Overhead Cost at Large Law Firms Matters After All
Large law firms historically have not spent much energy managing overhead cost. To be sure, BigLaw lay-offs are rampant but these have been aimed mainly at lawyers; staff have been cut in rough proportion to typical support ratios. News last week, however, suggests that firms may now target overhead per se.
The Recorder reported on Friday (2 Oct 09) that Cooley Lays Off 58 Staffers. These “cuts represent about 5 percent or 6 percent of the firm’s staff… and the majority were secretaries. The information services and marketing departments also took a hit.”
In general, several reasons explain why a big law firm might lay-off staff and not lawyers:
- To correct prior over-staffing.
- Support needs have declined; for example, technology substitutes for humans or a new practice mix reduces support needs.
- The firm outsourced support.
- Lawyers become more self-supporting. Self-support might not require extra time because of process improvements. If self-support does require lawyer time, however, query whether this implies working longer hours, billing less time, or working more and billing for work previously performed by staff.
In this instance, Cooley explains. Cooley Chief Operating Officer Mark Pitchford said “This is recognition that we were overstaffed in certain areas.” A confidential firm memo posted at Above The Law explains “we have streamlined, and in some cases reorganized, several firm functions, invested in new technologies and endeavored to implement attorney staffing ratios commensurate with our attorneys’ changing support needs.”
Will other firms take a similar step? In January 2009 I suggested in Law Firm Staffing Reference Model that few firms consciously decide on appropriate staffing and that support ratios seem random. Then in May, in Cost Control as Part of AmLaw 200 Turnaround Strategies I analyzed BigLaw support cost per lawyer. Making some assumptions, I found that the median AmLaw 200 support cost per lawyer in 2008 was around $170,000.
In this analysis, Cooley’s overhead per lawyer was about $210,000, well above the median. So these cuts may reflect a “move to the median”. Draconian and painful as the cuts are, however, they don’t move the economic needle much. Assuming average compensation of those cut is $60,000/year, then in my analysis, Cooley overhead per lawyer drops by about $4,000. (We cannot simply apply the 5% staff cut directly to the $210k overhead number because it includes fixed costs such as leases, IT, and malpractice premiums.)
To reduce Cooley overhead per lawyer to the median of $40,000 would require much larger cuts, perhaps close to an order of magnitude larger. My analysis likely does not hold up for such dramatic changes; nonetheless, we know overhead is enormous and hard to cut. A major overhead reduction likely requires a re-think rather than incremental cuts.
Do other firms now have “permission” to make similar cuts. Remember, by definition, half the firms spend more than the median. So that leaves 99 others who could cut to get closer to the median. And I’m not even suggesting the median is a good target. In fact, I suspect it reflects more than a modicum of bloat.
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