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With real estate and technology representing the legal industry’s top two fixed gross revenue expenses (salaries being No. 1), careful planning combined with overall strategic planning of real estate can reduce a firm’s leasehold expense by as much as 20 percent to 30 percent. By implementing a strategic plan today, particularly for multi-office firms, dramatic savings can be achieved within a few years, prompting partners and administrators to adopt these changes as permanent. CB Richard Ellis recently completed its 2002 National Law Firm Survey to document legal industry trends, with the support of the Association of Legal Administrators. More than 800 firms throughout the country were randomly selected, ranging from 10 attorneys to AmLaw 100 size, with about 25 percent responding to the survey. Of the 198 firms that responded, 12 percent are international firms, 15 percent are national, 26 percent are regional, and 47 percent are local. The results reveal a growing level of business sophistication among law firms, and suggest key areas of change and future legal trends. Over the past year, the legal industry has continued to grow and evolve, despite the economic downturn. Law firms are handling business operations more like a corporation and less like a traditional law firm. To increase productivity and profitability, firms are doing more cost analysis, outsourcing, marketing, and focusing on retention, resulting in better control and reduced overhead expenses. FLEXIBILITY IN PLANNING To reduce real estate costs, firms need to be flexible and efficient when it comes to long-term real estate decisions. With business and cost dynamics changing daily, firms must identify and implement a strategy that will enable them to respond quickly and proactively to sudden major changes, such as a pending merger or acquisition, rather than reacting after the fact, which can be costly. A lease should include options to accommodate expansion, as well as contraction options. By crafting flexible lease options, a firm is better able to grow its net revenue and manage office vacancy. For example, as senior associates become partners, they typically move to a larger office, which may involve relocating several other people or reconstructing space to accommodate a larger office. To reduce the cost of lost billable hours and expensive construction caused by internal promotions, many firms are heeding the advice of their consultants to maintain only two office sizes: partner and associate. Furthermore, by making the partner offices exactly double the size of associate offices (for example, 110 square feet and 220 square feet), post-occupancy construction activity can be greatly minimized. Even in firms with three to seven partnership levels, substantial savings can be achieved by maintaining only two office sizes. Some firms have even begun to adopt a “one size fits all” concept, realizing that egalitarianism offers tremendous benefits, in terms of enhanced flexibility and reduced disruption and construction expense. A third method of increasing flexibility is to combine major support areas to serve multiple purposes, now and in the future. We anticipate that technological advancements will continue to shrink space requirements for law libraries, information technology departments, storage areas, and clerical space. Consequently, it is critical that as law firms enter into 10- to 20-year lease terms, they plan to accommodate technological changes in the future. By placing law libraries, IT, marketing, records and other support areas adjacent to each other, a firm will be better able to effectively downsize, upsize, and eliminate these spaces as technology evolves, like an accordion that expands and contracts. EFFICIENCY IN OPERATIONS Increasing operational efficiency can add even more to the bottom line. When firms analyze their use of space, they can reduce the amount that certain functions occupy. When we evaluate efficiency in terms of size, we look at the real estate costs as a percentage of the firm’s revenue, as well as the amount of square feet or cost per attorney. As a benchmark, firms have historically incurred an overhead expense for real estate of 10 percent or more of gross revenue, and a per-attorney ratio in excess of 800 square feet. In today’s more cost-disciplined environment, strategic planning and implementation have enabled management committees and administrators to lower real estate overhead and reduce square-feet-per-attorney ratios. More than half of the respondents to our 2002 National Law Firm Survey reported spending 5 percent to 6 percent of gross revenue on real estate. As for the remaining respondents, 27 percent spent 7 percent to 8 percent on office space, 11 percent spent 9 percent to 10 percent, and approximately 10 percent spent in excess of 12 percent. As for square feet per attorney, 12 percent reported a ratio of less than 600 square feet, and 26 percent reported their ratio was between 600 and 699 square feet. The rest were split almost equally between 700 to 799 square feet and 800 square feet or more. A CORPORATE STRATEGY Another method of increasing efficiency is to take a “corporate approach” in managing a real estate portfolio. Traditionally, firms have let each branch office manage its real estate. In recent years, however, with more firms hiring administrators and executive directors who have both corporate management experience and an MBA, a corporate real estate strategy has become a definitive trend among law firms. The need to develop a businesslike real estate strategy is being driven by continuing consolidation within the law firm industry. Firms that once managed two to four offices are now faced with the logistical challenges of coordinating the real estate and operational requirements of six to 12 offices, several of which may be located abroad. This change in scale and complexity is dictating improvements and streamlining of systems and procedures in order to control all overhead expenses, including real estate. Many administrators are outsourcing all real estate-related activities — including lease and sublease administration, space acquisition and disposition, project management, and architectural and engineering design services — to national firms that can meet the firm’s needs in all of its locations. A national provider helps develop and implement real estate strategy on a standardized basis throughout a firm’s portfolio. Firms that outsource can save money and benefit from expert advice that takes into account their long- and short-term business goals. This approach also dramatically reduces the hundreds of nonbillable hours that partners often spend addressing real estate issues. Expanding flexibility and maximizing efficiency are key elements in a real estate strategy to reduce operating expenses and increase profitability. As the pressure increases to boost profits without losing cost-conscious clients, firms are taking a more aggressive approach to lower their largest fixed expense. Patrick Marr and Sherry Cushman are members of the CB Richard Ellis Law Firm Practice Group and are based in the firm’s Washington office. They can be reached at [email protected]and [email protected], respectively.

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