The legal sector is increasingly focused on financial management.
Contributing factors have included high-profile collapses such as Halliwells and Howreys, as well as ongoing failures and distressed mergers and acquisitions activity in the mid-markets.
Common reasons cited for law firm collapses include a failure to manage operating costs and debt.
In other words, it is a simple matter of some firms not paying enough attention to the key financials that underpin their survival and success.
There are other incentives to focus on financials.
The Legal Services Act has freed up the ownership of law firms.
Commercial entities entering the legal services market and seeking potential acquisitions will be looking at whether a target firm’s financials indicate that it is an attractive investment.
The emergence of alternative business structures on 6 October will also put additional pressure on law firms to deliver a high-quality service at competitive prices, as clients compare their tariffs against new commercial entrants.
The economic ‘new normal’ emerging from the downturn has made consumers of legal and other professional services more demanding and solicitous of transparency on costs.
The downturn has meant that transactional firms in particular experienced sudden and dramatic falls in revenue and profits.
They were therefore forced to take measures to cut costs, reduce staff and, in some cases, remove equity partners to manage their profits per equity partner.
Many have refocused their strategy on the practice areas that remain reasonably strong, thus assessing their business processes and systems.
Business guru Peter Drucker’s saying, ‘you can’t manage what you don’t measure’ comes to mind, particularly given reports that the management of some failed law firms was simply unaware of the impending crisis.
This is where software systems and other solutions can help.
Danny Cohen is finance director (FD) of Stephenson Harwood, a firm that has bucked the trend, reporting a 16% increase in fee income for 2010-11 in its third consecutive year of significant growth.
He emphasises that IT is absolutely core to the business, underlining the importance of gearing systems and processes towards helping fee-earners work more effectively rather than hampering them, and supporting regulatory compliance.
‘Systems have to be capable of being adapted to a firm’s particular needs and requirements and vendors need to be alive to this,’ he adds.
Stephenson Harwood has a tailored suite of financial-based IT solutions, including Elite Enterprise practice management system (PMS), DTE Axiom time recording software, e-Work for workflow processes and Copitrak for recoveries.
IT undoubtedly supports law firm management by translating financial data into valuable management information that highlights business trends and guides strategic decision-making.
However, this does not necessarily require specialist software.
Mid-market and smaller firms find that the new breed of integrated practice management systems can deliver their finance and accounting needs, and offer additional value-added synergies between different parts of the business.
One of the most valuable features of the latest integrated PMSs is real-time reporting of work in progress, which provides managers and accounting professionals with key financial indicators and trends across the business that are current rather than historical.
This enables FDs and others to forecast revenue and troubleshoot issues as they arise and to take remedial action if necessary.
Automated reporting and other functions reduce the burden on the finance function, and produce practical management information without the need to invest in third-party reporting products that involve extra expense and training.
One of the newest offerings, LawSoft, Pilgrim Systems’ integrated PMS, includes strong financial management tools that deliver key financial information to support strategic decision-making.
‘It enables firms to analyse performance data in real-time at firm, office, department, team, partner and fee-earner level with a single click of the mouse,’ says Pilgrim Systems’ chief operating officer Colin Kennedy.
‘The data can be viewed in easy-to-digest graphical format and supports the need to make quick commercial decisions about clients and cases.’
LawSoft’s matter estimating and monitoring module enables firms to plan the delivery of cases so that they achieve pre-set profit targets.
With LawSoft Office Billing, users create bills directly in Word, streamlining the entire billing process.
According to David McNamara, managing director of Solicitors Own Software (SOS), key performance indicators (KPIs), typically displayed graphically, are becoming the norm within the latest PMS systems.
These deliver highly visual, real-time financial information to individual fee-earners, department heads and management teams on key aspects such as performance against target and work in progress.
They have all but eliminated the need for monthly printed matter reports.
Rupert Hawke, finance director of Cartwright King, a specialist law firm with 100 fee-earners and six UK offices, agrees.
His financial management priorities are monitoring and managing cashflow and work in progress.
‘The key is to develop systems and processes that inform operational decision-making,’ he says.
The solution for Cartwright King is a fully integrated case management system: LAWFUSION by Select Legal, which includes time recording, billing and reporting features.
According to Hawke this enables fee-earners to control and monitor their work.
Reporting work in progress enables management to monitor and measure fee-earner performance, and forecast more accurately.
‘Integrated systems benefit the entire practice – the synergies boost efficiency and profitability,’ adds Hawke.
Banks and turnaround specialists focus first on the ‘hard core’ of debt visible in a law firm’s overdraft.
At practices of all sizes, serving all sectors, the overdraft figure will move up and down, often dramatically. But still it is this ‘hard core’ that matters.
If the ‘hard core’ – a point that the overdraft will never go below – is showing a sustained upward drift, that will ring alarm bells at the bank.
