Many legal publications and consultants offer advice for large law firms on how to stabilize and recover. Their suggestions focus on lawyer compensation, practice group strategy, alternative billing, and business development. I remain surprised at how little they focus on reducing law firm overhead.

Last week, the Zeughauser Group (ZG), a leading law firm management consultancy, offered its take. Ashby Jones, in the Wall Street Journal Law Blog, summarizes a recent ZG alert (5 May 09). The ZG alert, Forward-Looking Strategies: Tough Medicine and Elixirs for Success (link to WSJ – I could not find the PDF at ZG site), has excellent advice for law firms. It suggests:
– Cut lawyer costs
– Own particular niche practices
– Take advantage of the upcoming re-structuring of financial institutions
– Expand in selected rapidly developing countries
– Offer alternative fees
– Enhance profits through matter management (law firm business intelligence in my words)

Like many similar pieces, the ZG discussion does not shine a light on BigLaw overhead. Am I mis-guided to focus on overhead? Is it big enough that management should worry? To answer that, we have to quantify overhead. Here’s a simple way to determine it using AmLaw 200 data:

  • Start with gross revenue.
  • Subtract partner profits (all partners, not just equity).
  • Subtract associate compensation (I assume a blended $225,000/year and multiplied by associate headcount).
  • The remainder is all other overhead – everything from IT and marketing to occupancy and secretaries.
  • Lawyers require far more support than staff; I assume twice as much. So I multiplied the total overhead by 66.6% to determine overhead supporting lawyers.
  • To compare across firms, I divided this overhead by total lawyers.

In 2007, 0verhead per lawyer ranged from over $500,000 per lawyer to just over $50,000 per lawyer. The median is about $170,000 per lawyer and the average is $185,000. Even before the crash, I would have said that’s real money.

I can explain only some of the variance. For example, NYC bulge bracket firms by and large top the list. But many variances are hard to explain. If firms with overhead per lawyer above the median reduced their overhead to the median, profits per equity partner could, in some firms, increase by more than 30%.

While the math is simple, cutting overhead is not. Adopting a rational and analytic approach to supporting lawyers could, however, for many firms, reduce overhead. Perhaps quite significantly. Ideas I’ve offered include doing more with technology, forming secretarial teams, and outsourcing middle office functions.

As firms implement the excellent strategy suggestions of ZG and others, they must not forget to shrink their often bloated overhead. The old adage that it’s easier to grow revenue than shrink costs is still true. So too is the one about not leaving money on the table.

[Side-note: I was pleased to see ZG reference outsourcing: “Non-equity partnership … are less flexible than outsourcing.”]