Thought leader

By Michael Roch, Nick Jarrett-Kerr and Friedrich Blase of Edge International

The purpose of law-firm financial management was probably lost somewhere in the past ten years, perhaps when law firms grew phenomenally and turned into what some likened to factories. Many firms declared maximum profit-per-partner (PPP) their sole ambition and told their partners to figure out how to get there. Financial management focused on variance between budgeted and actual revenue, budgeted and actual expense, budgeted and actual profit, and getting a higher rate of billed hours collected faster. In our work, we often see a tremendous amount of management time spent on managing this month’s, this quarter’s, this year’s revenues and profits. Partners are inundated with matter reports without having any idea what the numbers they read really mean, often having received minimal training when they themselves were associates from senior partners who didn’t really understand what all of the numbers meant or how to influence those numbers.

So let us take a step back for a moment and think about the purpose of management, financial and non-financial. An organisation is like any living organism – its fundamental function is to increase its ability to survive in the future. If we are hungry, injured or in danger, our biological defence mechanism kicks in to ensure we maximise our chances of survival.

An organisation does not have such a defence mechanism; it has management. A law firm’s chances of survival in the future are entirely dependent on its ability to satisfy clients. If, one year from now, a firm is able to make more clients more satisfied, it increases its chances of survival. It is management’s sole purpose to put the firm in a position to accomplish that.

Profits alone give little indication of whether the firm’s ability to survive in the future has changed. To measure survival prospects, firms need a different set of indicators to those used in most law firms’ financial systems. They are, in descending order of importance: market position; attractiveness for professionals; level of innovation; productivity; liquidity; and, finally, current profits.

Any business, law firms included, must balance the long-term survival and success of the institution with the desire to maximise the business owners’ current net income. We find time and again that most firms do not manage for the long-term; most manage for the short-term: this year’s PPP. Sometimes, this is a successful strategy; but it is a gamble.

Extract taken from the ‘Financial Management for Law Firms’ report, written by Michael Roch, Nick-Jarrett Kerr and Friedrich Blase of Edge International, and published by Ark Group, June 2006. For more information, or to order a copy of the report, contact Adam Scrimshire at ascrimshire@ark-group.com