Time to Replace Your Accounting Software?

Changes in business strategies, rising client demands, and technology advances all have made a law firm's choice of accounting software an ever more important management decision. Five years ago the Y2K scare led many firms to upgrade or replace their accounting systems out of perceived tactical necessity. Now, however, an assessment of your accounting software should be strategic: how well does it support your overall business objectives?

Often the answer to that question will be, not very well! Any decision to replace your accounting software, however, should rest firmly on two basic determinations: 1) that the current system cannot be modified or upgraded to meet your current expectations at a reasonable cost; and 2) that a better system can be obtained at a reasonable cost.

Here are the key factors to consider in making those determinations. For each factor, careful diagnosis is necessary to identify root problem causes. After all, poor results may not be the fault of your accounting software if you have inadequate hardware, unsound operational procedures, computer virus infections, or a poorly trained staff.

Has Your Current System Become a Liability?

To assess the status of your current software application, it is important to look at both internal and external factors. These factors include performance reliability, functional shortcomings (and new technological advancements), staff productivity, internal systems incompatibilities, and vendor support.

Unreliable Performance

Is performance degrading? There may be several possible reasons. The system may be running out of usable storage space, causing processing slowdowns or even crashes. If you need to purge data from your system frequently, then there most likely is a space problem.

In one multi-office law firm, the accounting system froze whenever two offices attempted to run accounts payable at the same time. IT would then have to reboot the system before allowing staff to restart their work. Often data would be lost, and work would have to be redone. Only after many attempts to solve the problem did the vendor conclude that the firm had outgrown its version of the software. Unfortunately, the crashing problem was not the only complaint users had, so the firm hesitated to upgrade to a newer version. Instead, they took a hard look at the features of their current system, the upgraded version, and other software options available.

Meanwhile, to keep operating with their current system, the firm established a rotation system across offices in order to prevent crashes. This workaround solution deferred a more substantial investment, but at the price of lowered accounting staff productivity. For example, expense checks had to be written manually whenever it was not an office's rotation day; and that inefficiency was later compounded when those checks needed to be entered into the accounting system. These inefficiencies, plus increasingly evident requirements for real-time information, soon led the firm to invest in substantial hardware enhancements and technology-efficient accounting software.

Sometimes apparently capable application software can have performance deficiencies due to non-obvious design constraints. One firm's system, installed only 4 years earlier, slowed down considerably at peak usage times. Worse, time entries were occasionally lost (causing the increasingly frustrated staff to re-enter time).

When the system finally started crashing, the firm determined that it needed to upgrade its operating platform to meet the requirements of other software programs. Analysis showed that a specific data file was reaching its capacity, causing excessive processing by the software.

While new software was being investigated, this firm's accounting and IT departments kept the accounting system “alive” by purging some data altogether and transferring other historical data offline. It was recognized, of course, that the now-offline historical data would no longer be easily accessible, but this workaround tactic also had a more serious long-term effect: data offloading had to be repeated several times, so when the firm finally moved to a new system, multiple database files required conversion. That made the system transition more complicated and expensive than it otherwise would have been.

Beyond the adequacy of the accounting application software and its data structures, performance depends on efficient hardware and operating systems that meet the accounting system specifications. It is also important to ensure that the network is free of viruses, and that all software upgrades and maintenance fixes are up to date.

If accounting system performance problems persist after attention to all these technology issues, then it may be time for a change.

Functional Obsolescence and
Technological Advances

Are you spending more time performing tasks outside the system, or often explaining to users that “the system can't do that”? As the needs of the firm and its clients evolve, the accounting department must be able to adapt to meet them. These needs may include the ability to create custom billing templates, to generate electronic bills, or to capture important financial details for quick reporting to management. If recurring tasks and reporting requirements routinely take disproportionately large efforts to complete, then a system change may be necessary.

One medium size firm, already experiencing steady growth, landed a very significant client that would provide lucrative work. But the client had specific billing data and format requirements that the firm's accounting system could not meet. For example, single bills needed to be created, but multiple parties were each going to pay a portion of each bill. The system's accounts receivable module, however, supported only one amount for the balance due, with no breakdown between the parties who would be paying the invoice.

