This article was first published in Managing Partner in February 2013 and is reproduced by kind permission.(www.managingpartner.com)
Tackling Data Silos
...or “Where is the value in your financial data?”
Many law firms struggle with the effective management and use of their financial data as they seek to improve their performance. Often, for example perhaps following a merger, local practice means that “data silos” exist preventing the proper sharing of information across service lines and across offices or indeed jurisdictions.
So, how do you create meaningful integrated financial data across the business to exploit new opportunities? At first glance it may seem that this is an obvious and simple objective but
<![if !supportLists]>· <![endif]>what is meaningful data to hold at firm level
<![if !supportLists]>· <![endif]>how much should you integrate this, and
<![if !supportLists]>· <![endif]>what does the way your firm uses data say about your approach to running the business and how you understand your particular business model?
The emergence of the “Data Silo”
Surrounded as we are by burgeoning technology in the shape of smartphones, laptops and satnavs, it seems that effective and transparent data, neatly packaged, should be available “at the touch of a button” to any leader of a reasonably-sized business.
While systems to process the minutiae of bills and purchases have been around since the 1960s proper data analysis only really got going in the 1980s. The large supermarkets use loyalty card data to analyse individual shopper’s spending patterns down to the individual basket – what they bought, when they bought it, and what with. There is a price to pay, though (aside from all those spending vouchers) with terabytes of data to be managed, and a disciplined and structured approach required to make use of this data.
In law firms the volume of data is much reduced and so proper management of data should be easier. Despite this, many law firms struggle to pull together many key metrics across their businesses in an effective manner. However, the increasingly competitive and challenging market means that good integrated financials are more important than ever.
At the same time, law firms are becoming more complex, frequently multi-site and often multi-jurisdiction operations. In many cases this might be the result of one or more mergers, each component bringing its own financial systems and processes. In order to manage this effectively and to realise the benefits good integrated financials are a must.
Finally, major clients now expect integrated and timely management information covering all aspects of its relationship with the supplier. In one example, a large institutional client insisted that all panel firms provide complete transparency of all bookings on each of their matters. The client is able to directly access the law firms’ systems in order to see the costs on each matter. Rather tricky if you don’t have an integrated financial system!
Key drivers of the need for good integrated financials:
<![if !supportLists]>· <![endif]>Clients require good data covering their relationship with the law firm
<![if !supportLists]>· <![endif]>Need to cross-sell services from across the business to clients
<![if !supportLists]>· <![endif]>Increasing complexity of law firms
<![if !supportLists]>· <![endif]>Need to realise benefits of mergers/acquisitions
<![if !supportLists]>· <![endif]>Need to price competitively but profitably
<![if !supportLists]>· <![endif]>Need to benchmark performance effectively across the business
<![if !supportLists]>· <![endif]>Need to improve efficiency of all operations across the business
How good is your data?
Key “red flags” suggesting data silos are likely to be endemic in your business are:
<![if !supportLists]>· <![endif]>Consolidated financials are created from separate systems
<![if !supportLists]>· <![endif]>Recent merger or acquisition with limited post merger work to align financial reporting
<![if !supportLists]>· <![endif]>Multiple sites each with their own management responsibility and financial support
<![if !supportLists]>· <![endif]>Large number of “bespoke” financial reports – for particular partners, clients or offices
<![if !supportLists]>· <![endif]>Different base standards – e.g. what constitutes 100% utilisation, different meanings for terms such as realisation.
<![if !supportLists]>· <![endif]>Unexplained large variations in performance between different sites or service lines – often with different measures pointing in opposite directions
<![if !supportLists]>· <![endif]>Different targets for groups of otherwise similar fee earners – without good reason
Sometimes it is obvious that data silos are a challenge when a firm struggles to pull together the most basic information. At other times, financials can be superficially consistent but in practice hide differences of understanding which means the actual information is not really comparable at all. (“Apples and Pears”)
Law firms are people businesses and as such the data is only ever as consistent as the approaches of the people using and creating that data.
At one newly merged firm, financials were quickly put onto a common platform, but fee earners from the two legacy firms continued to set up clients and matters in slightly different ways, aided and abetted by the Finance teams from the two legacy firms. As a result some partners appeared to be writing off large sums while others appeared to be discounting prices heavily. It turned out that the differences were simply a matter of financial custom and practice.
In another firm, differing attitudes to good practice in time recording meant one unit appeared to have spare capacity while another appeared to have low recovery and unprofitable clients.
These discrepancies are driven in legal by behaviours which are common in professional services businesses but not in corporates. These include:
<![if !supportLists]>· <![endif]>The fundamental building block of the financial system (time recording) is open to interpretation by each fee earning professional
<![if !supportLists]>· <![endif]>Weak centre/strong local control leading to local financial practices
<![if !supportLists]>· <![endif]>“service” culture by central finance leading to excessive bespoking of reports for individual internal clients
<![if !supportLists]>· <![endif]>“sole trader” behaviour supported by performance measures discouraging sharing of data
Each will work against to objective of good integrated financials. In table 1 I have set out a simple check list of key metrics you should have available. Give yourself a tick for each one you can confidently say your business can achieve.
So what should we do about it?
Clearly, a more integrated approach will have benefits in identifying efficiencies, opportunities with new and existing clients and in unifying the firm under a common set of goals. However, there are traps for the unwary.
