A collaborative approach to financial measurement

Measuring profit in a legal environment is highly challenging due to the nature of differing and complex transactions, involving costs that can be difficult to quantify. Teamwork, however, particularly where technology and accounting teams work together, can produce real results.

BY JANET DAY

Law firms are no different from any other business. At a simple level you have a series of costs – people, space, training, infrastructure, and so on – effectively your cost of sales, and on the right hand of that equation you have fees coming in – revenue from sales. So, at the most fundamental level, measuring profit is simply looking at the balancing sum, which comes from deducting the cost of sales from the revenue derived from sale, and then producing a percentage – and sharing out that profit.
Sad to say, though, it really is not that simple. Even the widget manufacturer will divide the costs for each type of widget and the revenue derived from the sale of that model. Slicing and dicing the information at that level provides exactly what is required for the widget maker – an idea of which widget is the most profitable.
So, why is it not quite that simple for law firms?
The practice of giving legal advice to clients is a more complex animal than straightforward manufacture.
First, in a long-term relationship with a key client, certain types of work and certain activities may well be done ‘for the greater good’ rather than directly for profit. For instance, with key clients you want to develop a total relationship – so that the client feels their legal advisor is such an integral part of the business team that it would be impossible to imagine embarking on a transaction that requires legal input without that team member. To achieve this type of relationship some work may be undertaken at less than profitable rates in order to generate the overall relationship.
Many transactions also involve less easy-to-quantify costs – a complex transaction that consumes endless hours of meeting-room time and all the associated ancillary staff may well, in real terms, be less profitable than a transaction where, although the lawyer time is just as great, the support time is minimal. Such data is not always directly trapped – and may never be analysed, often being regarded as just a fixed cost of doing business. However, trapping these costs for internal analysis may well show a different level of profitability than that originally anticipated.
In an increasingly competitive market, understanding the value of the work as well as the quantum by volume becomes an imperative for a successful legal practice.

How to measure: A technology/accounting team effort
In measuring financial performance and analysing the results it is sometimes not the raw data that is hard to identify and access – but the mechanism for presentation that requires much more effort than might seem to be the case at first glance.
This is where the technology team and accounting team need to work alongside the business units – not just identifying what information is required but very importantly also identifying where the resulting information may be applied. Different outputs lend themselves more readily to different styles of presentation.

The technical challenges
Technology produces a plethora of potential solutions – for instance, there are any number of business-intelligence tools on the market. They are relatively easy to sell – because they appear to produce at the flick of a switch or two exactly the information that may be needed. The sales ‘smoke’ behind these products suggests that no technical skills are required to re-slice and dice the raw data to produce the information streams the business needs at any snapshot in time. In part this is true – although most users of business-intelligence tools will probably admit that there is a reasonable degree of skill required to manipulate these products and produce these one-off reports required.
Accounting and marketing teams worry when they ask for one-off bespoke reports: there is delay in getting the answer; the request might have been misinterpreted by the report writer; and when the report does arrive it really does not answer the questions raised – although it may well be exactly the report that was requested.

Possible solutions
So what is the solution to this dilemma? Do firms need more expensive reporting tools and highly paid report writers, or should they accept that they can never quite get the information they need? Maybe there is somewhere in between these two extreme positions where both sides can be relatively happy, and the results deliver real business benefit.
This is where the working-together piece comes into the frame. In the second part of this article, I will look at the teams involved and the work that went on in our firm in measuring referral tracking.

Referral tracking at BLP
It is a sort of Holy Grail for any business to identify its sources of business and the internal rainmakers. Much allegorical information will exist in any firm about who refers what sort of work and to whom. We decided to track referrals under three categories:

Internal referrals – between practice groups;
Inward referrals – where a third party refers work to the firm;
External referrals – where the firm refers work on to a third party.

Behind those three primary categories there were further refinements of information: for instance, with internal referrals was the referrer a partner, lawyer, etc.? Was the work referred to a practice group who had previously acted for the client, or was it the first time that client had used that group? Was the work referred by a practice group who had fostered the client relationship but not as yet worked for the client? Was the work as a result of a specific pitch or tender? Behind that detail were a series of financial parameters – rates, billing regimes, team composition, and so on.
Much of this information was already being captured during the client or matter-inception process. Categorising the information was, however, essential – and it had to be categorised in a manner that the consumer – the matter or client-originating partner and their secretary – could readily understand and use.