The firm's accounting staff therefore had to manually calculate payment-share line items, and assemble both bills and management reports offline, outside of the firm's normal accounting and billing system. The parties all had separate addresses, which were also kept outside the billing system, so even bill mailings had to be done manually. Further, because the bills were prepared outside of the accounting system by the partner's secretary, who then manually recorded the transactions within the system, transcription errors were made; so the total amount recorded in accounts receivable did not match what was sent to the client. Accounting therefore had to keep a separate spreadsheet record of who paid their portion of the bill.

The firm controller correctly concluded that this situation would predictably get worse, and that his firm needed to move to a more sophisticated accounting system with a “multi-payor” feature.

The following example may be categorized as both a functional obsolescence issue and an internal systems incompatibility. Two firms of relatively equal size and profitability agreed to merge. In the course of the merger discussions and due diligence process, the two firms determined that one firm's system was better suited for billing functions and other client-related activity. The terms of the merger were reasonably complex, however, and these terms were not provided to the controllers of either firm. The merger was therefore completed without anyone knowing whether either of the respective firms' systems would be adaptable to capture transactions and provide accurate management accounting reports to the partners.

When merged operations began, the system designated for all billing proved incapable of automatically capturing details in a manner that would provide accurate reporting. The accounting department had to reconstruct the first month's transactions in order to provide appropriate information to the partners. This reconstruction was time consuming and difficult, however, and the resultant lack of timely and accurate reporting exacerbated some financial disappointments of the merger. The firm began losing partners and eventually dissolved. In hindsight, it was determined an upgrade to a more sophisticated system with enhanced data capturing capabilities would at least have resolved the accounting issues.

In some older systems for time entry and posting of costs to client accounts, batch processing imposes a heavy demand on the system (and users) at the end of a week or month. Online, real-time processing delivers client bills more quickly, while also enabling attorneys to view work in process and compare progress with budgets. Even with upgrading, however, design constraints of some older systems may not permit this type of process improvement.

Law firm accounting systems have been designed with a primary focus on effectively processing the volume of transactions that occur in a professional service organization. During the last few years, however, we have seen improvements in the reporting capabilities of these systems. Excellent managerial accounting reports are vital for growing law firms, and should be an important consideration in any decision to upgrade a firm's accounting system.

As noted above, older accounting systems can prove costly through functional obsolescence or inefficiencies. Moreover, necessary upgrades to a firm's network operating platform may not support accounting software that runs on old technology.

But technological advancements exert pull as well as push: even perfectly working older software may become unsatisfactory due to rising expectations. For example, computer research vendors such as Lexis-Nexis and Westlaw now provide firms the capability to download client cost and billing information directly from their Web sites; this transaction data can then be uploaded into a time-and-billing system, eliminating the tedious and error-prone process of manual posting – if the time-and-billing system is advanced enough to accept such an upload.

Other vendors such as Federal Express, DHL, UPS and many other courier companies similarly support automatic data capture. FedEx, for example, can provide a CD with billing data that can be uploaded into a receptive time-and-billing system.

More sophisticated systems, in addition to posting costs to the time-and-billing system, can also create an accounts payable voucher; the only remaining step is to print the check! A process that previously took several steps and a fair amount of manual effort has thus been greatly simplified.

Other features that are attracting firms to upgrade accounting systems include capabilities for:

• Web-based time entry, which provides the ability to enter time from any location with Internet access;
• Easy, point-and-click enhancements that are more user friendly throughout the system;
• On-line reporting of employee reimbursable expenses; and
• Improved abilities to electronically push reports out to system users.

Lost Productivity

If accounting staff are becoming less productive with each passing year, and more manual reports are being produced to provide information to management, there is a problem. As noted in the examples above, workaround solutions to system reliability or functional capability problems inevitably cause staff to be less productive.

Be certain, however, to eliminate the possibility that lack of productivity stems from inadequate training. In our experience, low staff productivity and perceived system inadequacies are more common with second- or third-generation users of the software. Frequently, the training of these staff members has been inferior to that provided during initial system implementation. Additionally, accounting manuals often are not prepared; this lack of documentation can lead to serious deficiencies in accounting procedures when staff turnover occurs.

Internal Systems Incompatibilities

A technology upgrade within the firm such as a conflicts program, records management or document management program that does not work in concert with the time-and-billing functions of the accounting system can cause problems. Your firm may be failing to benefit from new capabilities because your accounting system is an older, incompatible version that conflicts with a newer technology platform, as discussed in the example above.

