Spectrum of sophistication

All law firms have different needs depending on their size and culture. Financial analysts can therefore be classified according to the precise part they play in the organisation. At Dorsey & Whitney LLP, a sophisticated financial-analysis function has even been a tool to spearhead cross-functional efforts and bridge some law-firm departmental barriers.

By Steven Petrie, manager of strategic operations and financial analysis, Dorsey & Whitney LLP

Many law firms of every shape and size today employ non-lawyer professionals under the title of ‘Financial Analyst’. However, while this practice has become commonplace, the description and application of the roles remains diverse. The analyst team in the modern law firm can assume one of many identities. Each represents a unique level of development on a vast spectrum of sophistication. Nonetheless, it is reasonable to partition this spectrum into three primary stages based on the primary functions and capabilities of the department in question. They can be characterised using three terms: Reporting, Analysis, and Synthesis.

The evolution of the analyst function is simply a reflection of the growing need to apply fundamental business principles to legal management. In recent years there has been considerable merger activity in the legal industry, creating massive entities with diverse service offerings and extensive geographic reach. These firms employ thousands of lawyers and nearly as many support staff. As a result, they are outgrowing the traditional partnership model of firm management. More than ever they are assuming characteristics similar to major corporations and are demanding professional, streamlined management. Consolidation has also translated into increased competition. In a legal landscape that lacks differentiation large firms must now project a unique value proposition in order to maintain historic revenue streams from institutional clients. Concurrently, these same clients are becoming far more sophisticated and price sensitive. Increased competition and emerging rate pressure has altered the playing field, and the impressive margin growth enjoyed by the industry in years past may be more difficult to attain in the years to come. Likewise, firms have turned their attention to financial levers, such as reducing costs, focusing investments, and maximising core performance metrics. A skilled financial analyst can act as an effective change agent; refining management’s understanding of critical issues and maintaining its focus on key metrics.

It is imperative, however, that firms first understand where the finance organisation currently resides on the spectrum. Only then will it be possible to map out a course for growth and development. Highly functioning finance departments are agents of synthesis within their respective firms. It is their job to retrieve, analyse, and apply quantitative and qualitative data to the diverse aspects of legal business. Furthermore, they are fully integrated entities that streamline their efforts with other administrative departments in the firm. A strategic-minded finance organisation may be capable of increasing profitability through revenue enhancement, business development, client retention and cost reduction.

Reporting

Our exploration begins at the most fundamental, and arguably the most frequent, manifestation of analyst capability and sophistication. Through conversations with a number of chief operating officers, chief financial officers and executive directors, I have found the majority of firms remain at this embryonic level of organisational evolution. Some are entirely happy with this deployment of resources, seeing it as adequate for their unique business requirements. Others, however, express a sincere desire to establish a true strategic-finance competency and extract greater value from their analytical resources.

At the most basic level of the spectrum, staff members are truly report writers in the guise of financial analysts. The academic background and work history of such employees is often rooted in computer science, SQL programming and database administration. While these skills are highly valuable in any analytical context, the reporting model emphasises them above all other attributes, including communication skills and project-management experience. Analysts under this framework are often responsible for report construction and dissemination, but they are rarely asked to derive cogent observations from the output. Instead, they are tasked with mastering internal-reporting systems and maintaining the underlying data infrastructure. While this ownership of firm-wide data can provide a source of professional empowerment and internal value, these analysts possess a limited ability to drive change or enhance business performance.

The reporting model is perfectly appropriate for smaller firms that aren’t subject to the analytical rigors of managing numerous offices and practices. It is also a viable solution in firms made up of managing partners and senior administrators who are willing to embrace technology and who are inclined to conduct independent financial analyses. The reporting stage is characterised by the deployment of technically-oriented analysts who are asked to construct basic reports and manage data.

