Financial-management systems: Do you really know what is going on?

Possibly that was true, once upon a time, back in the days when accounts systems were primarily concerned with correctly adding up columns of figures and ensuring there were no improper transfers between client and office accounts '“ but we have come a long way since. In particular, it is now dawning upon a growing number of firms, well at least the thriving ones, that running a successful law firm today owes more to business skills '“ and an understanding of financial management is one of those skills '“ than legal expertise.

In far too many firms, the practice management system is merely seen as something to keep the accounts records in good order. Partners and managers are meanwhile in the dark as to which areas of their practice are profitable and which are running at a loss, which fee earners are pulling their weight and who are the slackers, or even who are their 'best' clients, in terms of those that pay in full and on time for work that is profitable to undertake.

The irony is that most of this information can already be found in the modern practice management system. The problem has been extracting it in a format that partners (and other non-accounts staff) can recognise and understand. Or to use IT industry terminology, these systems leave us data rich but information poor.

In the mid-1980s, when law firms first started employing professional managers and qualified accountants, many of these hapless individuals had to spend days each month poring over printouts of ledgers, physically preparing spreadsheets and charts to produce reports that could depict key performance indicators (KPIs) and trends that provided the partnership with a clear picture of their firms' financial performance. Later, we started to see wider use made of report-generator software, such as Crystal, and executive information systems (EIS), as well as legal IT suppliers offering a far broader portfolio of standard reports with their PMS products.

Since then, the main development has been the introduction of KPI software by legal IT suppliers that can provide a synopsis of chargeable time, fees, profitability, cash collections, lock-up, work in progress and outstanding debt, but with the ability to drill down from a practice level right through to the individual fee-earner level.

Two things are worth noting about these products. First, they can be used (obviously offering different perspectives for different classes of user) by fee earners, as well as business managers '“ as there is no point setting performance targets if individuals have no way of monitoring their own performance. Second, by setting defaults and through-exception reporting, it is now possible to automatically generate a report to be sent to the appropriate individual when a particular performance parameter is being approached. The net result is partners and managers can now receive immediate alerts of, for example, any pending deterioration in a practice's financial position as soon as it starts to loom on the horizon. This is in contrast with the old-style, management-reports situation where it might take weeks for a trend to be identified.

To put it another way, the modern system offers the ability to keep the management finger on the current financial pulse, rather than leave firms scrabbling to pick up the pieces from historical data.

That said, it is clear that law firms still have to take some of the initiative when it comes to financial management and cannot rely entirely on third-party IT suppliers to meet all their needs. It was to fill one such gap in the IT market that Wragge & Co recently developed its MIDAS system. In the words of financial controller Glyn Morris: 'The system allows the firm to scientifically cost and manage any transaction or case using historical data. It meets the client's demands for fixed and lower fees, so there are no surprises at the point of billing, while ensuring we don't get caught out by uncontrolled costs and changes in the scope of a job.'

Charles Christian is editor of the Legal Technology Insider newsletter. He can be contacted at news@legaltechnology.com