The “ideal” would be a single system operating across the entire firm with a consistent set of targets and standards. In this scenario, any part of the organisation can be compared with any other. In any event, this option may be too expensive to implement in the short term and indeed will not of itself resolve one of the key issues which is behavioural – how people choose to enter the information and interpret the outputs can vary hugely.
By bringing together a small set of management data it can be quick and easy to reach effective conclusions and remain focused on the main purpose. Measure things right and measure the right things.
Key tips when bringing together financial data
There are some simple tips which will help keep any attempt to compare financial data across business models or offices on the straight-and-narrow:
<![if !supportLists]>1 <![endif]>Keep it simple – there are essentially only three elements to consider in assessing a business unit or indeed client – Income, cost and profit. The many other measures we apply – utilisation, realisation and so on are secondary to these principal measures. So, only bring together and compare the minimum number of measures that you need to.
<![if !supportLists]>2 <![endif]>Get those simple measures right – so make sure the income and costs you are using really to belong to the unit in question. If you decide to close it you don’t want to find the costs popping up elsewhere, or if you decide to expand that unit you don’t want to find the rest of the firm has been unwittingly subsidising it.
<![if !supportLists]>3 <![endif]>Understand the business model – decide what level of profitability is right for that business unit. Then decide what measures are appropriate to apply to assess the operation – the traditional ones like utilisation and realisation are only appropriate for some business models, and where they are they need to be used in different ways.
<![if !supportLists]>4 <![endif]>What gets measured gets done –what and how you choose to measure performance will probably have a bigger impact on behaviours than any number of management briefings. Make sure you measure the right things only.
<![if !supportLists]>5 <![endif]>Accept diversity – different parts of the business will work differently. Your Financials should reflect this. Don’t accept diversity in the numbers when there is no corresponding diversity in the business!
<![if !supportLists]>6 <![endif]>Get the question right - Select the data that is appropriate to answer your query to ensure you reach the right conclusion
<![if !supportLists]>7 <![endif]>Don’t let the tail wag the dog – many accounting conventions are derived from the requirements of financial accounting good practice. For internal decision making however these can be at best misleading for the unwary and at worst lead to incorrect decisions.
Providing good integrated financial data will be an increasingly important objective in our ever more complex and competitive market. Those who can do it well will have a distinct advantage in winning work and clients who will demand more from us.
This is however not just a matter of “form”. It is insufficient to have uniform format and presentation. Local behaviours and use of data also need to be consistent. Presentation should reflect the strategy and behaviours we want to encourage. Finally the analysis must effectively recognise true differences in the underlying operations of the business. Those who can do this will be able to maximise performance for each and every part of their operation and leverage the strength of the “whole” too.
By Chris Howe
Chris Howe is a Director at Raedbora Consulting Ltd and was formerly Commercial Director at Addleshaw Goddard
Key tests for data consistency. Can you do the following? Give yourself a point for each.
<![if !supportLists]>1 <![endif]>Measure income and actual* costs for each office 1pt
<![if !supportLists]>2 <![endif]>Measure income and actual*costs for each service line 1pt
<![if !supportLists]>3 <![endif]>Measure fee income per partner 1pt
<![if !supportLists]>4 <![endif]>Measure total sales to each client (even cross-service line/office) 1pt
<![if !supportLists]>5 <![endif]>Measure how each
<![if !supportLists]>a. <![endif]>Office
<![if !supportLists]>b. <![endif]>Service Line
<![if !supportLists]>c. <![endif]>Fee earner
Contributes to the success of your client figures? 1pt each. Tot 3pt
<![if !supportLists]>6 <![endif]>Measure each partner’s contribution to new sales (even if not managed/worked by them)? 1pt
<![if !supportLists]>7 <![endif]>Can you measure cost of work separately from charge rate or price? 1pt
<![if !supportLists]>8 <![endif]>Measure the profitability** of each
<![if !supportLists]>a. <![endif]>department/service line
<![if !supportLists]>b. <![endif]>office
<![if !supportLists]>c. <![endif]>matter
<![if !supportLists]>d. <![endif]>client
<![if !supportLists]>e. <![endif]>sector 1pt each. Tot 5pt
<![if !supportLists]>9 <![endif]>Do you know what the right level of profitability**should be for each of
<![if !supportLists]>a. <![endif]>Office
<![if !supportLists]>b. <![endif]>Service line
<![if !supportLists]>c. <![endif]>Client?
(Hint: they should not all be the same!) 1pt each. Tot 3pt
*actual – by this term I mean those costs that would be avoided/saved if the operation in question ceased to exist. Accountants might refer to these as “direct” costs
**profitability – There are many different definitions of profitability, each appropriate for a different purpose. Are you using the right definition at the right time?
0-5 points : Terrible! You have several basic gaps in your management information with the potential for loss of control of the business. Recommendation: Put in place immediate work to get basic financial measures across the business to re-establish controls.
6 -11 points: Basic controls are working, but you are not in a position to effectively assess performance and risk missing key opportunities in the market. Recommendation: Put in place work to deliver information which will effectively support decision making and strategy implementation. The basics are there, but your competitors will have better visibility and will therefore be able to be more nimble in pricing and investment decisions.
12-17 points: Excellent. You have all the key elements together for good visibility and control. Before proceeding, make sure you are confident your definitions of profitability are truly fit for purpose. If so then the key question is: Do you have a suitable strategy implementation plan to make use of this data to drive the business forward.
In summary, any score less than around 12 would be considered unacceptable for a major Corporate. We should not accept less in professional services!