Navigating complexity with Katchr: Legal finance reporting challenges in 2024
“The increased demand for transparency in financial reporting driven by new regulatory requirements has placed additional strain on law firm finance leaders.” Evelyn Partners.
In their 2023 Law Firm Survey, Evelyn Partners identified the critical need for the provision of robust financial systems and controls to satisfy these heightened compliance demands and simultaneously support overall financial health in law firms.
We’ve engaged with several of the UK’s leading professionals in law firm leadership and legal finance to gather in-depth insights into the common themes around financial reporting challenges in the legal sector. In highlighting these obstacles, we are uncovering areas of opportunity for growth and efficiency.
Timeliness of Data
“By the time they produced them [reports] in all honesty, they were out of date and you couldn’t really take action on them retrospectively.” Alice Ketley, Financial Controller, Cripps.
One of the most pressing issues in law firm finance is the delay in obtaining and utilising relevant data. Our discussion with Claire Burden, Head of Advisory Consulting at Evelyn Partners, revealed that law firms often rely heavily on manual data manipulation for their financial reporting, a practice that introduces considerable lag and errors. “There’s a timeliness issue,” Claire noted, “because they take the reports that are already out of date by the time they’re printed out and put onto Excel.” Our findings unveiled similar trends; some law firms are still producing their reports up to two weeks after month end. This retrospective analysis becomes an anchor holding firms back from taking timely action. The root of these delays often lies in the complexity of the processes required to produce those reports. A former Director of Berwins explained, “we had to click about 15 times to find a report and then it came up with a spreadsheet.”
The slow grind of manual reporting not only stifles decision-making but also traps firms in a cycle of inefficiency. Management teams find themselves adrift, repeatedly circling back to the finance department for clarifications. Alistair Howard, Finance Director at Lodders Solicitors, reflects, “the board were asking me questions that I couldn’t really answer immediately. It used to take me a long time and to do a lot of analysis to be able to answer those to the sort of level of quality that I wanted to do.” [1] Beyond the management and partner level, financial accountability amongst fee-earners is arguably of equal importance. But ultimately, lawyers are not accountants. They studied law to work with words and people, not tables of columns and numbers, and require simple, clear visualisations to understand the data presented to them quickly and efficiently. Hugh Gardner, Partner at Marriot Harrison, recalled his attempts to engage lawyers in firm performance, “it would take me ages to draw up the reports. And then they would just switch off the minute they saw a spreadsheet coming from me because it wasn’t their comfort zone.”[2]
“A lot of people have fear when they see a spreadsheet.” states Hugh. Commenting on the complexities of past reporting at Marriot Harrison he continued, “it [reporting] was produced in really obscure data spreadsheets. So for those people who are scared of numbers there was absolutely no incentive of going anywhere near it.”
Manual Errors
This reliance on Excel not only slows down access to data but also creates what can only be described as a “black box” where errors and inconsistencies can easily be hidden. “There are so many errors,” Claire Burden explained, “and lots of times we see where a financial planning and analysis person has left a law firm and somebody else is trying to replace them… it can get really messy.” This lack of transparency and continuity can severely undermine the confidence of law firm leaders in the data they are provided, complicating the decision-making process.
Regarding continuity, the know-how to create more bespoke ad hoc reports, such as billing in a particular region, may either be in the hands of one person or the practice management vendor. A lack of readily available information flags concerns around an over-reliance on scarce resources to produce business-critical insights. Partners need access to such information at their fingertips without depending on the availability or timings of one individual. Nor the practice management vendor for that matter. Hugh Gardner stressed the correlation between poor accessibility and the level of colleague engagement in the firm’s performance, “the problem we had is that people who don’t like to look for information were very able to ignore it because to find that information really involved digging amongst the depths of the case management system.”
Traditional Systems
This unveils another significant challenge; the static nature of traditional practice management systems. Alistair Howard, commented on how the firm’s previous cumbersome reporting tools were complicating decision-making, “I had some reports but they were very slow to run; could I look at more than one thing at a time? No, I had to run separate reports.” That isn’t to say that practice management systems aren’t a vital component in running a successful legal business. But whilst they are essential tools for gathering data, most don’t focus on providing the deeper reporting capabilities required to transform data into information that is timely and actionable. Alistair added, “there was a time when a previous boss of mine said ‘Alistair, I want information. I don’t want data’ and I really did see that’s all I could provide.”
“There was a time when a previous boss of mine said ‘Alistair, I want information. I don’t want data’ and I really did see that’s all I could provide.” [1] Alistair Howard, Finance Director, Lodders.
Some firms believe that switching to a new practice management system might solve their reporting problems, but in most cases, this is proves counterproductive. Claire Burden points out, “often law firm leaders can forget the level of disruption and inefficiency that’s caused by a big practice management system change.” Even when new systems are implemented, they often fail to deliver the dynamic holistic insights that law firm finance leaders need to make informed decisions. Instead of enhancing the decision-making process, these systems can sometimes just provide a more visually appealing version of the same outdated reports. And this solely addresses the data within the practice management system. But what about data fragmented across CRM, DMS, and CMS platforms? With little to no communication between isolated data siloes, what is the accuracy of reports even in retrospect?
“Whilst we were able to look after profitability at a team level, we didn’t know which of the clients within that, that were doing work for that team, were profitable.”[3] Tim Sarson, COO, Birketts.
One Version of the Truth
What this means is finance leaders in law firms are also grappling with the challenge of creating a single reliable source of truth. Different versions of data can lead to significant confusion and misinterpretation. As Claire Burden explained, “you end up with these different diverging versions of what the statistics are telling them. And again law firm leaders just can’t make decent decisions off of that information.” Richard Clark, CEO of CFG Law, reflected on the challenges in surfacing data from multiple sources to generate reports, “the challenge was always going to be you have different interpretations” he continued, “you didn’t really have a sense that people were focused on the same things.”[4] This issue is compounded when manual adjustments are made to Excel reports without updating the underlying data in the practice management system, leading to further discrepancies.
“The challenge was always going to be you have different interpretations.”[4] Richard Clark, CEO, CFG.
While financial reporting in law firms is undoubtedly complex, recognising and addressing these challenges is essential for the firm’s long-term success. Finance leaders must be equipped to navigate these complexities, ensuring that the firm’s financial reporting is supported by access to timely automated information (not data) driven by insights from multiple systems to create a single unified version of the truth.
Should you have any questions on optimising your financial reporting, feel free to reach out to Carly Hirst via carly.hirst@katchr.com for a deeper insight on streamlining your firm’s reporting processes.
