Detecting silos: How to tackle financial data silos

31 Jan 2013Feature

Chris Howe explores how to find and tackle financial data silos across your firm's practice groups and offices

Many law firms struggle with the effective management and use of their financial data as they seek to improve their performance. Often, perhaps following a merger, local practice means that data silos exist that prevent the proper sharing of information across service lines, offices and 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 there are a range of issues to consider, including: ?

What is meaningful data to hold at ?firm level?
How much should you integrate this?
What does the way your firm uses data say about your approach to running the business and how you understand ?your particular business model?

Why your firm needs good integrated financial data

To meet client requirements for data on their relationship with your firm
To cross-sell services from across your business to clients
To manage the increasing complexity of law firm business
To realise the benefits of recent mergers and acquisitions
To price competitively but also profitably
To benchmark performance effectively across the business
To improve the efficiency of all operations across the business

Emergence of data silos

Surrounded as we are by burgeoning technology in the shape of smartphones, laptops and sat navs, 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 shoppers’ 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 key metrics across their business 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 with multi-site and multi-jurisdictional 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 growth 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 their relationship with their suppliers. 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 wanted to be ?able to directly access the law firms’ systems in order to see the costs on each matter. This is rather tricky to provide if you don’t have an integrated financial system.

Red flags of endemic data silos

Key ‘red flags’ that suggest data silos are likely to be endemic in your firm include:

consolidated financials created from separate systems;
a recent merger or acquisition with limited post-merger work to align financial reporting;
multiple sites with their own management responsibility and financial support;
a large number of bespoke financial reports for particular partners, clients or offices;
different base standards (e.g. what constitutes 100 per cent utilisation and different definitions of terms such as realisation);
unexplained large variations in performance between different sites or service lines – often with different measures pointing in opposite directions; and
different targets for groups of otherwise similar fee earners without good reason.

How good is your data?

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 (see box: Red flags of endemic data silos).

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 that one unit appeared to have spare capacity, while another appeared to have low recovery and unprofitable clients.

These discrepancies are driven by behaviours which are common in professional services businesses but not ?in corporates. They include:

the fundamental building block of the financial system (time recording) being open to interpretation by each fee earning professional;
a weak centre/strong local control leading to local financial practices;
a ‘service’ culture by central finance, leading to excessive bespoking of reports for individual internal clients; and
‘sole trader’ behaviour, supported by performance measures that discourage the sharing of data.

?Each works against the objective of good integrated financials.

Figure 1 sets out a simple checklist of key metrics your firm should have available. Give yourself a point for each one you can confidently say your business can achieve, then see how it scores.

An integrated approach

Providing good integrated financial data will become an ever-more important objective in our increasingly complex and competitive market. Those who can do it well will have a distinct advantage as clients continue to demand more from law firms.

A more integrated approach will help with identifying efficiencies and opportunities from new and existing ?clients, and in unifying the firm under ?a common set of goals. However, there ?are traps for the unwary.

There are some simple steps which will help to keep any attempt to compare financial data across the firm’s business operations or offices on the straight and narrow (see box: Seven steps to integrate firmwide financial data).

The ideal approach 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 could be compared with any other. You would be able to measure things right and to measure the right things.

This is however not just a matter of form: it is insufficient to have a uniform format and presentation. The system will ?not of itself resolve the key behavioural issue, which is that the way that people choose to enter information and interpret the outputs can vary hugely. Local behaviours and uses of data need to be consistent. Presentation of the data should reflect the strategy and behaviours that the firm wants to encourage.

Ultimately, the data analysis must effectively recognise true differences ?in the underlying operations of the business. Those who can do this will ?be able to maximise the performance of each and every part of their business ?and to leverage the strength of their ?whole firm too.

Seven steps to integrate firmwide financial data

Keep it simple.There are essentially only three elements to consider in assessing a business unit or 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.
Get the simple measures right.Make sure the income and costs you are using really do belong to the unit in question. If you decide to close the unit, you don’t want to find its costs popping up elsewhere and, if you decide to expand the unit, you don’t want to find that the rest of the firm has been unwittingly subsidising it.
Understand the business model.Decide what level of profitability is right for that business unit. Then decide which measures are appropriate to assess the operation – the traditional ones like utilisation and realisation are only appropriate for some business models and, where they are appropriate, they need to be used in different ways.
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.
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.
Get the question right.Select the data that is appropriate to answer your query to ensure you reach the right conclusion.
Don’t let the tail wag the dog.Many accounting conventions are derived from the requirements of good financial accounting practice. For internal decision making, however, these can be at best misleading for the unwary and, at worst, lead to incorrect decisions.

Chris Howe is a director at Raedbora Consulting (www.raedboraconsulting.com) and was formerly commercial director at Addleshaw Goddard