Leading the business, not just counting the beans

Law firms are facing huge pressures to overhaul their professional traditions to become modern competitive businesses. And at the heart of this change is the finance function, which is no longer limited to just counting the beans.

By David McLaughlin, Simmons & Simmons

The days of finance directors’ duties being limited to crunching the numbers, this year’s numbers, are becoming a thing of the past. In a broader context, finance needs to balance the competing roles of ‘number cruncher’, ‘corporate cop’ and ‘business partner’. Most finance functions are under pressure to concentrate on the first two but may harbour an aspiration towards the third. The general challenge for the finance director (FD) is to ensure that finance is able to provide transaction-processing services in the most cost-efficient and effective manner – ensuring compliance with statutory and other regulations – while at the same time acting as the sole provider of financial analysis and management information to the business and supporting the decision-making process.

The danger for finance is that the focus placed on cost control and the need to maintain high-levels of compliance (such as those introduced through Sarbanes Oxley), reduce its ability to deliver added value to the business. Quite often, it is the added-value work that is sacrificed to keep the processing going: paying suppliers and staff, billing and collecting from customers. A further danger for finance is that, with too much time devoted to the lower end of the scale, other departments step in to assume the advisory role that properly belongs to the (right) finance team. I have witnessed first hand in a number of organisations the frustration of finance professionals who have the knowledge and experience to deal with decision support but who are excluded from that process – often with the end result that the ‘advisor’, lacking both insight and the deep-seated knowledge of the finance professional, ends up as a politically astute messenger between the decision maker and the finance professional.

To escape this predicament, FDs in all business sectors need to focus on reducing the cost base of core processes, whether through elimination, simplification, consolidation, automation or outsourcing, and reinvesting part of the savings achieved in developing the advisory work. If this is not possible, finance will be left to count the beans while others help lead the business. However, as processing efficiencies continue to make advances, much of this work will become automated or eliminated through one route or another and the finance function could be left high and dry with no business rationale: out-manoeuvred by automation and outsourcing at the lower end and excluded from advisory services at
the higher end.

The challenges within a law firm are in essence the same, but are made harder by the nature of the partnership organisation and the relative state of development and professionalisation of back-office support. Before joining a magic-circle firm in 1997, my experience had been ten years in audit and six years with a major paper company, based primarily in the UK and France. This provided me with a broad range of experience and a solid grounding in cost-conscious environments.

Stepping into the legal environment for the first time was a real eye-opener in that none of the basic rules of finance seemed to apply. There was limited cost control, in some instances very little control altogether and a complete absence of timely, reliable and relevant management information with which to understand and develop the business. It was a backwater, and my first task was to analyse the performance of London practice groups for the year that had ended some seven months previously. This took eight weeks to complete, by which stage the current year was nearing its end and the budget for the year after that had already started. However, I believe the timing of my appointment was right and over the next five years we were able to transform the quality, relevance and timeliness of reporting, together with improvements to the processing and control environment. By the time I left, reliable and relevant global-practice-group information was available across the world within days of the month and year end.

Just over a year ago, I was appointed FD at Simmons & Simmons and this gave me the opportunity to put into practice what I had been preaching. First and foremost, the FD needs to identify who his ‘client’ is. In many law firms this is seen as the individual partners, but the focus should be higher than the individual and the FD must serve the partnership as a whole. This attitude also needs to be filtered down through the entire department – often work is prioritised by the seniority of the person requesting information, even if there are more pressing demands that would benefit the partnership as a whole.

This calls for a difficult balancing act to ensure that individual partners can be accommodated but in a manner that is consistent with the best interests of the firm as a whole.

Perceptions of how different law firms are to the corporate world have certainly impacted the role of the law firm FD. Readers will recognise the familiar comment that as partners are ‘producers, managers and owners’, the rules that apply in the corporate world have no relevance to law firms. This is simply not the case, the only difference being that until comparatively recently the finance function in a law firm would have bowed to partner pressure and complied with all requests rather than stand up for what was right.

There is also a perception that the core business processes we provide are completely specific to law firms and cannot possibly be operated in the same way as in other corporate businesses. These include billing clients, paying suppliers, paying staff and reimbursing expenses. None of which, apparently, are needed in other organisations. These myths need to be broken. So how can a finance function operate properly in a law firm and what does the FD need to focus on?

As with all finance directors in general, the FD in a law firm needs to determine whether finance focuses solely on transaction processing, leaving the advisory work to others, or whether the function should provide both services. Within Simmons & Simmons there is a clear remit for finance to provide both, working in tandem with other functions to deliver a seamless, cross-functional service to the firm. This remit, and support for the mission, is backed at the highest level through the involvement of two non-executive, independent directors who are also board members. In this respect, the firm is advanced in its governance structure and benefits enormously from the experience its non-executive pairing – one of whom is chairman of the audit committee. And their presence on the board makes my role easier as I am not the only ‘non-lawyer’ voice.

Second, it is essential that the firm has sound financial systems that operate globally. In the last year, Simmons & Simmons has implemented a global-practice-management solution, replacing a multitude of stand-alone financial-ledger systems and integrating fully with personnel and marketing systems.

This provides fee earners with immediate, global visibility of work performed in all offices. From a finance perspective, a global system removes the need for numerous manual processes and significantly reduces the overall cost of ownership as processes are harmonised, simplified and eventually centralised.

The real advantages of a global system, however, are the data warehousing and reporting capabilities. We are currently developing a solution to convert masses of data into useful management information that the partners can rely on to understand, develop and improve the business.

Third, it is necessary to have highly motivated, intelligent, commercial and innovative staff within the finance function. These are the individuals who will make the systems work, identify ways in which to improve processing and develop enhanced reporting tools. They will also provide the added-value advice that supports the business in its decisions. In a word: professionals – professionals that have in-depth knowledge of what works well and which best practices to implement. Historically, such individuals have been lacking in law firms.

Partnerships are not corporates, but there are very few real differences between the two. Law firms need to embrace the best practices that the corporate world has developed to be able to reduce the cost of finance and focus on the right activities. World-class companies have harnessed earlier than most law firms the benefits of global systems, the development of automated processing, the advances brought by the internet and web-based systems, and the move to outsourcing and off-shoring. Law firms that accept that the processes that underpin their business are in essence no different to other organisations and seize the opportunities, through innovation and the effective use of technology, will be able to apply resources to what really matters: adding value to the business.

David McLaughlin is FD at Simmons & Simmons. He can be contacted at david.mclaughlin@simmons-simmons.com.