The role of the law firm finance function

Recent times have brought the role of the law firm FD and their team under close scrutiny, and no one would deny that this issue is only going to become more important over the next couple of years. The impact of the recession and the predicted consequences of the Legal Services Act 2007 are highlighting the crucial role of the finance function in law firm management.

At the same time, it is clear to the external observer that the quality of financial management in law firms is often still a long way behind the standards expected of public companies. The trend is towards more commerciality in approach; but this trend must actively be continued and accelerated by those in the driving seats of law firm finance departments if they are to meet the challenges facing the profession.

Historically, it would be fair to say that law firms have got the value they deserved out of their finance function. Those firms that have recognised the importance of proactive, forward-looking financial management, and given their FD the authority and stature commensurate with that importance, have reaped the benefits. In the vast majority of firms, and particularly those below the top-100, the converse has been true. Without doubt, a more commercial approach is vital for future prosperity.

The FD’s background

The typical law firm FD has been in position for around nine years. This is in comparison with just two years in the plc environment.1 On one level, this may be down to the nature of the business – the plc is in business to create shareholder value, a necessarily short-term metric, whereas law firms are essentially there to create sustainable incomes for the partners. It may also suggest the relative dearth of quality FDs applying to law firms – and the attraction of holding on to one when they are found.

An interesting trend is the increasing number of FDs coming to law firms from non-law backgrounds. This is something that has accelerated particularly in the past two years, and FDs in top-100 law firms coming from non-law backgrounds now outnumber their counterparts with a legal background.2 This is only to be commended, as finance staff with a corporate or plc background can bring a valuable perspective on the role of the finance function in business management, particularly when it comes to working capital and the importance of cash.

When you look below the top-100, however, you often find finance staff with a career only in law firms. The issue of roles and authority will be considered later, but it is often the case that the incentive to work in law firm finance, as compared with businesses of a similar size in other sectors, is simply non-existent.

The role of finance in law firms

The finance function in law firms is not usually seen as being involved in the strategic and visionary aspects of business management. Unsurprisingly, FDs spend significantly more of their time (26 per cent) reporting than on any other activity. They also spend a considerable chunk of their time (18 per cent) managing their team, but only 15 per cent of time is spent advising the CEO (or equivalent).3

With this being so in the larger firms, it is surely even more the case at the smaller end of the scale. Finance staff seem to spend a significant proportion of their time ‘fire fighting’, dealing with day-to-day cashflows rather than looking to the future to predict and manage the firm’s finances. This is indicative of an outdated mindset, very often being translated across from the partners to finance.

The authority issue

This all leads us to the question of authority. If the FD and finance department have a mandate to only measure current performance and, very often, to simply ensure compliance with the SAR, it is hardly surprising that a more forward-looking mindset is not more prevalent. Moreover, if finance staff are not recognised for the value they add to the business, then motivation and buy-in to initiatives become optional extras.

In the plc world, the FD is invariably number three in the management hierarchy (behind chairman and chief executive). There is no doubt that, in other sectors, the FD is seen as absolutely central to business strategy. After all, how can management set its vision and roadmap for the future without a good idea of its likely financial situation and funding options? In law firms, on the other hand, the FD is often not even on the board (if the firm actually has a board). More than 40 per cent of partners see the FD as a subordinate, rather than as a peer.4 Thus, the crucial decisions about the firm’s future are taken by the partners and then communicated to the finance department.

This goes a long way to explaining the historical lack of quality financial management across much of the legal industry. The attractions of a career as a subordinate to the partnership, where the opportunity to be involved in decision-making and strategy is severely limited, do not compare well with a career in the corporate or plc sectors. Often, when a firm does recruit a strong-minded FD, it is not long before they fall out with a partner – and their tenure is necessarily short-lived.

The communication factor

In this context, it is all the more important that communication between finance and the rest of the firm’s management is clear and regular. If financial management is to become the priority it needs to be in the 2010 economy and beyond, communication will be at the heart of the new relationship. It is therefore enlightening that 50 per cent of managing partners view their FD’s communication skills as ‘neutral’ or ‘weak’.

Leaving aside the necessary condition of financial ability, the most important skill for finance staff in law firms is an understanding of the ‘lawyer mindset’, and an ability to speak ‘lawyer language’. Accountants deal primarily in numbers, whereas the lawyer’s stock-in-trade is words – and this represents a fundamental gap that needs to be bridged. It is not uncommon to come across firms where finance and partners may ostensibly be on the same page, but this has become lost in translation.

Adding value in the law firm pipeline

In contrast to the approach taken by most lawyers, the process of adding value in a law firm can be seen as a pipeline consisting of five steps – only one of which actually involves legal work. The other steps involve business development (getting clients and instructions) and finance (billing and collection).

Just as the business developers contribute at the beginning of the pipeline, an effective finance team can bring real, measurable value to the management of the business. This is not just a question of ‘policing’ the billing of work-in-progress and the collection of debts, vital though these are. The FD and team can help to set the firm’s financial strategy, predicting cashflows and planning growth accordingly. If a firm is looking to grow, then lock-up management and funding of assets is an important area for consideration. The finance function should work together with the senior or managing partner to establish the vision, and to ensure that this is achievable in the context of the firm’s current and future financial prospects. Moreover, financial management can act as a driving force behind strategy, leading the firm in a clearly defined direction.

Communicating value

The place to start is with management information. If the gap between the lawyers and the finance team is to be bridged, finance must be able to articulate the case clearly and in a manner that will be understood by the less financially literate of the partners. This means just a few lines of the most important detail, suitably edited to provide an accurate but concise picture of the situation.

Above all, law firm FDs need to recognise the significant value they add to their firm and, crucially, they must be able to communicate this value to the firm’s other senior managers. We have come across firms that ‘couldn’t afford’ a head of finance, and were writing off £250,000 in debts each year. Talking ‘lawyer language’ and demonstrating the contribution of the finance team in terms of the profits the partners can draw and the cash situation of the firm will be important skills in the legal market of the coming years. Any FD who can do this will be well placed to help their firm develop, and to develop their own career in the process.

Footnotes

1&2 http://www.legalsupportnetwork.co.uk/index.php/resources/top-100-law-firm-finance-directors/

3&4. Role of the Finance Director, MPF Finance Panel (March 2008).

Barry Wilkinson is a partner and Anthony Wilkinson is a consultant at Wilkinson Read & Partners. They can be contacted at barry.wilkinson@wilkinsonread.co.uk and anthony.wilkinson@wilkinsonread.co.uk