Most law firms face stiff challenges in today’s marketplace. Changing demographics, new technologies, aggressive competition and Coronavirus, demand that firms change the way they do business. Often firms respond to these challenges by trying to do what they have done in the past. Those that thrive change to address reality.
Many small businesses, like law firms, are adding work-at-home positions, four-day workweeks, and online client contact. All of these changes affect the work culture and how you do business. You may look at the big picture and decide that a smaller office space is needed to compensate for the remote users. Technology may change to support remote users or online client contact. Some expenses will be added and some deleted.
One of the fundamental business metrics is return-on-investment (ROI), sometimes referred to as profit margin. In this new work-at-home world we find ourselves, we must consider more variables and expenses when we look at the business metrics. If you are doing strategic planning, SWOT analysis, or Needs assessments, you will see this complexity. Your team must define how to collect the data needed, how it will be analyzed, and what the goal is. I would consider what the ROI was in the past and focus on meeting that number and then plan to improve. First, find your profit by subtracting total expenses from the revenue. If that is a negative number, you can stop there. To find the margin or ROI, divide the profit by the revenue.
Overhead is another popular metric used to group expenses that are necessary for the business but cannot be associated with the production of the products/services being offered. You do not want the larger portion of the total expenses to be overhead. You can debate expenses like the cost of a case management system, but most count this as a production cost, not as overhead. The cost of legal staff (attorneys, paralegals, etc.) are part of production, but the cost of administrators or support staff are considered overhead. Other expenses, such as rent, utilities, business insurance, and supplies that do not become a part of any products or services, are overhead expenses. You now have to consider where to track the remote office expenses. I would suggest that it is overhead and not production, just like building costs. Other expenses like the cost of medical records, accident reports, and depositions, are part of production.
The other popular metric in this group is the burden rate. The burden rate consists of costs associated with employees (or staff) over and above gross compensation. This includes health insurance, license fee, training, etc. (Basically, any costs associated with your employee that is not their salary or pay). When you hire an employee for your law firm, they will cost more than the hourly wage (or salary) you pay them. The additional cost of that employee is known as the burden. The burden cost is important to compute and understand because it includes a variety of significant costs that are part of overhead and are related to employment. So it is a way to further breakdown overhead expense.
Knowing the burden allows a firm administrator or manager to determine the real cost of hiring an employee. The problem we have with burden is deciding what part of overhead is a burden. If you have to purchase a new license for your case management system, that is a burden. How much of the cost of the building is burden? To get a true burden, you should use only expenses directly related to an employee. Once you have the burden cost, you can create a percentage of overhead, a rate per hour average for all staff, or a dollar amount to be added to a salary. Most small businesses use a burden rate based on total hours worked and apply that rate to the hours of the new employee. Not a perfect measure, but it will give you a good idea of the total cost for an employee.
Our original question was, how does all of this change in this new environment? If you were able to cut building or office expenses, factor that in. If you had to purchase equipment for a home office, spread that cost over the first year. Whatever variables you consider, I would keep it simple. Select data elements that are easy to collect data for and are stable over time. Often the cost of a remote employee is not the same as an employee in the office. How did your burden change? What was the impact on overhead? Do you need some new categories in your chart of accounts in your financial system to collect data? All of these questions should be addressed when doing strategic planning.
Besides the financial impacts, there may be a security impact. You may have workers looking at business data and systems at home. Consider what kind of support a remote user needs and factor in the sensitivity of the data being presented remotely. You may have to make a change in the IT support you have as your remote users expand. These actions will create an expense. Are you going to supply the laptops, internet lines, or other equipment? When are your employees considered to be “on the clock”?
I would suggest that it will be six months to a year for the new work environment to settle down. You will learn as you go. Along the way, design a data collection strategy and improve it as you build the new environment. Don’t wait until the business fails to start developing a new work culture.
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