Nina Lee

Law firm overhead expenses are a big part of your firm’s profitability, but do you know what your overhead percentage is? Do you know what your overhead costs are, or even what expenses are included in overhead costs?

The first step is understanding your overhead costs, then you can find ways to reduce them to make your firm more profitable. With a clear financial picture, you can keep unnecessary costs down and position your firm for future opportunities.

What Are Overhead Costs?

Overhead costs are the expenses related to running your firm, specifically ongoing costs for general business functions. These are law firm expenses you would still have to pay even if you didn’t produce anything within a period of time, such as rent for office space, accounting, software, insurance, and employee salaries.

Though often used interchangeably, overhead costs are different from operating expenses. Also known as direct costs, operating expenses are the expenses necessary to run your business or costs incurred in your day-to-day operations. These may include marketing expenses, labor costs, and expenses related to production.

According to Law Crossing, the typical law firm spends 45 to 50% of the fee dollar on overhead expenses. Usually, these expenses are non-lawyer salaries or wages, rent, phone, supplies, or library costs.

Types of Overhead Costs at Law Firms

There are several types of overhead costs for law firms:

1. Fixed Overhead

These costs are costs that are the same regardless of time, profits, or activities, such as rent, insurance premiums, loan payments, government fees, or property taxes. These costs will be there whether you’re selling legal services or not.

2. Variable Overhead

These costs are costs that will vary according to your sales volume. Typically, they increase as your sales go up and decrease as they go down, such as office supplies, marketing, and some utilities.

3. Semi-Variable Overhead

These costs are costs that you have to pay regardless of what’s happening in your firm, but the amount can vary based on your activity. Some of these may include hourly wages, most of your utilities, and business vehicle costs.

How to Calculate Overhead Costs at Your Firm

Generally, the lower your overhead, the better your profit margins. However, in order to reduce overhead, you have to know how much your overhead costs you.

First, calculate all of your overhead costs for the month. This may include partner salaries, office rent, internet service, lighting and heating costs, office supplies, and technology subscriptions. Categorize them into fixed, variable, and semi-variable overhead costs.

Then, determine your monthly sales for legal services during that same time period and divide them by your overhead.

(Overhead/Monthly Sales) x 100 = Overhead Percentage

For example, say your law firm has $10,000 in overhead costs in a month and $50,000 in sales. The overhead rate is .2 or 20%, so for every dollar the firm earns, 20 cents is spent on overhead.

If your percentage is high, you may need to adjust your overhead to turn a profit. If it’s low, that’s a good sign. Keep in mind that if your overhead is way too low, it could mean that you’re compromising quality to keep costs down.

Track these calculations over a few months to track changes in your overhead costs. You should be able to identify cost drivers and potential areas for cost reduction with more visibility.

8 Ways to Reduce Overhead Costs for Law Firms

Here are some ways to reduce overhead costs for your law firm without sacrificing quality.

1. Streamline Administrative Processes and Workflows

Administrative processes can create a burden on your law firm that wastes time and money for labor. You can streamline these processes with workflows for billing, scheduling, document preparation, and more, relieving the burden and allowing your staff to focus on more important work.

2. Implement Legal Technology

Legal technology often involves an upfront investment that pays off considerably in better efficiency and productivity. A comprehensive law firm software offers features to streamline lawyer time tracking, law firm invoicing, reporting, client and project management, reporting, and more.

3. Negotiate Contracts with Service Providers

The payment to service providers for technology, accounting, and other work can be a significant part of your overhead costs. Negotiate your service provider contracts to ensure you’re getting the best prices and save money on the services you need to operate your firm.

4. Adopt Remote Work to Consolidate Office Space

Allowing staff to work remotely, either full-time or part-time, helps you optimize your overhead for utilities and supplies. Depending on the schedule you implement, you may be able to reduce your office space to pay lower rent as well. As an added bonus, top talent is seeking out opportunities for remote work, hybrid schedules, and flexibility, giving you an edge in a competitive market.

5. Outsource Non-Core Functions or Tasks

There’s plenty that can be outsourced at a law firm without compromising your core competencies, such as receptionist duties or document preparation. Outsourcing this work helps you save money and frees your staff to focus on mission-critical tasks.

6. Implement Paperless or Digital Document Management Systems

Going paperless is a great way to reduce costs related to physical paper, printing, mailing, and labor costs to have staff handle all these tasks. With document management software and invoicing technology, you can access all the information you need efficiently from anywhere with an internet connection, saving you a lot of time and resources spent on manual processes.