Analysis

Analysis represents the level of evolution beyond the most basic reporting stage. Within this framework, analysts are selected based on far more than their technical acumen. In addition to a fundamental understanding of relational databases and reporting software, the ideal candidate must exhibit a penchant for problem solving, analytical prowess, and advanced communication skills. In the analysis model, the strategic finance team is allowed greater freedom to dictate report content and design. In many cases, the analyst is empowered to determine which data elements are most meaningful and is expected to tailor reports accordingly. Following report construction, the analyst is also asked to review report results in an effort to identify trends and outliers. Often such observations may be summarised in an official memorandum or executive summary. In this advanced setting, analysts may also be asked to conduct formal reviews of offices or business units. Such exercises can be invaluable tools for effective firm management, as they are capable of providing much needed focus for managing partners and chief administrators. Well-crafted business reviews seek to emulate positive performance for firm-wide imitation and highlight potential risks for immediate resolution.

In the analysis stage of development, financial analysts are often assigned specific offices or practice groups. This translates into a coherent matrix of core responsibilities and provides lawyers and administrators with a single point of contact for analytical support. Analysts often assume responsibility for ad hoc projects related to their individual offices and practice groups. Such endeavours may range from a cursory review of local marketing expenditures to lateral-candidate due diligence and complex profitability modelling. Interpersonal skills become pivotal in this context, as analysts are required to develop solid working relationships with office managers, partners-in-charge, and practice group leaders throughout the firm.

While the analysis model can represent the final destination for some firms, it is most often a transitional stage visited temporarily in pursuit of true departmental sophistication. The major shift between the stages of reporting and analysis is the adjustment of the candidate profile. With a well-rounded analyst already in place, taking the leap from analysis to synthesis no longer entails a cumbersome personnel move. Instead, it is about altering internal boundaries and expectations; empowering and engaging the talented analytical resources in your finance organisation.

Synthesis

The pinnacle of sophistication for strategic finance in the law firm setting can be characterised by the word synthesis. Under this advanced scenario, financial analysts are asked to do far more than simply highlight key trends and aberrations. They are expected to apply quantitative and qualitative analysis directly to the critical business decisions of the firm. Such exercises include pre-merger due diligence, office expansion/contraction modelling, outsourcing feasibility assessments, and several other advanced functions. Effective execution at this level requires regular interaction with senior management. In fact, it is highly likely each member of the management team will be assigned a designated analyst to assist in monitoring his or her area of responsibility. At the very least, the strategic-finance department will regularly report to the managing partner or chief administrator of the firm. The analyst will have to hone his or her presentation skills and project-management abilities.

Within the synthesis model, financial analysts are also liberated to redefine the analytical framework and its relative metrics. One of the primary reasons legal finance remains such an intriguing field for inquisitive, non-lawyer professionals is the lack of overarching norms and textbook principles. In advanced firms, analysts are encouraged to constantly question the status quo and rethink the core metrics. At Dorsey & Whitney, we have long sought to overcome the cumbersome redundancy of overlapping work-credit designations within our core performance metrics (i.e. billing vs supervising). This is by no means a dilemma unique to our firm. However, in recent years, we have devoted analytical resources to rethinking and deconstructing our approach to these issues to establish new and innovative means of capturing contribution and value. These endeavours are at the core of the strategic-finance mission; not only to report and distill the data, but to constantly rethink the manner in which it is articulated.

Another critical attribute of the effective strategic-finance function is its orientation in relation to other administrative departments. Highly-functioning analyst teams streamline their efforts with all administrative disciplines – including marketing, IS and human resources – in an effort to drive positive, cross-functional change. This can be particularly challenging given the structural holes that often exist within large firms; the organisational divides that serve to isolate knowledge, innovation, and best practices. Cross-functional efforts can also be stalled by the unproductive presence of functional ethnocentrism – the belief that your own department is somehow superior to others within the organisation. In an academic text titled Making the Team: A Guide for Managers, Leigh Thompson argues that these internal obstacles can be overcome through the empowerment of boundary spanners. She elaborates: “Boundary spanners bridge the functional gaps…that exist in organisations. A person who bridges or spans a structural hole fills a unique spot in the organisational network: bringing together people, knowledge and information.”¹ Financial analysts are ideal candidates to assume this challenging role. When the right personality is coupled with the necessary access and tools, a successful analyst can work effectively across the dynamic strata of the firm, bridging previous gaps and fostering new ties. At Dorsey & Whitney analysts have managed numerous cross-functional teams for a vast array of internal projects, ranging from driving complex strategic sourcing endeavours to overhauling marketing expense-allocation methodology.

