Management Tips for a Key Major Expense

After the costs of employing personnel, the next most significant expense incurred by professional firms is rent. Generally this represents somewhere between 5% and 7% of total revenue. However, this is probably one of the more difficult costs to try and manage also given often the lease period committed to by the firm. Commonly this is a set expense locked in for three or five years with similar options to follow on thereafter. Committing to a longer lease may enable you to negotiate hard on price.

That said, there are probably a couple of approaches that can be considered when endeavouring to manage or reduce this cost:

  • Trying to time the market. As with most things, rent ebbs and flows with economic cycles as well as supply and demand. Firms that are renegotiating leases in times where rents are high may be best to consider shorter term leases that will enable renegotiation when the market has cooled a little. Conversely, if favourable lease terms have been able to be negotiated, look these in for as long as possible. Often if there are new or additional tenancies about to become available, a landlord will be more willing to negotiate. Ideally firms will wish to avoid moving too often, as this is costly also, thus with some good initial research upfront it may be possible to secure good premises on an affordable basis.
  • Review the style and class of premises that your firm requires. Firms and practitioners will have varying views as the type, style, location and class of premises that their firm needs to occupy. Generally the larger firms drive their brand by being located in a better building in the CBD. However, for other firms, this may not be as important. For smaller firms, the opposite can actually transpire with clients, with them concerned about fees in light of the expensive surrounding in which they wait to see their adviser. So, if the style or type of the premises is less important to your clients, brand, image and the like, this is a good approach to reducing this expense. But, please be mindful, something that looks like a dog’s kennel, with shabby flooring, poor lighting and the rest can also turn clients away.
  • Be mindful of excess space. This is probably one of the main factors identified when we see rent as a proportion of revenue above the typical benchmarks. Firms, because they are committing to a three, five, ten year lease, often want to ensure they have room to grow. Whilst this is a great idea, it’s also imperative to be realistic about this. If your firm hasn’t grown by 20% a year for the past two, three, four years, why will it grow that much in the future? Where you do find yourself with excess capacity, perhaps consider sub-leasing part of it where possible.

These are just a couple of tips to consider when endeavouring to manage this expense. How do the remainder of your expenses compare to market? If you want to know, contact us.

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