How the teams worked together
Here, the international team, the marketing team and the accounts department worked closely together – always with a member of the technical team available. Defining the categories and agreeing the information flow out to the users of these services. Behind the scenes, IT checked the mapping of these categories against existing categories to avoid unnecessary duplication of information and also to ensure that key categories had unique identification.
Adding these fields to the client and matter-inception process required close co-ordination between the client-compliance team and the technical team – while still keeping in mind the requirements of the marketing and business-development teams.
Of course, the technology team have to do quite a lot of work behind the scenes, looking at validation criteria, ensuring that the data maps to the correct fields and, of course, ensuring that the resulting output format matches the specifications of the receiving teams.
We formally monitored the initial results and made quite a few system changes. This was mainly because as you see resulting data from a new system you start to realise the requirements that had been omitted from the original specification. This process has to managed and monitored, otherwise you end with feature creep – and the resulting system may meet the operating team’s needs, but will fail to meet the initial financial reporting and management requirements.
Eventually we field tested the resulting data flow by presenting to the board both the information being captured and the measurement tools that had been added.

Beyond raw data
Measurement was a really interesting feature. This was not just about capturing raw data – how many matters and of what business types – but much more about measuring both the profitability of those matters and also measuring the real value of the flow.
That close collaboration between groups is not always easy to achieve. At BLP we are lucky, the business-service teams are used to working together and will spend time ensuring that each member of the project team understands what they have to do, and most particularly why it has to be done in the specified format.
As with all projects, we started this referral tracking with a project-initiation document – not a real technical specification, but an operational outline of what is needed, the business drivers behind it and the hoped-for benefits. This project was sponsored by the international team, but the interested parties including marketing and business development. Of course the finance team were also involved seeking to measure and manage the value of referrals into the business – and also to understand referrals out from the business and the drivers behind those referrals.

Project monitoring
We measured and monitored the project against both the initiation document and also the anticipated benefits section. Formal reporting and monitoring back to the project team against these criteria helped everyone understand where we were during the development phase and what we had achieved when we got to the first milestone in the enterprise wide roll-out. While such internal measuring is nowhere near as robust as the measurement normally associated with proper financial management, it is a good way of identifying whether projects achieve their desired results. A side-line benefit for the technology team is that we get to understand what the business is actually getting from the work which is being done.

The role of technology
Often technology is just the facilitator and delivery mechanism. Sometimes, however, new developments in technology help in the recognition of unforeseen benefits.
Using web-based technology allowed the technical team to develop input forms, which required the absolute minimum of training. That is essential if a new system is to get early and successful adoption from the users. Leveraging off web-service delivered data, the amount of input by the user of the system was limited to validation of selected characters rather than complex streams of input. Here you gain a double advantage – both accuracy of information and also a more happy user audience – where the requirements placed on them are kept to a minimum.
The resulting system allows the matter inceptor by a few additional keystrokes to provide marketing, business development and the international teams with a wealth of data. Further it provides the management team with good quantitative as well as qualitative data flows on work sources.

The importance of presentation
Getting the users to input the necessary information had been perceived as one of the key potential obstacles to the success of this project. However, by making the data capture as straightforward as possible, and by closely integrating it with already existing information streams – this obstacle was diminished to an acceptable level for the user group.
For ease of consumption much of the resulting report information is presented initially in graphical form – so that a user can at a glance see the types of work referred from different sources. Drilling into this information will provide the necessary detail if needed, but quite often the pictorial snapshot gives everything that is required by the lawyer consuming the information.
The result of this is that we are now reviewing many of the reports that are currently produced in numeric format to see if the different presentation forms allow the user to make better and quicker use of the data.

Only the start...
The referral tracking project has been an unquestionable success in that it provides data that had previously been almost impossible to really quantify. It also supplies a number of teams with information about sources of highly profitable work as well as just deal flow. Like all systems, it continues to evolve, but it is now an accepted part of the firm’s culture.

Janet Day is IT director at Berwin Leighton Paisner. She can be contacted at janet.day@blplaw.com