The article discusses three key fiscal performance measures for all businesses (including law firms)—cash flow, revenues or collected fee receipts and profit margin—and identifies building in a high fixed cost of operations as a primary obstacle to improving law firm profit margins. Although the article mentions “occupancy,” (i.e., office space), technology and marketing as significant contributors to the fixed cost of operations, it identifies labor costs as the most significant contributor to high fixed operation costs:
Consider labor costs that are predominantly salary and deferred salary (bonuses that are implemented as the 27th paycheck at year end)—with substantial recent upward pressure . . . .
The error is that the variability of expenses is not aligned with the variability of revenues. The single most important cost initiative that law firms can undertake is to increase their flexibility in overhead. The place to start is the direct cost of producing revenues—fee earner compensation. That does not mean pay people less. It does mean to have pay programs that can adjust to the revenues in a way that does require drastic measures.
(Emphasis supplied). By using contract lawyers to work on a project-by-project basis, a firm can align the variability of expenses with the variability of revenues. Since it makes good financial sense to use contract lawyers, it’s no surprise that independent contract lawyers are busier than ever.