Avoiding the financial squeeze with achievable financial management best practices

With economic indicators worsening on a daily basis and government bailouts making headlines, law firms are being forced to look within and make sure their own financial houses are in order. Be it via more stringent financial controls, greater cost cutting or efficiency initiatives, firms globally are on high alert. One area that continues to provide cost cutting and efficiency opportunities is law-firm technology, in particular leveraging a firm’s practice management system to not only extract and analyse vital performance information, but also to implement best practices that utilise existing technology to improve key performance indicators, such as cash flow, and billing and collection cycles.

Intelligent financial practice management begins with the identification of key indicators that drive performance. Based on the collection of financial best practices of law firms across North America, Europe and Australasia, these key indicators often focus on time entry, billing and collections with the broader goal of improving financial performance and, as a result, client relationships.

In the case of one firm, Orrick, Herrington & Sutcliffe – an international firm with 1,000 lawyers in 18 offices in seven countries – the biggest issue focused on delinquent and untimely time entry and collection practices. A specific committee was created to focus on raising individual firm partner awareness of best time capture and billing practices. Several measures were introduced, including: incentives for meeting – and penalties for missing – time capture deadlines; limits and guidelines for lawyer write-offs; sending automated reminder statements; creating a grading system/report card; face-to-face meetings; and, partner training lunches.

Thinking outside the box

Once Orrick’s committee had identified measures assuring that the firm’s partnership would take financial management seriously and be held accountable, they took a closer look at how their existing practice management system, ADERANT Expert, could be utilised to develop and, more importantly, enforce some of these measures. Specifically, the firm took advantage of more system features and reporting capabilities to develop quarterly and annual report cards that evaluated partner performance. Orrick instituted an automatic bonus and penalty system as part of the new report cards. The committee consciously exploited the innate desire of Orrick’s partners to improve individual performance and live up to their ‘overachiever’ reputations, while producing tangible benefits for the firm as a whole.

The new system was not designed to draconically punish or over-reward partners. Penalties were set at a percentage of their average work-in-progress and accounts receivable. Bonuses were also set at moderate levels and calculated on a percentage basis of the billing partners’ annual cash collections. Grade ‘A’ bonuses had a pre-set ceiling and floor, the same applied to penalties for ‘Cs’ and ‘Ds’. Those with ‘Bs’ neither received rewards nor penalties.

Tangible benefits: firm-wide

There have been tangible benefits from Orrick’s use of partner report cards. Partners who were delinquent or inattentive to their inventory have either improved or are actively working through specific issues and exceptions. Consistent communication on metrics, variances and financial results has significantly improved partners’ understanding of the link between key financial metrics and overall firm profitability.

Another advantage is that partners can see the impact their individual performance has on the firm’s overall finances. Equally as valuable is the communication that now takes place between finance, partners, practice group leaders and the firm’s leadership team when it comes to lawyers’ financial accountability and performance.

In this example, Orrick leveraged its existing business management software, ADERANT Expert, to reduce lags in time capture and client billings, encourage faster collections and, as a result, increase cash flow and profitability. The report card system has enabled the firm to achieve measureable results, including: a 14 per cent decrease in Orrick’s average days in the cash cycle since 2004; improved cash flow from faster billings and collections; increased – and faster – partner draws; a 31.2 per cent increase in profits per equity partner, from $1.09m in 2004 to $1.43m in 2006; improved client service, time capture and access to firm data; and, the ability to recruit and train top-talent based on increased profitability and financial health.

In summary, the development and application of financial management best practices and, in the case of Orrick, creative and non-conventional thinking and execution work very well in this economically stressed time. Specifically, taking a closer look at rudimentary measures such as time entry, collections and billings, and leveraging existing technology to better manage these areas can keep your firm on the right financial path.

David Thorpe is general manager, EMEA at ADERANT and can be contacted at david.thorpe@aderant.com