Selecting and pursuing the ideal model

While a highly-functioning strategic-finance group can provide significant value to your firm, it is by no means a ‘one size fits all’ methodology. It is quite possible that the functional demands placed on the finance department only call for effective execution within the ‘reporting’ realm of analyst sophistication. Likewise, it is critical to detach our relative assessment of the three stages from any positive or negative connotations. The application that is most valuable to your firm may constitute a poor allocation of resources to the firm next door. The ideal analytical manifestation in any firm is ultimately a function of several internal and external variables, such as lawyer headcount; practice breadth; geographic scope; firm culture; and market dynamics. Each of these elements has the capacity to change over time. Likewise, it is critical to maintain a fluid and flexible perspective in relation to your firm’s analytical capabilities, allowing them to morph as you see fit.

To a large degree, the internal dynamics listed above speak for themselves; numerous lawyers, diverse practices, and sprawling offices require greater analytical attention and management oversight. In these dynamic cases, a reasonable argument can be made for the necessity of an advanced strategic-finance function. However, it is also important to consider external elements, such as market dynamics. How many rivals do you face in your primary markets? How intense is the ensuing competition for legal work? Cost-reduction initiatives, creative pricing models, and focused business reviews are only a few of the tools sophisticated analysts can utilise in pursuit of a competitive advantage. Conversely, a mature market with limited rivals; high barriers to entry; minimal price pressure; and steady profits might warrant far less analytical rigour.

If you have performed a thorough assessment – and determined your current strategic-finance capabilities are inadequate given your firm’s internal dynamics and external environment – you may be wondering where to go from here. Hopefully, these insights have already provided some clarity over the path from reporting to synthesis. In order to facilitate the successful evolution of your strategic-finance function, however, you must adhere to the 3 Es, namely:

Elevate;
Empower;
Engage.

If you find yourself stuck at the initial reporting stage, first reconsider your candidate-selection criteria and, ultimately, elevate your standards. Unfortunately, this may force some difficult decisions in relation to your existing staff; current analysts may need to be transitioned to more appropriate reporting roles or potentially dismissed. However, in
order to progress through the analysis stage and onto the synthesis model, it is critical you have well-rounded analysts in place, capable of shining under increased expectations, intense scrutiny, and high levels of exposure. As you assemble this revamped team, think about instilling an element of functional diversity. The more styles, skill sets, and academic backgrounds you can acquire, the quicker your team will evolve. This has definitely proved effective at Dorsey, where the current strategic-finance team consists of the following academic melting pot: two finance majors, an accountant, an industrial engineer and a student of political philosophy. With your ideal analyst team now in place, you have officially arrived at the analysis stage of finance sophistication. However, your remaining development within this context and subsequent evolution to the synthesis model will be dependent on your ability to both empower and engage the newly-acquired analytical resources. Your analysts should be empowered through the assignment of office and practice-group responsibilities. They should be granted the independent authority to identify projects, cross internal boundaries, build teams and resolve issues. In all efforts, it is critical that either the managing partner or chief administrator engages the analyst team in the active management of the firm. This regular interaction facilitates the extraction of maximum value for your investment and constitutes the ultimate attainment of finance sophistication.

References

Thompson, Leigh, L., Making the Team: A Guide for Managers, 219, Upper Saddle River, NJ, Pearson Education, 2004.

Steven Petrie is manager of strategic operations and financial analysis at Dorsey & Whitney LLP. He can be contacted at petrie.steve@dorsey.com