Fantastic finance: Assessing law’s new love of financial management

Financial management was never a subject to excite lawyers, with the thought of budgets and figures sending many a law-firm partner running for cover. But, with consolidation and growth, things have changed, including law firms’ approach to this crucial area. Caroline Poynton talks to Kay-Uwe Bartels (Mayer, Brown, Rowe & Maw LLP), Maynard Burton (mfg solicitors), Jim Cummings (Pilgrim), David Furst (Horwath Clark Whitehill LLP), Rosemary Kind (Shoosmiths), Duncan Murray (Morton Fraser) and Patrick Synnott (Matheson Ormsby Prentice) about their views and strategies for financial-management success.

As another day drew to a close, the lawyer sat back and ruminated on his success. Since joining the mid-tier firm of Charles, Chillian & Walker, he had managed to tempt some new clients to the firm, had advised a significant property developer on a range of deals and stabilised a number of client relationships that had wavered in the wake of the retirement of the firm’s star real-estate partner. Indeed, he didn’t think it would be remiss to consider himself the essential cog in what was sure to become a booming property practice.

If only he could get the ‘figure men’ off his back, whose endless reports bore such little resemblance to the business as he understood it. He would also have to stall the HR director, who wanted him to commit to training and mentoring activities, for which he had neither the time nor, if he was honest, the inclination. Even the IT director was on his back, trying to fix training time for the new system that would ‘enable’ him to do the work he had always delegated to his secretary. At times, he wondered when deciding to become a lawyer had meant signing up to be an accountant, trainer, marketer, IT guru and even personal secretary. He was even beginning to think it might be time to move on.

In the legal profession of the 21st century, where law firms have enjoyed consolidation and growth like never before, lawyers are encouraged to think as businessmen: practising law with a commercial/client-focused mindset, seeing deals through to payment, getting involved in business development, helping juniors climb the ranks and wholeheartedly adopting the latest procedures for operational efficiency. Indeed, the inference among many firms is that those lawyers who fail to modernise their behaviour will have little or no role to play in the law firm of the future. What may be underestimated, however, is the huge cultural shift required to turn a profession into a business operation. Success will demand expert management at every level, or lawyers are likely to feel, as in the fictional example above, disenfranchised and demoralised. Good management, of course, is the remit of every law-firm department, but there is no area quite like the firm’s finances to engender either a spirited commitment to change or a deep-seated resentment to ill-considered management interference.

For a start, it is in the firm’s approach to financial management that the budgets are set, targets agreed and suitable remuneration managed. Get that wrong, and firms can wave goodbye to the dream of the lawyer who has time for internal or external business-development activity. And worse, lawyers who rightly or wrongly feel mistreated or unappreciated are likely to perform badly across the scale, damaging the firm’s efforts for profit and undermining morale. Evidence suggests that law firms have recognised the dangers and opportunities, and are now going out of their way to get their financial management right, but how they are going about that, and whether they are achieving success, are the real questions.

Most notably, law firms have seriously developed the role of the finance director. The experiences of Kay-Uwe Bartels, director of finance at Mayer, Brown, Rowe & Maw, LLP, and Patrick Synnott, finance director at Matheson Ormsby Prentice, are typical in that both developed considerable financial-management experience outside law firms: Bartels with Deutsche Bank, KPMG and Veba Telecom (now E.ON) in Germany; and Synnott at KPMG in Dublin. And now, both are targeting those experiences on strategies that are broad and fundamental to the growth and profitability of their firms. As Synnott says: “I work very closely with the management and partnership. Indeed, the finance role ends up being involved in just about everything and all parts of the firm.” Jim Cummings, chairman at law-firm solution provider Pilgrim, has seen similar developments: “Some firms have moved from the traditional model of simply having a senior cashier or practice manager towards appointing chartered accountants from other industry sectors where they bring with them new and fresh ideas on how to measure business performance at all levels of the firm. Some have even implemented structures whereby the finance director is effectively CEO, allowing partners to focus on the law while he or she focuses on managing the business.”

