Following this year’s Modern Law conference, George Bull of Baker Tilly commented on revelatory views expressed there, that “of the 200 or so mid tier law firms, only some 50 may survive in the short-medium term.”
While some firms have diversified their offer to take advantage of new opportunities or changed their billing model to meet clients demands, others have been slower to adapt their business in response to the changing external operating environment.
In his paper, Are you going to be one of the fifty survivors?, George examined some of the common characteristics of firms likely to fail, and highlighted some of the tactics firms could use to avoid slipping through the net. He suggested there are 19 pitfalls that law firms needed to avoid in order to be one of the fifty survivors.
Of these 19 pitfalls, a total of six (around one third) relate directly to a law firm’s ability to extract and utilise good quality management information from operational data. Many others he mentions could certainly be improved by it.
A sucessful law firm uses Management Information Systems
As the pitfalls below (as highlighted by George) show, it is essential that a law firm has a good quality management information system in place to allow practice management to make good business decisions.
(1) Allowing too much working capital lock up
Work in progress not billed and debtors not collected in a timely fashion leads to increased working capital requirements. These requirements can be significantly reduced by active invoice management and regular credit control procedures.” In my experience, firms that do this well do it by making sure fee earners are responsible for managing these, and are provided with regular timely information to help them.
(2) Ability to adapt and change cost base
If revenue continues to be under downward pressure, difficult decisions such as reducing staffing levels must be taken early. Prompt decisions help ensure that working capital is available to meet the often substantial costs of staff reduction programmes.” Again, timely information about both revenues and costs, and breakdown of both of these across different types of work, is key to making prompt decisions.
(3) Ability to adapt and change service offerings
A thorough review of the profitability and cash requirements of each service line should be undertaken. Management should understand the commercial rationale for persevering with loss making departments. This rationale should be reviewed and challenged on a regular basis.”
Profitability by service line is something we are seeing increasing interest in amongst forward thinking law firms. Interpretation of the data, particularly apportionment of costs, is something that will always be debated, but surely I is better ti have the debate than simply to ignore it as “too difficult”
(4) Lack of management information
A lack of regular, usable financial information often evidenced by inappropriate WIP and debtor provisioning, can lead to poor financial decisions being taken.” The words I would focus on here are “regular” and “usable”. The days of once-a-month paper reports to partners and heads of department are surely gone for good?
(5) Difference between profits and cash
The lack of regular, usable financial information and the consequent failure to understand and highlight the difference between profit and cash can be very dangerous. Management teams driven by profit may not acknowledge future cash requirements and so may fail through unforeseen cash needs.” To me this point emphasis the need for management reporting that covers a fully rounded set of measures, but also presents them in a way that is easily understood by non-financial managers.
(6) Weak financial management
If the chief financial officer does not have the status or presence to command respect among equity partners, their sound financial advice and planning may be ignored in favour of alternative strategies which cannot be funded.” Whilst this may be partly an issue of personality, it is also, in my view about creditability, and there is nothing that undermines a CFO’s creditability more than not being to be able to provide timely answers to questions about financial results.
In order to achieve long-term success, your practice management and information systems need to monitor and provide good quality timely information for making good decisions.
George’s article highlights the importance of investing in your management information system in order to ensure the long-term financial stability and success of your organisation.
Will your firm be one of the fifty survivors?
What do you think are the characteristics of successful law firms? Do you have any best practice case studies from your own practice that you can share?
Has your firm embraced the Infirmation-driven model that George Bull highlights, to increase efficiency in your practice? How did you manage this change internally?
Does your management information system enable you to avoid the pitfalls listed above?
You can tweet your thoughts to @KatchrData
If you’d like to discuss how your law firm could be using management information to ensure you are one of the fifty survivors, please contact us by email or call 03333 010 766
Blog post by Graham Moore, Managing Director, Katchr