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November 21, 2006

Watch The Overhead

Connecticut Law Tribune, January 23, 2006

When I graduated from college, I accepted a job with one of the top national advertising agencies located in New York City. I commuted four hours round trip every day from Orange. It was a glamorous job and looked great on my resume. However, in that year I learned one very important lesson which has never left me--your gross salary matters much less than what you actually take home.

Back then I negotiated a whopping $14,000 a year. (Can you guess how old I am?) It was about 25 percent more than my counterparts who worked in Connecticut. However, when I deducted my monthly commuting costs, New York City income taxes and the like, I actually netted less than my peers. When I left New York and took a lower paying job in Connecticut, I, too, actually netted more with the bonus of saving four hours a day of commuting.

It is a very simplistic concept but one that never seems to actually be put into practice. To realize more income in your legal practice, you have to take home more of every dollar you earn. If you gross $150,000 a year but spend $75,000 to $97,500 on overhead and your peer earns $125,000 but only spends $31,000 to $43,000 on overhead who is really taking home more money.

The firms I have talked to spend 50-65 percent of each dollar on overhead. Most of the newer solos spend 25-35 percent of each dollar on overhead. Newer lawyers can charge less per hour and actually take home as much as, if not more than, lawyers charging more per hour but with greater overhead expenses.

How does one reduce their percentage of expense per dollar earned? It's a philosophical decision. If you understand that you are the product, you will make decisions which reinforce this philosophy. You will look to keep your monthly debt service to a minimum. You will not lease the priciest real estate. Your office will not be lavishly appointed. (This can actually be off-putting to most clients who pay on an hourly basis because they see their dollars paying for Italian leather instead of your expertise and time.) The one possible exception is if you are a personal injury lawyer and your fees are paid contingently. Only then can a well-appointed office in a pricey setting send the message, "I will get you money and it won't cost you a penny."

You have to start by asking yourself a very practical question: How often, if ever, will clients come to my office? Therefore, are an actual office and the attendant maintenance costs really necessary? Based upon the type of law you practice, can you meet clients elsewhere, such as their office or home? (What a novel concept.) One very high priced lawyer I've talked with has clients across the country who have never been to his office, nor will they ever. So does it matter if his physical office is established in his home? Not if he travels to his clients and at their cost. I can tell you from attorneys canvassed who meet their clients outside of a traditional office setting, not only has this proven cost-effective, but it is very appreciated by clients.

The newest phenomenon amongst solos is the virtual office. This provides the solo an address in an office building to receive mail, a telephone number with a live answering service, the ability to rent the conference room on an hourly basis to meet clients at "your office" as well as the option to contract for administrative services as needed on a project basis. You simply do not have office space to work at on a daily basis. All of this at a fraction of the cost of a fully appointed private office or generally a shared suite. Doesn't $150 a month sound better than $900 or $1,200 per month plus insurance, utility costs, parking and more?

But let's not forget personality considerations. Do you need a place to go each morning? Is it not feasible or impractical to have an office in your home? Would you prefer to share space, barter services for space or simply establish your own private office? The answers may be all of these at one point or another in your legal journey. It all turns on finances, and at what point in your career you are making the transition to practicing on your own.

If you want to be financially more successful without having to commit 65 cents of each dollar to office expenses, or you simply don't want to work as many hours to net the same income as your peers, make sure your overhead is no more than 25 to 35 cents per dollar earned.

 

Susan Cartier-Liebel is solo practitioner, adjunct professor at Quinnipiac University School of Law and a business consultant for solo and small firms. She can be reached at [email protected] Copyright © Susan Cartier-Liebel (2006) All Rights Reserved. No portion of this material may be copied, transmitted, posted, duplicated or otherwise used without the express written approval of Susan Cartier-Liebel.

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