Thought leader

The legal profession has become extremely competitive and is set to become even more so. Both commercial and public-sector clients are far more sophisticated in their approach to commissioning legal work. Many employ in-house teams recruited from practice and procurement managers from industry, and they use beauty parades and tenders. As a consequence, lawyers find themselves squeezed on price but expected to provide high-quality work that add values to the client. This, in turn, has lead to increasing pressure on profits exacerbated by a shortage of talent and rocketing fee-earner salaries.
Despite these market pressures, law firms have been slow to develop the tools needed to understand how their profits or losses are generated, and to measure and report on financial performance, and develop internal and external benchmarks. This is compounded by the lack of financial awareness of fee earners including many partners. Many have no idea how to manipulate the key performance indicators (KPIs) to make their work more profitable.
FD legal has chosen this strategic issue as the theme for this month’s thought leader following on from Managing Partner magazine’s 2007 conference, ‘Financial Management and Measurement in the Legal Profession’. Contributions by a host of leading firms at the conference used case studies to explore how to align measurement with strategy, evaluate and motivate fee earners through such measurement, and create internal benchmarks and communicate external ones effectively. They explained how they manipulated this wealth of information to develop the commercial understanding and abilities of the fee earners.
There is no doubt that this is one of the key challenges facing the finance director and managing partner today. The theory behind law-firm profitability was developed in the US during the late 1980s and 1990s by David Maister, among others. It is only in the past few years, however, that we have seen the development of the business-intelligence IT tools capable of producing user-friendly information to apply these theories and techniques quickly and cost effectively to law firms. We are at last moving away from producing reams of paper-based reports each month that take ages to design and yet are not flexible enough to drill down to the heart of a problem and explore solutions in ways a fee earner will understand. Scorecards, traffic lights delivered via the web, backed by training, allow fee earners to see their performance and that of their clients quickly, at their desk and at their convenience.
This evolution in technology is beginning to allow finance directors, business managers and analysts to spend more time with partners and fee earners, helping them to interpret financial information and advise them on how to improve performance rather than just producing historic information through monthly reports and management accounts.
Financial measurement and reporting is a big investment for any firm. It is only worthwhile if it is relevant and easily understood by the users and leads to changes in their behaviour and practice. If used well, it will make a significant contribution to maximising the financial performance and profitability of law firms.

Rod Meade is director of finance at Bircham Dyson Bell LLP. He can be contacted at rodmeade@bdb-law.co.uk