7. Evaluate and Optimize Marketing Spend

Law firms need strong marketing, and that takes money. However, you should be strategic in your approach to marketing, only allocating resources towards tactics that generate a high return on investment for your firm.  

8. Conduct Regular Reviews of Expenses and Identify Cost-Saving Opportunities

Staying ahead of your finances and expenses is the best way to continually optimize and stay profitable. Review your expenses and financial standing regularly to determine your overhead percentage and find ways to reduce costs.

Final Thoughts on Reducing Overhead Costs at Your Firm

Reducing overhead costs is vital for maximizing profitability at your law firm. With simple changes like adopting cloud-based technology, optimizing your marketing spend, or outsourcing administrative tasks, your firm can effectively lower overhead.

Legal work should center on serving clients, not drowning in administrative tasks. Balancing the books, managing calendars, and answering calls often cut into your day, leaving less time for billable hours. The weight of these tasks is so heavy that many small firm lawyers count it as one of their biggest hurdles. Plus, the surge in workload over the past year has only added to the stress, even impacting staff retention.

Balancing billable and non-billable hours can be challenging. Some non-billable hours are inevitable, like attending professional networking events or participating in continuing legal education. However, there are some non-billable tasks that you can reduce, automate, or outsource.

Effective Strategies to Minimize Legal Administrative Tasks

1. Accurate Time Tracking

Accurate time tracking is essential to ensure you bill for all the hours you work on a case. Relying on paper notes or Excel spreadsheets is not efficient and often leads to errors or missed entries. A practice management system with built-in timers, like Bill4Time, allows you to easily record time, even when you switch between tasks throughout your busy day.

Additionally, features like Google Calendar integration further streamline this process, enabling you to create time entries directly from already existing calendar events. This integration improves accuracy and reduces the need for duplicative efforts, making time tracking seamless and reliable.

2. Outsourcing

The obvious way to reduce administrative time for lawyers is by outsourcing administrative work. Most large law firms have an extensive support staff to help with these tasks, but the extra expense can be a challenge for small firms.

If the budget is tight, law firms can hire as-needed help, such as a virtual paralegal or part-time support staff, to address administrative needs. Contractors help with tasks like bookkeeping, marketing, web development, or fielding phone calls without adding a full-time position.

3. Delegating Responsibilities

Effective delegation is vital for alleviating some of your administrative burdens. Focus on the tasks that only you can perform, such as complex case research or high-stakes client consultations. Other responsibilities, like routine document preparation or initial client intake, can be assigned to capable team members.

Clear prioritization and delegation strategies are essential for maintaining productivity and ensuring that your firm operates smoothly. By delegating appropriately, you can ensure that all tasks are completed efficiently without overloading any single team member.

4. Implementing Better Organization

File maintenance and organization are critical to a smoothly running law firm. Lost files and misplaced documents not only waste precious time but can lead to malpractice suits. Also, if your clients are evaluating your capability based on your organization, a messy desk or frantic search for files can leave a bad impression.

The best way to stay organized is with digital tools. Searching for documents stored online is a matter of a quick toolbar search rather than hours spent rifling through paperwork. Bill4Time, for example, offers a cloud-based document management solution that provides lawyers with security and confidentiality, along with an efficient organizational system that makes accessing documents more convenient.

5. Utilizing Practice Management Software

Practice management software is a great way to reduce legal administrative tasks. They offer automation specifically designed for law firms and legal professionals. In addition to timekeeping, practice management systems can automate and streamline administrative tasks like maintaining client records, case matters, billing, emails, and more.

Furthermore, some practice management software uses cloud-based operating systems, so you can access any information within the system at any time from any device with an internet connection. Whether you’re in a taxi, waiting for a client at the courthouse, or meeting a client for lunch, practice management systems provide the tools you need to stay organized and productive.

Reduce Legal Administrative Tasks with Legal Technology

Non-billable hours and administrative tasks are part of doing business at a law firm, but lawyers can take numerous steps to reduce the administrative burden and focus on billable tasks. One of the best ways is with digital practice management systems, which track time and automate tasks like billing and time tracking. With solutions from Bill4Time, law firms can become more productive, efficient, and profitable with automated processes designed to cater to the needs of legal professionals.

Want to see how Bill4Time can reduce admin tasks at your firm? Let us show you in a demo — sign up here!