Across the globe, law firms are continuing to monitor their cash flow and take action to reduce the impact of the current pandemic and resulting business challenges.
In our previous articles we covered the key measures firms should prioritize to maintain healthy cash flow, encourage and enable clients to pay their bills promptly and looked at how ensuring cash in the bank is critical throughout the whole legal matter process.
There is an underlying consideration however, that will help firms to really gain a competitive edge; enhancing the commercial culture of the firm to support its profitability potential. For firms who have previously struggled to change lawyer behavior, current events are driving change across the industry and now is the right time to start putting building blocks in place to implement a commercial culture.
What we learnt from 2008/09
The economic downturn in 2008/09 saw the rise of the discerning client and, as a result, the introduction of dedicated pricing teams, the implementation of pricing policies and the more granular breakdown of budgets and matter plans. These pricing and budgeting experts have subsequently learnt to work closely with legal project managers to ensure that budgets are kept in check throughout the lifecycle of a piece of work and therefore maintain profitability and client satisfaction.
To differing extents, law firms have learnt the theory for staying profitable – they are aware of the pitfalls of underpricing at the outset, profit leakage in the delivery of the work, and the causes for delayed payment or billing write-offs. The key focus will undoubtedly remain on cash, but underpinning profitability is the best place to start. Now is a key time to really put that theory into practice and to ensure that financial understanding lands resoundingly with partners and other lawyers.
After all, it is the lawyers that are the front line and firms will rely on them to pick up the phone to their clients which will have a positive effect on client relationships and builds commercial awareness for lawyers. If alternative payment arrangements are going to be offered, there should be guidelines and education for lawyers about which ones to use and why.
In order to make educated decisions, real-time visibility of the firm’s financial data is a must – not only for senior management – but for the partners and lawyers also. Some lawyers will already be commercially savvy, and others won’t. This comes down to many factors but even with the best will in the world, lawyers cannot be expected to prioritize the firm’s bottom line without relevant up-to-date data to inform them about how best to impact it.
Adopting a commercial culture does not mean that sensitive financial information needs to be shared in full throughout the firm. Relevant information at a client or individual matter level can, and should, be shared to empower the right staff to make informed decisions. Providing visibility of key metrics such as time entry, work in progress, debtors and individual client and matter profitability should all be considered.
Our recent cash flow survey of 257 senior law firm finance professionals showed that although firms were trying to influence the behaviors of their lawyers, they were not providing them with visibility of the key financial data they needed. For example, 41% in the US said they were planning on implementing incentives/penalties to ‘increase profitability margins.’ Clearly such strategies cannot be deployed if lawyers do not have a complete understanding of the necessary financial metrics, by client and matter – yet only 14% in the US said that their partners had access to this key profitability data.
Likewise, in the UK, 54% confirmed the implementation of incentives/ penalties for ‘reducing discounts below standard rates.’ Half were planning to implement incentives / penalties for ‘increasing cash recovery’ – however, only one in five partners have access to this data currently, which raises questions as to how they can be realistically incentivized to increase said recovery. Firms need to address the data disconnect to realize this goal.
With all the change that has been forced through with the shift to remote working, now is also the perfect time to adopt technology to help reinforce that culture of commercial awareness. Lawyers who were reluctant to adopt new technology or change their behaviors around pricing or billing will be more ready to adapt than they ever have done, and providing them with the relevant financial data they need to make informed decisions is the first step.
Clients will be increasingly discerning over bills, whilst still expecting a high quality and speedy service. Lawyers will need to be able to deliver the service without having a negative impact on the bottom line – a point they will be more aware of in times of economic difficulty. Partners cannot simply visit the finance team in person for an up to date report, but they still need to be informed. Technology is the bridge to maintaining healthy cash flow and first-class client service.
To help law firms make this jump, and based on feedback from our clients, we have released an easy to deploy Working Capital Edition of our flagship financial BI Solution - BigHand Quantum. The firm-wide dashboards highlight the most important WIP and Debt metrics for better financial visibility to support business decision making.
To find out more about this new solution and how BigHand can get you up and running in a matter of days, visit: Quantum Working Capital Edition