The poor state of most lawyers' understanding and experience in finance and financial management became apparent to me when I left practice to manage a technology start-up for an international Internet Service Provider. As strategic business manager, I was accountable for the revenue flow, profitability, growth, and analysis of past performance. Prior to this and while practicing as an attorney, the closest I came to finances and financial management was a fee target prescribed to me by the senior partner every new financial year of the practice. Little has changed since my return to practice and judging by the e-mails I have received from readers of these articles, a number of colleagues have asked for articles on financial management and on finance matters that can improve their own skills base as well help improve their practice.
This article takes into account the current lack of financial education or exposure to practice financial management and looks at the value of introducing a more collaborative strategic process in the management of a law firm. It turns on its head the "old ways" where the captaincy of the firm was the sole responsibility of the senior partners and proposes that by creating a learning culture and an obligation of accountability, the firm as a whole will unlock a more productive and efficient workforce as well as acquire valuable information to help in the strategic planning of the firm.
Accountability is the start
The days of simply prescribing fee targets to young professionals or departments without input from those concerned and without explanation as to the reasons why such targets have been determined, or what the consequences to the firm are if such targets are not reached must come to an end. Management (i.e. the partners of the firm) must learn to adopt a bottom-up approach to the running of the practice. This implies a more collaborative management of the firm where all key role players (i.e. partners, professionals, clerks and staff) have an input into the business strategy and where all are held accountable for achieving the result.
As fee earners, the department head or individual lawyer must have some meaningful input concerning determining his/her fee target every year. This in turn implies accountability by the fee earner in managing his/her practice and achieving the agreed targets. Accountability, however, presupposes that the fee earner has the skills and resources to do his/her job. Resources aside, the skill and experience in having some meaningful input regarding ones fee target must be premised on the following:
1. The fee earner has an understanding of the overall budget (master budget) of the firm for the next financial year and also understands the impact of his/her fee contribution.
2. The fee earner has the skill to realistically forecast his/her fee income over the next 12 months, having regard to competition, macro and micro economics, historical patterns of practice activity over the past few months and years, and suchlike.
3. The fee earner understands and is equipped with the skills to manage the fee target during the 12 month period, with the opportunity to argue for an adjustment to the initial targets if such targets are at variance with the actual revenues being received.
4. Training and skills transfer in financial management and education. Young practitioners should be mentored by senior members of staff in the development of financial practice management.
Fee earners must be able to read and interpret budgets, P & L statements and cash flow statements. In particular, monthly budget reports must be given to practitioners to evaluate and, where there is a huge variance between the forecasted figures and actuals, remedial steps must be implemented. This process will assist the firm to better manage its revenue and, inadvertently, ensure improved performances from fee earners. Accountability will result in a form of reward for successful management and where targets are not met, the fee earner must be required to explain the poor performance.
To be held accountable is only possible if there is a plan in which the fee earner can be held to book. This means that, as a first step, a financial plan must be agreed to, according to which the practice maps out its strategy over the next financial year. The strategy must result in a quantitative strategy that is reduced into a master budget. The master budget must then be analyzed into its constituent parts to see whether it is a realizable goal. It is imperative that the fee earner and his staff are involved at this point. The fee earner must be given a forecast fee target and instructed to critically review and test whether it is realizable. This is done by an analysis of the following:
1. A review of the previous 12 months' fee target and the success or failure in achieving the target. If the previous year's target was not achieved and the forecasted target is higher, then it spells disaster for the credibility of the budget. Either the fee target must be revised or a plan must be put in place to meet the challenge suggested.
2. A general overview of the market must be assessed. If success in liquidations ensured a good fee income in the previous year, will such success continue in the next year? What is happening in the economy that is resulting in companies folding? Is the market improving? What are the trends in liquidations over the past few months?
3. Writing of fees must be compared against the collection of fees. What is the collection period? Are our clients bad payers? What is the status of my debit aged analysis?
4. What other areas of practice show positive opportunities to attack? What areas of practice are loss leaders and how can resources be transferred to more profitable areas?
The above analysis will help test the forecasted fee target and can be varied where necessary. It also gives senior management a better idea of, and better information to more accurately plan, the future of the firm. It also creates the mechanism to hold the fee earner accountable as he/she has effectively signed off on his/her fee target as reasonable. The fee earner, at the same time, is better equipped to understand his/her value and contribution to the firm and the consequences of not achieving the agreed target. During this process, the fee earner is also acquiring an understanding of practice management and an education in practical financial management.
Successful financial management will not be complete without a critical review of the financial strategy employed. Notwithstanding the obvious reasons and benefits of financial review, such analysis will also result in the unearthing of information critical to the future growth of the firm. Information that is revealed to the fee earner and the firm during a financial analysis is what I like to term "strategic hidden treasure". Analysis of one's performance does not require of the fee earner to be a qualified accountant or have the daily experience and skills of the firm's bookkeeper. Financial education and regular interaction with finance will equip the fee earner to identify, through the numbers, information such as existing or future opportunities as well as to highlight problems or threats to the practice.
A review of the past financial year and in particular the fee target is linked to accountability and also links to a tacit performance review of the fee earner. This, in its own right, is a strategic hidden treasure for the practice as it ensures the productivity of the fee earner. Furthermore, the analysis will assist the firm in:
1. Identifying areas of opportunities to pursue in the future. If the analysis shows that the fee earner, while classed as a litigation lawyer, generated more revenue through divorces, it may be an opportunity to focus resources into establishing a family law department. If the analysis shows that litigation fees are linked to an increase in defended MVA matters, perhaps there is an opportunity to create a turn key solution and establish an MVA practice.
2. Identifying threats and weaknesses. Fee targets not reached could be the result of poor or inefficient performances by the fee earner and his/her staff. This may be a time to re-allocate resources to other departments or conduct performance reviews through the Human Resources department. It may be the result of a lack of resources to do the job. The analysis may show a visible threat in the form of clients leaving the firm for the services of another firm. This, in turn, could highlight deficiencies in your service that need to be revised.
3. Planning the next year's master budget by taking into account existing and future variables that can impact on growth, productivity and profitability.
4. Alerting the firm to environmental and competitive changes. It acts as a key indicator to adjust ones strategy to capitalize on new opportunities and meet threats head on.
It is an accepted business mantra that revenue is the lifeblood of a business and that without careful management, the writing will be on the wall for the future success or existence of that business. Management of revenue therefore implies a form of accountability that needs to be directed not only at senior management but across the whole practice. Every member of staff must understand his/her contribution to the overall strategy and be held responsible for his/her delivery. Appropriately implemented, financial management by all members of staff will add value to the practice by providing invaluable information upon which future strategies can be planned, while at the same time ensuring optimum performance of staff.
Today's clients gravitate towards those service providers that are more efficient, more productive and whose reputations are built on strong brands known for service delivery. To achieve this and to be the law firm of choice means that a more collaborative strategy is required where staff are integral in not only providing the service but accountable for the business management of the firm.
Sean Bosse is an attorney at Guthrie & Rushton (Cape Town) with a strong passion for what he calls "The Business of Law". Sean completed an MBA in strategic management and marketing and wrote a thesis on brand development by law firms. Before joining Guthrie & Rushton, Sean worked as a strategic business management consultant for an international internet service provider. Please feel free to contact him at: email@example.com