The cost of living and rising inflation is a key challenge for smaller firms – particularly pertaining to high insurance premiums, tax, wage demands, increased super payments, and added pressure from clients.

In conversation with Lawyers Weekly, three SME firm leaders discussed financial pressures moving into FY2024–25 and how smaller firms can best cope.

Quantum Law Group managing partner Zile Yu confirmed that a number of rising costs are definitely impacting SME firms – which already have fairly tight budgets.

“Increases in utility costs and other operational expenses are significantly impacting the profitability of smaller law firms by eroding their financial margins and adding strain to already tight budgets. As these fixed costs rise, law firms find themselves spending more on essentials; this leaves less room for profit.

“Further, expenses for support infrastructure at smaller firms impact these margins as marketing and business development, technology and recruiting expenses increase. With expenses outstripping demand for legal services, firms must either find ways to cut costs or increase their revenues, both of which can be difficult in a competitive market,” he said.

“This situation often forces smaller firms to innovate and adopt cost-saving measures like reducing office space, leveraging technology for efficiency, freezing recruitment processes and outsourcing non-core tasks, all in an effort to maintain their profitability and continue delivering high-quality services to their clients. There are also business models where smaller practices are outsourcing their overheads for a fixed percentage of fees in order to obtain the benefits of economies of scale.”

As costs rise, so does the competition between firms – and Travis Schultz & Partners CEO Kelly Phelps said that because of this, it’s never been more important for smaller firms to focus on “maintaining high service standards despite the financial pressures they are experiencing”.

VIEW ALL

“After years of salary increases, firms may need to focus on upskilling to derive the most value from their people, whilst bringing in tech and automation to replace some of the more administrative or repetitive tasks,” she told Lawyers Weekly.

“Rather than further salary jumps, small firms might look to offer performance-based bonuses when firm-wide goals are reached. Small firms just don’t have layers of middle management to fall back on. Efficient processes, multi-skilled, empowered employees who all contribute to the firm’s success will be a must.

“In tough times, it’s even more important to focus on value-creation. Rather than ask ‘how can we cut costs’, it’s always better to enquire as to what we can do to deliver both greater value and higher revenue.”

Aldermane already operates under a streamlined business model and utilises various tools to minimise exposure to increasing costs and overheads – and managing partner Rory Alexander said that providing “an exceptional service to clients” remains priority.

“As costs increase, smaller firms need to be laser-focused on deploying their limited capital only towards expenditure, which is tied directly to maintaining or increasing revenue. A fancy office, management overhead, and administrative burden [do] not drive profitability – but hiring quality people, paying them fairly, and delivering on your promises does, and always has. This is particularly the case in a people-based industry such as law,” he said.

“Our premises are simple, but fit for purpose; our people work remotely and flexibly; and we engage executive and administrative support only on an ‘as-needs’ basis to minimise over-capacity. This was a foundational principle of our firm, and we are realising the benefits of that model in this time of increased costs.”

In terms of client pressure to reduce legal fees and ongoing cost sensitivity, Alexander said Aldermane’s flexible pricing has been particularly helpful in the current market.

“We implement flexible pricing models for our clients, and always have. This includes hourly rates, capped rates, not-to-exceed pricing, and fixed fee models. Cost sensitivity has always been an issue, and the legal industry is particularly vulnerable to the knock-on financial effects of the broader community,” he said.

“In our experience, by adopting flexible pricing models and then delivering to a clear schedule, clients’ cost sensitivity can be managed collaboratively and a mutually beneficial outcome achieved.”

Yu echoed a similar sentiment and agreed that alternative billing models can be a “viable option” for SME firms.

“Balancing competitive pricing with the need to maintain financial stability and support for legal teams involves a careful balance of maintaining outstanding customer relationships; generating steady revenue through customer loyalty; creating a positive brand within the industry; implementing incremental pricing increases where required to cover increased business expenses and employee wages; and maintaining a healthy work culture,” he said.

“Striking this balance between internal and external functional stakeholder management allows a firm to invest in continuous professional development and maintain competitive compensation for their teams, ensuring employee job satisfaction and service quality that meets client expectations to further justify those pricing increases.

“On an industry level, there has been a growing trend in alternative billing models that hybridise fixed fees and value-based billing, as opposed to the traditional billable hour, as clients are increasingly concerned with prices that reflect actual value and effective time worked. This is certainly a viable option during this period of economic challenge, meaning that firms may need to strategically adjust pricing models in order to navigate and mitigate any business risks from the current climate.”

What to focus on moving forward

To deal with increasing costs and overheads, firms can adopt flexible working and pricing models, invest in upskilling current staff to ensure cross-functional capabilities, focus on building a strong, loyal customer base and invest in legal technology to “elevate productivity and remain competitive”.

“By leveraging practice management software and integrated or standalone automation tools, firms can streamline operations, reduce the need for administrative workload, minimise overheads and reduce administrative burdens. Further, AI, in general, can be useful for ideating and implementing marketing campaigns for a low cost as opposed to outsourcing to marketing professionals for business development purposes. Finding the right service provider that can help seamlessly implement these technologies without any major disruptions to workflow can make all the difference,” Yu said.

“Whilst it is something [that] is already being done in other industries, law firms could reduce overhead costs on utilities and office space through flexible working arrangements. Embracing hybrid conditions with the right systems in place could enhance operational efficiency but also demonstrate the firm’s commitment to modern work practices whilst maintaining service excellence, which would further help smaller firms stay competitive.

“In addition to this, investing in training and development, such as cross-training existing staff so that they can pivot on various aspects of a matter would reduce the need for additional hires. Further, investing in their continued learning to keep up with legal trends, regulations and best practices enhance the firm’s service capabilities. This commitment to professional development also fosters a culture of continuous improvement, excellence and cross-functional capacity, which makes for a highly marketable workforce and would, therefore, strengthen the firm’s competitive position in the market.”

Increased implementation of technology can not only help streamline operations but also minimise any additional support staff needed, further reducing costs, said Alexander.

“Smaller firms can be more nimble and agile in their adoption of technology to streamline business functions and processes – and these systems enable smaller firms to deliver for clients at a scale and efficiency which belies their limited headcount,” he added.

“By reducing or minimising administrative and corporate support and other cost-centre functions through automation, smaller firms can pass on cost savings to clients, remain competitive, shore up their margins, and remain financially viable.”