Best behaviour: developing good practice in compliance

Accountability, awareness, fear, anxiety, non-productive, time consuming, unnecessary, onerous are all words that have been commonly used in the past year to describe the roles of designated compliance officers.

Few lawyers – if any – welcomed the requirement to have COLPs and COFAs, although some have mentioned that it was probably the kick they needed to get much closer to the management and compliance aspect of their firms.

Across the whole legal services sector, traditional and non-traditional, the past twelve months, and probably longer, has seen a very real step change and acceleration in how legal services are sold.

High profile failures, interventions, consolidation among mid-size firms, aggressive acquisition strategies and new entrants are starting to make a very real impact on the marketplace, together with an element of complacency with those who believe the changes will not affect them.

This has, to some extent, driven a significant shift in responsibilities for many directors and partners who have had to develop greater awareness of – and accountability for – risk, compliance, finance, strategy and overall management of the firm.

Some firms have embraced the new culture better than others and got much closer to how their business performs and what the key performance indicators are that drive income and profitability. Others have simply done nothing different or not changed; they do so at their peril.

Supporting business

Compliance and increased regulation is a key driver but at the heart of the firm there should be a wholesome and robust financial management structure, with controls and processes that facilitate the business plan, create accountability and allow the firm to thrive.

It’s a huge challenge for many to keep their head above water in the most challenging market conditions the legal sector has faced for many a long time: a basically flat economy, a contracting market, legal aid reforms, personal injury referral fee ban, civil costs reforms, professional indemnity insurance pressures, plus new competition from within and outside the traditional legal market.

The SRA exceeded its entire 2013 budget for interventions within the first three months of the year, citing the following as a few of the main reasons why. Firms continuing to take on financial commitments that they cannot afford, senior managers who bury their heads in the sand thinking they can weather the storm without having to make major changes or believe their financial situation will rectify itself. And, latterly, failing to provide the SRA with key information.

The latter point of failing to provide key information was no doubt caused by inefficiencies borne out of poor controls that created suspicion and prompted further investigation.

In-house issues

The SRA also doesn’t buy into the theory that many firms’ financial or administrative problems are solely down to the economic and political environment. Poor leadership and financial management is very much an in-house issue which many firms have addressed but sadly far too many haven’t.

The Code of Conduct provides that firms must run their business “in accordance with proper financial management principles” and “actively monitor financial stability and viability”. The two go hand in hand, but how has this been translated into practical tools to assist lawyers to be better finance and risk managers?

There is some help out there with some CPD events and there are various lists showing poor and good behaviours (see my own below) but many compliance officers remain reliant on external advice from accountants, banks and consultants to interpret management information and implement process and behavioural change.

Typically, poor behaviours include drawings in excess of net profits, VAT receipts used as cash received, partners out of touch with office account bank balances, and all net profits drawn no reserves retained.

Example of good behaviours, meanwhile, include all partners receiving a full financial information pack including bank balances, profitability levels being tested and unprofitable work being (properly) dropped, and drawings linked to cash collection target and not exceeding profits.

Good governance is one of the SRA’s favourite phrases in the context of financial and risk management but in 2014 what does it look like? The reality is it’s about how the firm is managed top to bottom and end to end in terms of business and legal processes.

Billing cycle

The most beneficial aspect for law firms to review and improve is in the back office and support areas, starting with a full and honest review of the ‘WiP to Billed to Cash Collected’ process or sometimes referred to as the ‘billing cycle’.

Compliance officers (and equity partners or shareholders) should also have a full awareness and knowledge of the firm’s creditors, notably Crown payments such as VAT & PAYE. Arrears in this area are probably the quickest route to intervention and potential overall failure of
the firm.

Management of the client matter, the end to end process, and improving the quality, efficiency and cost of service delivery to the client is also a key element of good governance.

Continuous process improvement should be any compliance officers mantra, how can we do better and how can we improve the overall performance of the business. The two are inexorably linked.

Good governance will not remove all financial risk, but the SRA wants to be assured that firms are well run, recognise the risks and then implement appropriate strategies, systems and controls.

Distress signs

A year on how many boards of directors or partners as well as designated COLPs and COFAs are aware of and can identify the signs of financial distress or even financial success at an early stage?

Many firms have a suite of management information that is either overly complex or not detailed enough to allow strategic and tactical decision making. This leads to ineffective business plans, poor organisation structures and a lack of direction and purpose. Does this sound familiar?

You can measure and monitor as much as you like but a firm will only succeed if it has a client-focused approach to generating income that is supported by robust risk and financial management controls, and a very clear and detailed business plan.

The biggest challenge isn’t necessarily around management controls. This is vitally important, of course, but attracting the work in the first place and then converting it into work in progress (WiP), WiP into fee’s billed and fee’s billed into cash is a far bigger one for many.

This is where a balance between risk management, compliance and sales has to be struck. Many senior lawyers today are balancing the need to run a business and generate income by being one of the firm’s major fee earners. It’s this aspect that too many wrestle with.

Shared responsibility

A more equitable balance can be achieved by shared ownership of responsibilities through a collective team of partners and business owners who all have a detailed awareness to a micro-management level of the key financial indicators of the business. Yes there is one name designated as either COLP or COFA but all business owners have a part to play in support.

Another common misconception is that all of the actual administration work has to be done by the COLP/COFA. Let’s dispel that myth: delegation of the workload to knowledgeable and qualified staff means that the most effective COLP/COFA has oversight and accountability, not masses more paperwork – don’t confuse the two.

If there is one key learning point from the last year, for me that would be make compliance and risk management support business and income growth. The most successful firms combine the two with good governance and shared best practice across every level of staff.

Nobody can tell you how to manage the finances of your business and what works for one firm may be unsuitable for another.

The business plan and strategy determines the behaviours needed to make a business successful within a regulatory framework. Don’t let it be the other way around, allowing the regulatory framework to drive the business strategy, because the one area that is sure to suffer is the client experience and the income line.

Finally, one of the most common findings I see in SRA audits is the fact some firms don’t take profit costs quickly enough. How ironic. SJ

 

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Tony Brown runs AGB Legal, a consultancy dedicated to improving law firm performance. He is a former CEO with a multi-disciplined regional law firm which gained one of the first 50 alternative business structure licenses.

www.agblegal.co.uk

 

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