A law firm’s long-term premises strategy is key to enabling it to achieve its strategic and profitability goals. It not only facilitates the appropriate number of staff, but can also positively or negatively affect client and employee behaviours.
The profession is now subject to big challenges from dispersed or virtual providers who are not hidebound by existing long-term lease liabilities and have been able to exploit a much lower cost base than many traditional law firms.
However, it will not be long before some law firm leases come up for renewal, especially those entered into at the end of the twentieth century or at the start of the new millennium. At that time, a big ‘stick or twist’ decision is likely to arise.
Law firm leaders should consider the following ten strategic issues when deciding on their future premises needs.
1. Profitability. Compared with the huge cost of staff, the benefits of reducing premises costs might seem small. However, a reduction from a cost of 10 per cent of revenue to 5 per cent could instantly improve the profit margin. Additionally, in the golden age of law firm profits, firms would routinely add a floor or two for growth but – unless the short to medium business plan for growth is compelling – the negative cost of unused space should be resisted.
2. Moving costs. Even if amortised over several years, the dislocation costs associated with furbishing and furnishing new space should be balanced against the lease or purchase costs of cheaper space. Additionally, latent productivity benefits can be obtained from cleverly-designed floorplans and equipment layout.
3. Location. Prime office space is no longer as important for law firms as it used to be. Off-the-street or passing business is minor for most commercial firms. For visitors, ease of access, good facilities and parking are often key factors.
4. Client visits. It is important to ascertain how many external visitors the firm actually receives; many client meetings take place at clients’ premises. Some firms restrict their central office site to a meeting suite, with staff routinely working in cheaper premises elsewhere.
5. Staffing. New and disruptive entrants to the legal services market often operate on a dispersed staffing model both to minimise offices space and to convert staff costs from a predominantly fixed-cost model to a variable-cost model. Some savings can also be considered by outsourcing some processes. In such models, social interaction for dispersed staff can be promoted through the use of social media and office events.
6. Performance and culture. The dispersed staffing model and outsourcing will not work for every firm. However, lawyers tend to work more in groups than in teams. There is plenty of research on the beneficial effect of working environments on staff satisfaction, productivity and motivation.
7. Consolidating offices. Some regional firms still have offices within close distance of each other; many could benefit from consolidating some of these into one office. Staff cost savings should also be considered in this regard.
8. Fragmenting offices. Conversely, it could be cost effective to move high volume, low-margin practice groups from high-cost space into lower-cost space nearby.
9. Image and brand. Until about ten years ago, there was a tendency for law firms to believe that smart new offices in primary positions would have a positive effect on their competitive positioning. However, commercial clients have recently been heard to say when looking around a law firm’s grand offices “no wonder their fees are so expensive!”
10. Sales tricks. Firms are often lured into expensive decisions by the offer of incentives such as rent-free periods or sale and leaseback options. Resist the ‘amazing deal’.
Expensive office premises have contributed to the demise of many once-successful firms. The onset of a major recession, followed by increased competition in the legal market, showed that expensive prime office space was fool’s gold in many cases.
Poor management decisions often remain hidden, but foolish or haphazard decisions about property often rise to haunt law firm leaders (and the partners who signed personal guarantees). A premises strategy ought to take a higher place on the agenda of law firm leaders than it has in the past.
This article first appeared in Managing Partner Magazine and is reproduced with their permission