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Profitability Implementation: Three Key Success Factors

I have been working on law firm profitability implementations for more than 20 years. Over those years, I have amassed hard-won knowledge about the key success factors for profitability implementations for legal and professional services firms. In our Q3 Forefront article we discussed Five Critical Factors for Selecting Your BI Vendor and Solution. Let’s assume that you have now selected your vendor and solution, and your firm is ready to kick off your profitability module implementation. In this article you will learn about the top three success factors to help your firm get excellent results from its investment in profitability and BI.

#3 – Start with the End Result Clearly Defined

You will be faced with dozens of tough decisions during your profitability implementation. A good practice is to start with the end in mind: Who are the user personas? What data will they be able to see? What are the reporting requirements? How often will you distribute profitability reports? Let’s look at each of these in detail:

User Personas: The basic question to start with is “Who will be able to see our profitability data?” There is a tremendous variation among law firms with how widely the data will be shared. Some firms keep the profitability data tightly held, only allowing employees from the finance department and management team to view it. Other firms open it up a little bit more and allow key partners such as department heads to see detailed profitability statistics. Progressive firms will open up the profitability data to all partners within the firm. Once you have defined the user personas, you then need to determine which data they can see. Our best practices recommendation would be to at least open up profitability data and reports to partners who are working as matter billing lawyers, enabling them to do client and matter profitability analysis on their book of business.

Data Access: Now that you know the user personas, the next question is what slices of the data can they see? Typically, the management team and finance team can see all data with no restrictions. If the firm chooses to open up data to the partners, there are two basic scenarios commonly seen. In the first, partners can see the profitability contribution of their clients and therefore their own profitability or contribution. In the second scenario, the partners cannot only see their own profitability, they also can see the profitability of all other partners. (I call this wild west scenario, and this is pretty rare.)

Data Format: The fundamental question here is: “Will it be dashboards, static reports, or both?” For most firms, this comes down to their overall information access strategy. If the partners are already use to interactive dashboards, then it is logical to continue that method for the profitability information. For firms that are still distributing static reports, they will probably stick with the PDFs. Our best practices recommendation is that if you are currently using static reports, then the firm should consider extending that to give the partners interactive dashboards. This will give them the ability to filter and analyze their profitability, view their trends in profitability, drill down and focus on problem clients, etc.

Data Frequency: The final decision is how often you are going to distribute the profitability data. Many firms do this on an annual basis, providing partners with the detailed recap of their performance in the prior year. This is a big mistake. Your firm will see far more impact if you distribute profitability information on a monthly basis. This will enable partners to identify poorly performing clients early in the year and proactively make changes in staffing or rates. Scenarios supporting predictive outcomes can provide a very clear picture of the expected profit from the billable work in January.

#2 – Take Care When Defining your Profitability “Granularity”

In your chart of accounts, you might have 300 or more accounts for tracking expenses. You don’t need this level of granularity in your profit cube. So your decision is how much granularity do you really need? We capture your decision in what we call a profit account. The profit accounts define the granularity in your cube. You then create a mapping between your GL expense accounts and profit accounts. You have two basic options:

Aggressive Rollup (recommended): Aggressively roll up GL accounts into profit accounts. An example of this strategy would be if a firm has 300 GL accounts and rolls them up into 20 or less profit accounts. The advantages of this strategy include small cube size, better performance, faster processing, and easier reconciliation.

Less Aggressive Rollup: For example, rolling up 300 GL accounts into 60 profit accounts.

Let’s look at two sample GL accounts to determine how we should design the Profit Accounts: 51103 – IT: Hardware Expense and 51104 – IT: Software Expense. The question is for these two GL accounts, what are the reporting and analysis requirements? There are several basic options:

  • Report on them as individual line items (rows)
  • Combine them into a single line item (row) for “IT: Hardware/Software”
  • Roll them up into a more generic line item (row) for “IT” and add 15 other IT accounts
  • Roll them up into an even more generic line item for “Overhead”, combining them with 100+ other GL accounts.

So how do we determine which solution is best? There are two basic questions: (1) Will both costs use the same allocation method? If not, then they need to be in separate profit accounts. (2) Will the firm want to see these costs broken out as separate line items when reporting on profitability? If “No” and they have the same allocation method, then they should be combined.

So what is the best practices advice? Aggressively roll up your accounts. When your partners are looking at client profitability, do they really need to know that software expense contributed $1.58 to their cost rate, and hardware expense contributed an additional $1.79? Probably not. We see many firms bring far too many line items into a profit cube. We don’t think it provides value, and we think it actually results in distracting the partners from the bigger profitability picture.

#1 – Keep it Simple

Following on the previous section, let’s generalize that advice. After years of experience with implementing profitability solutions for leading law firms around the globe, we can offer this as our #1 “best practices” advice: Keep it simple. Your guiding principle for all implementation decisions should be: what is the simplest solution that covers my user requirements? You will have many decisions to make, and in most cases you should go with the simplest choice. That means fewer allocation methods, fewer rules, and fewer exceptions.

Every time you bring in more complexity, the result is that you:

  • Reduce the ability to easily communicate the profitability calculations to the partners and firm management
  • Reduce the overall trust in the profitability values and calculations
  • Build a culture where partners will continually feel entitled to lobby for more exceptions
  • Increase the time required to rebuild/process the cube
  • Increase the amount of time that the finance staff will spend validating and justifying the cube values
  • Decrease “cube defensibility;” this is the concept that when a partner questions their cost rate or profitability, you can easily defend your stance that the cube results are valid and fair. If you have 20+ rules, the cube is not easily defensible. Any good lawyer will have plenty of arguments as to why one or more of the rules is unfair and should not apply to them.

We can say without a doubt that firms which have simpler profitability implementations are more satisfied with their results.

Our final comment: While we are strongly urging you to keep your profitability implementation simple, we also acknowledge that your firm does have special reporting requirements and exceptions that must be implemented to actively reflect the realities of your business. Exceptions should be fully supported in your profitability implementation, but you must aggressively try to limit those exceptions--especially when you’re dealing with relatively small expense amounts.

Iridium Technology

Iridium Technology is focused on "Business Intelligence for Law Firms. Period." The Iridium BI product line consists of a complete BI solution specifically built for law firms, offering four modules: GL, Revenue, Expense, and Profit. We fully support both Enterprise and 3E. We are recognized for fast and beautiful dashboards, and ability to handle our client's toughest customization. Click here for more information.

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