How can law firms generate meaningful and useable management information?

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The golden rule with most things in life, and management information being no exception, is that the quality of what you get out, is only ever as good as the quality you put in.

Improve data quality

The key therefore to good quality record keeping is to have in place sound systems and controls to ensure transactions are recorded accurately, timely and consistently.  These systems and controls should be regularly reviewed to check they are relevant and the most efficient way of doing things. This will not only lead to improvements in the quality of the data being entered, it will also help your firm to adapt to change if there are changes in software or staffing, for example.

Once processes are embedded to ensure the data being entered into the accounts software is accurate, timely and consistent then this can be developed further and shift from being basic bookkeeping to more meaningful management accounts preparation.  This shift will involve incorporating the typical year end accounts adjustments, and posting these on a monthly or quarterly basis.  These adjustments would usually include:

• Identifying prepayments and spreading the cost over the relevant invoiced period
• Identifying accruals and late invoices so that all known costs for the period are included
• Capitalising and depreciating fixed assets in line with policies adopted
• Capitalising and amortising intangible assets in line with policies adopted
• Calculating recoverable WIP each reporting date
• Reviewing the office ledger for any potential bad debts and including a provision for these

Make informed business decisions

When a firm has good quality management information (MI) incorporating all of the above adjustments, then they are in a really good place to make informed business decisions, and influence interactions between fee earners and clients.  Firms will also have the ability to drill down into the profit and loss and balance sheet in more detail to make comparisons to a previous month’s or year’s performance, and also the ability to measure and review key performance indicators (KPIs) on an ongoing basis.

Additional tools such as budgeting and forecasting are also fundamental. Budgeting is useful for monitoring overall profitability of a firm, comparing how fee earners are performing against their individual targets and controlling costs, whilst forecasting allows you to consider future cashflow and any pinch points, which helps in making some of the more strategic business decisions.

Furthermore, whether your firm time records will also impact on the KPIs that can be measured and reviewed.

The more data that is measured, the easier it is to manage and control. However, there is also a risk of information overload and people not having the time or inclination to review the data, and not taking action as a result.  It is therefore far more productive to have less information that is targeted so that far more people in the firm receive bespoke MI on a KPI basis that is relevant to their role and work type, within their control and set against realistic bespoke targets. People can then easily make informed decisions and take appropriate action to improve the financial performance of the firm, whilst maintaining excellent relationships with clients.

Top four financial KPIs for law firms to monitor

1. Work in progress days – the length of time between undertaking work on a matter and raising a bill for it
2. Debtor days - the length of time it takes for a firm to collect payment for a bill

These two KPIs combined provide you with the firm’s lock up – the lower the number, the quicker it takes a firm to be paid.  Focussing on bringing this number down should therefore be a priority.

3. Utilisation rates – the percentage of a fee earners total working hours spent (and recorded) on (presumably billable) client work
4. Recovery rates – the percentage of billable hours that a firm invoices to clients

These latter two KPIs combined provide you with the efficiency of the firm – the higher the number, the more productive staff are.  Focussing on pushing this number up should therefore be a priority.

If a firm also reports by work type and/or branches then it should also be possible to calculate these four KPIs to a more detailed level, by person and by work type. This will in turn give more meaningful areas to investigate and improve performance. It will also help to generate specific and appropriate actions from the relevant fee earners that will boost cash flow and profitability.

All of these higher-level reviews can help focus attention on areas of the business where improvements can be made and help to challenge fee earners and management to get the best out of their teams.

Checklist to improve management information 

1. Systems and controls are imperative for having accurate, timely and consistent data
2. Monthly adjustments for prepayments, accruals, depreciation, WIP movement etc will improve the quality and reliability of the management information which in turn will lead to more informed business decision making
3. Comparing actual results to previous years and budget (where available) will provide a good insight into which work types are under or over performing and what costs need to be monitored and controlled
4. Updating budgets with actuals, and forecasting ahead will allow consideration of future cashflow and any pinch points giving a clearer picture to allow for strategic business decisions
5. Using the data to calculate KPIs will allow you to monitor performance; this can be drilled down by branch/work type/fee earner as appropriate
6. The more data that is measured, the easier it is to provide challenge and to manage and control outcomes.
7. Reducing volumes of information and switching to lower volumes of relevant KPIs alongside specific targets will be more productive and impactful.