Thought Leader

THE NEXT three years will provide a sea-change in how most law firms conduct their business, in particular their financial affairs.
The prospect of UK law firms being financed through outside equity capital is already causing some finance departments to implement structures and systems to anticipate the requirements of financial investors. Early adopters will be watched closely for the structural changes they undertake in areas such as client acceptance, matter management, billing and collections.
The reason for this is simple. Financial investors are likely to require robust management structures to be in place. Sound financial practices will no longer just be a means to maximise PEP. They will constitute non-negotiable conditions that will be monitored tightly and managed rigorously with little sympathy for individual partner idiosyncrasies.
A number of practices will also cross the Atlantic, where even leading firms, while highly profitable, are often managed on a cash basis and partners enjoy far greater independence. UK firms will use their new financial strength to intrude on the traditional territory of the US firms, while many younger CFOs will have worked in the US and the UK over the course of their careers.
A new generation of CFO will also play a more critical role. Current CFOs of many AmLaw-100/200 and UK top-100 firms are retiring members of the baby-boomer generation; most have a financial-accounting background and carry a CPA/chartered-accountant qualification. However, as the position of law firm CFO becomes a more attractive long-term career option for professionals, the next generation are rooted more in finance than accounting, likely to have a strong banking or industry background. Tomorrow’s CFOs will be more analytically minded, using systemic data to back up their business case.
Technology will be on their side too. Analytically-minded CFOs tend to be early adopters of business-intelligence systems. They will encourage investments in business resources that allow real-time profitability management. Matters can be staffed at optimum levels of leverage custom to each matter, while the leading firms have also begun to implement full-blown enterprise applications similar to those adopted by the large accounting firms a decade ago. These can integrate the management-accounting system with the professional-development and business-development side of the practice.
With firms now beginning to take the implications of outside financial investment seriously, this year has seen the start of a significant shift in terms of how they are managed?

Michael Roch is a London-based partner of Kerma Partners. He can be contacted at michael.roch@kermapartners.com

This thought leader was first published in Managing Partner (vol 10, iss 2, June 2007)