That finance directors are now able to take on such authority for firm-wide decision making is the result of wide-ranging changes impacting the legal profession. Recent years have seen consolidation among mid-tier firms, while larger firms have become truly global/multi-site operations. At the same time, clients expect their law firms to demonstrate an in-depth understanding of their business and deliver excellent value-for-money services (although what that actually means remains a subject of some debate). Law firms have responded with initiatives to improve knowledge management, marketing and business development, operational efficiency, and internal collaboration and team work. Most of all, firms have made the distinct move from a partnership to corporate culture. And it’s not just the largest firms that have made the transition. Maynard Burton of mfg solicitors, a UK mid-tier firm, describes the process in his firm: “I was the managing partner, but I became the chairman of the managing board because we changed the way we managed the firm in 2003, when we grafted on a corporate structure and identity.” The firm also addressed some of the traditions of the partnership: “The partners agreed to abandon certain voting rights, such as the right to veto, and adopted a majority vote and the 75-per-cent vote for special resolutions. The partners have delegated to the board the day-to-day management decisions, which has freed us up a lot.” He points out the partners can still have their say and even get rid of management, but his firm’s strategy is typical of firms trying to liberate the business to move forwards.

Such steps have enabled more powerful finance directors and managing partners to put better financial management on the centre stage. For instance, risk management was once largely overlooked or even ignored. It is now a crucial discipline that impacts everything, from day-to-day behaviour to the way the very business is structured. Duncan Murray, finance director at Morton Fraser and past president of the Law Society of Scotland, says that firms can improve credit control through better analysing the risks in taking on clients and thereby avoiding situations where the client becomes insolvent or has difficulty paying. In larger firms, such checks may revert to specific departments, but even smaller firms are establishing checking procedures, via a head of department or managing partner, if the size of the assignment is over a certain level. “I think this is good because there has been a tendency for individual partners wanting to drum up business to take on anything that comes their way, without thinking whether it is really the right thing for the firm,” says David Furst, head of accountancy firm Horwath Clark Whitehill’s professional practices group. The shift from the individual to team work and financial accountability is also neatly reinforced by the move.

On a bigger scale, facing the financial risk of growing businesses has convinced many firms to convert to limited-liability partnership to protect individual partners from the catastrophic impact of a claim. Furst thinks that law firms have been relatively slow to make the step to LLP, but a number took the plunge this financial year and in two to five years’ time, he expects most to have followed. A significant part of such conversion is the requirements for financial disclosure, which has concerned some firms. Furst, however, argues that it makes sense for firms that want to improve their financial management: “The fact that the accounts are published is going to put pressure on management to continually produce the results and that is good for the partners and the firm, as it encourages efficiency and productivity to keep costs under control.” The decision to take on the consequences of converting to LLP also underlines the now central role of financial management in the modern legal business.

Beyond risk management, firms are implementing strategies that reflect both the size of their operations and the degree of transformation that has already occurred in their businesses. For all firms, work in progress is a priority, but it appears to be particularly emphasised by mid-tier/smaller firms. “The entire billing and collection process is a big issue. Depending on the type of work, it can have quite a long tail on it, which has to be financed because you’re paying for staff and premises as you go. Consequently, that’s an area that we are always seeking to improve,” says Synnott. In this respect, Furst has particularly helped personal-injury firms, which typically struggle to manage the cash flow on a large number of relatively small assignments. “We have helped them with the financial modelling, talking to their bankers and working a way forwards to ensure they have adequate financial backing for that type of work,” says Furst. For Burton, however, the onus also lies with the lawyers. “Historically and traditionally, solicitors have been reluctant to be hard on their clients. I think that’s changing, along with the old view that solicitors can put their feet up at the end of a job and watch the money roll in.” Burton’s strategy for managing such change is education, starting with the partners. “You get the partners on side and it’s easy to filter things down to associates and assistant solicitors. We also have in-house seminars with the fee earners to teach them how to manage their accounts better,” he says. “Most of all, we encourage fee earners to see each job in business terms, which includes getting paid.” Getting fee earners involved in credit control may sound like a challenge too far, but Burton argues the case for exactly such an approach. “Sometimes clients have the greatest respect for a lawyer who follows the correct procedures for chasing payment because it shows you have business acumen on your side. If you don’t chase a bill for six months, a client may think, ‘Well if that’s the way you look after your firm, how can you be expected to look after mine?’.”

