Over the past five years there has been a noticeable shift in emphasis within the finance departments of law firms. During the 1980s firms were profitable, instructions were plentiful and the average firm operated with sizeable levels of work-in-progress (WIP) – a protective layer of “fat” which could be utilised in a poor year. Consequently, attention in finance departments focused on the cashiers.
Significant changes in the Solicitors Accounts Rules, high interest rates, providing firms with the opportunity to manage client funds and on-line access to banking facilities, all concentrated the minds of financial managers.
Only the most efficiently run firms were looking at cost control, management of working capital, and the potential benefits of developments in IT which were filtering in from across the Atlantic.
Although recession hit the profession late, few firms were prepared when problems arose.
Hardest hit were specialist property firms, whereas practices with a wider range of services found a compensating increase in the volume of recession-led business, which was often litigation-based and tended to be short-term.
First indications that firms were suffering came from inter-firm comparisons. Most firms were maintaining their turnover, but few were recording similar increases to previous years, mainly at the expense of the WIP reserves.
This was followed by an increasing number of firms considering mergers, not aggressively with a view to expansion, but defensively, as a means of survival. Clearly many partnerships were struggling, which alarmed the banks, which in turn began to downgrade the credit rating of solicitors generally.
Clients were not slow in taking advantage of this new position.
Beauty contests became more popular, resulting in downward pressure on charging rates, requests for fixed fee work, and contingency fees dependent on success, with little or no reward for a lost case or an unsuccessful bid. With a few exceptions, the premium work of the 1980s disappeared.
Those firms with efficient management and good controls on their working capital and overheads began to draw away from the rest. This was especially reflected in the growth of the largest firms who could afford to “buy turnover” to obtain prestigious clients, often on the basis of providing increasingly international services.
One of the most evident responses came in demands for new IT. The accounts package was transformed into the practice management system.
This was an accounting package, yes, but with on-line time recording and bill production; user-friendly fee earner time management and enquiry screens; sophisticated reporting capabilities; immediate and transparent integration with the myriad of other software packages running on the network; and all built around the familiar Windows interface providing immediate use with minimum training.
The consequence of these changes to the organisation of finance departments has been to divert resources away from cashiering into more proactive working capital management groups working closely with partners and fee earners.
This has seen the development of new and flexible methods of charging clients; providing information for beauty contests; building relationships with clients' support departments; and improving reporting of management information across the firm.
The biggest shift though is the concentration on the control of work in progress and debt collection, especially involving the use of new systems.
The main thrust of organisational change has been to bring together the various areas involved in working capital – timesheet processors, costs draughtsmen, billing assistants, and credit controllers – to form a single group adopting a conveyor belt approach covering all aspects of working capital, from the recording of chargeable time to the collection of the cash.
This will provide a more integrated and complete service resulting in reductions in “lock-up” and allowing improvements in three main areas – fee earner utilisation rates, percentage of recorded hours billed and bad debts.
Over the next five years, new technology will create a further shift in emphasis within finance departments. Systems providing fee earner inquiry screens, on-line time recording, instant bill production and case management are now available, reducing the need for input staff, general costs draughtsmen and billings clerks.
The questions are merely when this will happen and what will the new demands be?