According to a recent economic survey of law firms, lawyers are working harder, generating more revenue and taking home more money. However, expenses have increased at a higher rate than revenue resulting in a lower ratio of income to expenses. Nationwide, firms of all sizes reported that their average net income per lawyer in 1998 was 55.7% of total revenue, down from 56.7% the previous year. With a strong economy, these trends are expected to increase in 1999.

A closer comparison of firms between 9 and 20 lawyers shows that the average gross revenue per lawyer in 1998 was $267,036. Those firms averaged spending $116,408 per lawyer on overhead, which represents 43.6% of revenue. Average gross income per lawyer was $150,628, or 56.4% of revenue. When doing comparisons with your firm, be aware that theseare averages per lawyer, including both partners and associates.

When looking at the bottom line, it is much easier to improve the income to expense ratio by increasing income rather than decreasing expenses. If every attorney in a 10 attorney firm increased their billable hours by one hour per week at the rate of $100 per hour, that would result in over $50,000 in income. Most firms that size would have a hard time reducing expenses that much. However, most attorneys are already working as hard as they want and charging as high an hourly rate as the market will bear. So firms need to constantly work toward controlling expenses.

The largest overhead expense for most law firms is support staff salaries and benefits. For firms of 9 to 20 attorneys, that represents about 14.7% of total revenue. A nationwide shortage of legal secretaries is driving salaries up, so the best way to control salaries is by decreasing the ratio of support staff to attorneys. According to the survey, the average ratio of secretarial staff to attorneys was .65 to 1. That ratio has improved in the past five years, but not as much as would be expected with improvements in technology. As new law school graduates with good computer skills enter the market, that ratio should continue to improve. Firms should strive toward reducing the ratio of secretaries to attorneys closer to .50 to 1.

It is interesting to note that although technology has advanced rapidly, and most firms have increased and improved their technology, the average cost per attorney has shown very little increase over the past five years. That is undoubtedly due to the fact that the cost of equipment has decreased as technology has matured. However, with changes brought about by Y2K compliance, we will likely see an increase in technology costs when 1999 figures are available.

With other expenses on the rise, it is also encouraging to note that the cost of lawyers professional liability insurance has decreased over the past few years. Five years ago, the average cost of professional liability insurance in a firm of 9 to 20 attorneys was $3,835 per attorney. In 1998 it was $2,580. The ANLIR plan endorsed by the Tennessee Bar Association has become very price competitive within the past two years and the competitive market will undoubtedly drive the price down with other carriers.

Although reference material represents a small percent of gross revenue, it nevertheless averaged $3,771 per lawyer in 1998. Law book expense should constantly be reviewed for possible cost savings. Once a subscription has been entered, a publisher will normally send annual updates to publications that sit on the shelf and are no longer needed. I recommend doing a complete inventory of library material each year, including the annual cost of each publication, so that a rational decision can be made on whether some subscriptions can be cancelled. In some cases it may make more sense to use one of the public law libraries and some publications can now be accessed through the Internet. You should also take a close look at dues expense to determine whether you are receiving benefit from the association you joined years ago, or if you are simply a name on their list of members.

Finally, I recommend that firms of all sizes prepare an annual budget of overhead expenses. A well managed law firm knows where their money is spent and the best way to do that is to prepare an annual budget. Although a budget primarily serves the purpose of projecting what you are going to spend in the coming year, the most useful part of the budgeting process is to take a close look at what you spent your money on during the past year. In going through this exercise, you can often find areas where savings can be realized, and although individually they may be small, they can add up and result in improvements in the bottom line.

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