What Should My Law Firm Overhead Costs Be?

This is part of my series where I try to help anonymous strangers on Reddit (as u/AgileAtty). You can find the original post here. This is my answer to a follow-up question; the original question is in my Part 1 post.

Thank you for this wonderful reply. We are tracking these metrics on spreadsheets and need to rely on the data more seriously to make decisions. Question for you, excluding partner salaries, what do you see as a typical range of overhead costs at a firm that does $3-5m in revenue? $600K to $1m in overhead? Remainder in profit?

I'm not aware of any well-designed study that would give us the number you're looking for. I've seen lots of anecdote and one-off, but given that lawyers don't have any official financial reporting requirements I take them all with a big grain of salt.

Let me ask you this: Would knowing other firms' profitability do anything to help your firm become more profitable? Would it change your desire to understand where you currently are and improve upon that figure in a way that is realistic, achievable, and sustainable? Or would it have you chasing shadows and acting on emotion instead of logic?

This isn't law school anymore. You aren't getting graded and your rank against other lawyers or firms doesn't matter.

By the look of things, you've done an amazing job getting your firm to where it is today. It sounds like you serve an important function in your community and are able to make a nice living doing so — for yourself and your team members. Instead of chasing the #bestlife version of what other lawyers say they're making, part of growing in your business maturity is understanding that there is very little that other lawyers are doing that can have a 1:1 translation to your business.

My advice: take that emotion you're feeling around FOMO or keeping up with the Jonses and channel it into appreciating what a good practice you already have. But don't stop there: put your energy into understanding why YOU have been successful so far, not what other people say will work. Establish your baseline metrics so that you can run small, "safe to fail" experiments against them and gain actionable insight about the direction of your practice — regardless of whether your experiments yield the desired result.

That way, when you make changes to your various systems and processes, you're not doing it because "XYZ Firm did this thing and they say their revenue is bigger than mine and I want what they have." And you're not doing it because "ABC Technologies says they've invented the ultimate AI-powered breifonator for lawyers and if I don't adopt this new thing I'm going to get left behind."

Instead, you're doing it because you understand your market, your products, your clients, your team, and yourself, and you can articulate a reasonable hypothesis for why you should invest in some change to your business (including hiring another person). Once you do, you can start to run experiments for which you have reasonably high confidence that they will yield a positive result.

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