Money, they say, needs to be put in to such a business through a loan, cash or investment, because a business with significant ‘hard core’ is wasting time managing cash that should be spent on managing and growing the business.
Chris Marston, of Lloyds TSB, says his bank increased lending to law firms by 7% last year.
Certain information is more likely to unlock bank finance and address this ‘hard core’, he notes, convincing the bank that the firm is in control of its affairs.
That information also underlines what is being financed:
Work in progress;
Data on new instructions.
Time was, Marston adds, that to ask a legal practice for such information was a sign that the practice was not trusted by its bank.
But in the current environment, creating and disclosing such information is likely to lead to cheaper finance – and more of it.Streamlined workflow
The drive for efficiency has led many small and mid-sized firms to streamline their day-to-day accounting functions.
As McNamara explains, there is little point in a firm streamlining its workflow and legal process operations if this simply generates a bottleneck of processing transactions for the accounts department.
SOS offers modules such as Fully Auto Bank Rec, which can perform 70-80% of reconciliation work automatically, and BACS, CHAPS and CEPS (client electronic payments).
Modules are increasingly popular as they dramatically reduce the need for any duplication or rekeying of financial transactions.
They are, effectively, automatically linking to firms’ own bank-line systems, reducing the burden on the accounting function and removing the risks associated with re-keying data.
Mergers and downsizing have also resulted in the establishment of breakaway boutiques and sole practitioners who are benefiting from the development of cloud-based financial management systems.
SOS’s Virtual Practices division is among suppliers offering a fully-hosted financial management system, complete with outsourced legal cashiering.
This gives smaller firms and start-ups the opportunity to benefit from a powerful PMS system without high investment cost, as it is a monthly subscription model.
The combination of time recording, billing and experienced legal cashiers allows sole practitioners and others to focus on delivering legal services, without the burden of routine financial management and compliance.
Consolidation in the legal software supplier market has also had an impact on the sector.
Software suppliers need to offer continuous development to reflect changes in the business and regulatory environment, and support business agility.
Consequently, legacy financial management systems lose relevance and may not include the efficiency-boosting functionality which is particularly valuable given the increase in fixed-fee arrangements.
Integrated PMSs enable firms to keep close to their clients and address their changing needs.
Although the latest PMSs include sophisticated tools that support strategic financial management and control, the finance function of a successful law firm also needs to focus on culture and communication.
Hawke highlights the challenge of developing commerciality in fee-earners so that they think about how the way they work affects the business.
Effective financial management means communicating well with all the firm’s stakeholders to ensure that they understand and buy in to its strategy.
External communication, with banks, for example, is a critical success factor.
Alternative business structures and continuing insolvencies in the legal sector have changed the relationship between law firms and banks.
Law firms are no longer assumed to be low risk by banks, and firms seeking new or extended lending facilities are required to provide evidence of business and financial acumen, with proper responsibility, processes and control.
Addressing this challenge requires a combination of effective systems that produce clear financial information and business communication skills.
As Cohen observes: ‘Banks’ attitudes to lending to law firms have changed.
'Gone are the days of cheap and easy money, and banks may now require covenants for unsecured debts.
'It is therefore important to stay in touch with your bankers, keep them informed of how your business is performing, and your aims and goals.
'Be clear on the type of funding required and why it is needed. Be prepared to shop around.’
In terms of financial and other management, law firms need to respond to changes in the business and legal services environment.
Emerging business structures will require them to operate in a more commercial way.
Competitive profitability, sound leadership and management are essential to the success of any business model.
Such attributes require clear and efficient business processes, and sound financial management and control.
Freelance journalist Joanna Goodman is a former editor of Legal Technology Journal
- PMS: A practice management system is a ‘decision support system’ which, using a set of indicators, enables analysis of the current state of an enterprise and comparison with the strategic objectives. The system cited by Stephenson Harwood is ‘Elite Enterprise’.
- DTE Axiom: a time-recording software product.
- e-Work: a software product to manage workflow purposes.
- Copitrak: software with a range of cost recovery products, currently used by 4,000 professional firms. The data collected also provides financial data for the entire business.
- LawSoft: software from Pilgrim Systems that enables users to estimate the amount of time it will take to complete a matter, by setting it out in individual steps.
- LAWFUSION: produced by Select Legal, LAWFUSION can be used both to ‘design and deploy’ case management and practice management for a long list of practice areas, including conveyancing and employment, and crime and legal aid work.
- Fully Auto Bank Rec: a product from Solicitors Own Software, that automatically matches all cashbook entries against downloaded electronic bank statements.
- Virtual Practices: a division of Solicitors Own Software, Virtual Practices provides hosted (outsourced) legal solutions and cashiering services for smaller legal practices.