For larger firms, effective financial management seems to have become particularly broad, with firms looking to tie up the budgetary process with strategic vision. “Within Mayer, Brown, Rowe & Maw, our financial management is quite sophisticated, with a strategic and budgeting-planning process in place on a firm-wide level, as well as in each practice group,” says Bartels. For the German offices that he is responsible for – Frankfurt, Cologne and Berlin – he has implemented a budgeting process that starts with the strategic view, such as the firm’s goals for the next three to five years. “Within the month’s reporting, we look at what we have budgeted and compare it with what we planned and intended to reach within a certain time frame,” he says. Combined with a rigorous client-relationship-management strategy, which aims to identify the most profitable clients with whom partnerships can be developed, Bartels thinks his firm can both prosper and provide a quality service based on a true understanding of the client-specific business case and needs.

Whatever the emphasis between small and large firms, however, firms seem to be in complete agreement on the essential worth of technology in enabling better financial management. As Cummings says: “Clarity and transparency with the client at the outset in relation to charge rates, billing points, e-mail alerts and payment terms will allow the matter to progress without any nasty shocks along the way. And it is sophisticated client and matter-inception software that can assist the fee earners immeasurably in this sensitive area, while allowing the process to happen in as automated a way as possible.” Burton agrees, adding: “If firms don’t invest in up-to-date technology, they’re going to fall behind. After all, without the tools of the trade, how can you expect fee earners, account staff and others to run the practice efficiently? Great steps have been taken in technology – press a button and you can see exactly what the position on an account is at any time of the day. And it’s easy to monitor and chase accounts. Put simply, we’d be lost without it.”

Perhaps there is no better demonstration of the link between IT and financial management than to look at Rosemary Kind, who became IT director at Shoosmiths in 2002, only to add the finance director’s title to her credits in 2003. Combining the roles may not seem like the most obvious winning strategy, but for Kind, it has proved a happy blend. “The biggest benefit is from the IT side,” she says. “It has enabled me to spend a lot of time close to the business and has given me a better understanding of what the firm needs to meet its strategic objectives.”

In particular, Kind has used her joint expertise to implement key-performance indicators (KPIs), which measure fee-earner performance against clear targets and goals in relation to billable hours, individual work-in-progress levels and debtor days. Ensuring that the KPIs are in line with the firm’s strategic goals is far from an absolute process and, as Kind says, the indicators used cannot stand still. But with her peculiar mix of technology expertise and financial/strategic outlook, she is in a good position to get the balance right. “KPIs can be used to shape behaviour within the firm – as you achieve one area of objectives you need to maintain those behaviours while starting to shape another area,” she says. If she can get this right, KPIs may also prove the essential tool to implementing firm-wide change.

Of course, real success in performance measurement (whether individually or firm-wide) demands the best information pulled together at the right time. And for that, firms will no doubt benefit from properly integrated systems. “Designed to use a single database, a fully integrated system will allow the management reporting or business-intelligence software to pull together the data into one place, simplifying the process and reducing the risk of error,” says Cummings. It may also help alleviate that perennial problem of information overload, where lawyers feel bombarded by figures or targets, upon which they are unlikely to act. Furst agrees, adding: “A failing in some finance departments is that they don’t recognise who needs to see what information, nor do they make it punchy or pick out the bits that are really important so action can be taken upon it.” Combine effective management and technology, however, and finance departments could achieve more in this key area.

There are still areas in financial management where work needs to be done. For instance, the innumerable problems with staff remuneration demands several dedicated articles to the cause. Suffice it to say, Burton sums up the chief problems, particularly with partners: “If you can measure a partner’s performance, then you can reward it accordingly, but partners do different jobs – some grind away at the fees like a hamster in a wheel, but they don’t bring in much new work. Other partners are expert at bringing in new work, but their fees are usually much lower by consequence. You are treading on dangerous ground by putting down a formula for this broad remit because some partners are likely to think it unfair.” Debate will also continue on lockstep versus merit-based remuneration, with many firms opting for a mix of the two. But for many firms, this tricky area is still one for exploration. “What we all want to achieve is fairness in our remuneration model,” says Murray. As a speaker at the forthcoming Ark Group conference on financial management in the legal profession (27-29 June), he is looking forward to exchanging ideas on what firms are doing in this respect. “It’ll be interesting to explore benchmarks – lockstep arrangements and how you build in merit payments beyond that. It will also be good to discuss the extent to which firms are prepared to have differentiation between what the lowest and highest equity partner earns.” Clearly, there is still much to watch in this sensitive area, with firms likely to adopt new/adapted strategies in coming months/years.