if you can look at your budget and say, “Yes, I can afford a virtual assistant for the next six months,” and the matter that you have before you looks like it’s going to maybe last three months, and you need that service, then perhaps that’s a better option than hiring someone, who has the expectation of being there for the long haul. While it may work out, it might be a little bit more prudent to invest in a virtual service to get through that work for the three-month period, versus someone that’s going to expect to be there a little bit longer. And so again it’s situational, it all depends is the answer.
But I think the focus, especially when it comes to cost savings for solo and small firms, if you’re paying attention to what’s actually being brought in to saving money, or almost like creating a savings account for the firm, and creating reserves for the firm, and operating it in a such way that you’re kind of having the levels of control are at what you do expend in terms of overhead, that’s where you’re going to get the ability to kind of manage where you’re growing in terms of finances for the firm.
Stephanie Francis Ward: Do you have any cost-saving tips for office supplies?
Natalie Kelly: Office supplies are interesting, because that’s the area where things can get out of control, or I’ve seen things get out of control. Firms don’t necessarily sometimes even pay attention to it, which is also fascinating for me. Office supplies, you want to start to look at cost savings in that area.
One of the things that you can do is look to your local or specialty bar associations. There are a lot of member benefits programs or sponsored programs for savings on office supplies. And if you’re not taking advantage of those, you’re probably missing out on some of the savings that you can receive, or discounts that you can receive when it comes to office supplies.
Again, it’s how much you’re spending, how much you’re expending, what those numbers look like. And so for most firms, if you’re looking at office supplies, again I kind of use that three month figure as an operate—it’s going full operational, like moving forward operationally for three months, looking at what you have expended over three months, kind of use that as a gauge to determine what we might on an average spend on a particular thing—whether it’s paper, whether it’s pens, whether it’s pads, those kinds of things, look at that.
But then also take in to consideration what savings might be had if you moved, say, to a paperless office, probably very little paper costs. But you’re spending more on the technology or the hardware within the firm and the like. And so just paying attention to those types of things in terms of supplies, it really really does depend on how you’re practicing nowadays.
Stephanie Francis Ward: Natalie, that’s everything that I have for you today. I wanted to thank you so much for joining us.
Natalie Kelly: No problem, I’ve enjoyed it. And hopefully the listeners got a chance to—or really start to think about their budgets and putting that down in writing somewhere.
Stephanie Francis Ward: Yes. And listeners, thank you for joining us as well. I’m Stephanie Francis Ward signing off from the ABA Journal’s Asked and Answered.
End of transcript
Updated on March 11 to add transcript.
In This Podcast:
Natalie R. Kelly is the director of the State Bar of Georgia’s Law Practice Management Program. She is a 2016 candidate for her JD degree from Atlanta’s John Marshall Law School, where she previously taught Law Office Management as an adjunct professor.