A merger or implementation of a new line of business may also cause compatibility problems. Unless both parties use the same accounting system, it will probably be necessary to upgrade or replace one or both of the old systems to achieve the desired efficiencies.

One of the more common merger strategies for large general practice firms with litigation expertise has been to acquire a smaller patent boutique firm. This type of merger will put a strain on your accounting system: you will want to merge data from the acquired firm, but the billing and process requirements of a patent firm differ from a general practice firm. Accordingly, anytime a firm contemplates a merger, one of the due diligence steps should include a review of requirements for the systems and related IT investments that will need to operate in a merged environment.

Likewise, if the firm engages in an ancillary business with specific accounting requirements, such as government contracting, the current system may not be built for the different reporting requirements.

Vendor Support

Has your software vendor discontinued providing maintenance upgrades for the version of software you are still using? If your vendor no longer markets actively in the legal industry, or cannot provide the timely and effective support you need, then a new system should be considered before your old one has a substantial problem that seriously affects accounting operations. This is another reason why delaying the inevitable change to an upgraded system may prove much more costly in the long run.

Is a Better System Obtainable?

Obviously, you would not retire your accounting system without having a replacement system set up first. Moreover, you'll want a replacement system that is superior overall, not just better with respect to the prior system's problem areas.

Planning for a replacement system should therefore be done systematically, starting with a requirements assessment.

Requirements Assessment

We recommend the following five steps for a requirements assessment:

1. Brainstorm about ideal system capabilities that could improve client service, help lawyers manage their work and fees, improve staff efficiency, and enhance business decisions.

2. Identify and evaluate current accounting-process bottlenecks. For example, what improvements would permit more timely billings to improve cash flow? Which accounts payable processes take an inordinate amount of time for a relatively minor quantity of disbursement dollars (expense reimbursements)? What improvements would speed budget preparation?

3. Summarize the weaknesses of the current system, as discussed previously.

4. Select the “must have” improvements from your brainstorming ideas, process improvement opportunities and current system weaknesses.

Also consider future growth plans with their associated requirements, eg, plans to open an international office and the associated requirement to capture accounting data in a foreign currency. Other potentially needed capabilities may include such features as enhanced reporting, online time and expense entry, expanded general ledger chart of account capacity, multi-company features, multiple billing template designs, and simultaneous cash and accrual accounting.

Some desired capabilities may be available on other systems, while others may require custom development. Well-tested off-the-shelf software is preferable, since custom development adds much uncertainty regarding timely delivery, cost, and error-free performance.

5. Calculate the budget required for a new system that meets all current minimum requirements, along with the capability and support to handle projected needs. Estimate an acceptable investment cost for new software, based on business operations, profits, and projections.

For less sophisticated software, estimate that implementation and training will equal the software cost; for more sophisticated software, estimate even higher.

Internal resource staff time is often overlooked and underestimated. Depending on the complexity of the new software and associated business process changes, plan on 10 to 20 hours of internal staff time for every implementation and training hour contracted from the vendor.

Apart from the accounting application software, consider hardware and operating system upgrade costs, including any implementation and training cost for the firm's IT staff.

Determine how much current and historical data will be need to be extracted, converted to the new system's format, and reconciled – and at what cost. Vendor support for extracting and importing converted data should be a major factor in vendor selection. The decision related to historical data conversion can also have a substantial effect on the total implementation cost.

Finally, be sure to quantify gains and savings from enhanced productivity and reliability. Use these as input to your assessment of the proposed system's cost-effectiveness.

Deciding to Proceed

If you've determined that your old accounting system has become a liability and that system replacement should be affordable, then you're ready to focus on acquiring a new system.

Detailed guidance for RFPs, sales demos, and the like are topics for another article. But it will be important for the acquisition team to retain the key perspective of the analysis thus far: that replacing the firm's accounting system be treated as a strategic, not a tactical, decision.

Changes in business strategies, rising client demands, and technology advances all have made a law firm's choice of accounting software an ever more important management decision. Five years ago the Y2K scare led many firms to upgrade or replace their accounting systems out of perceived tactical necessity. Now, however, an assessment of your accounting software should be strategic: how well does it support your overall business objectives?

Often the answer to that question will be, not very well! Any decision to replace your accounting software, however, should rest firmly on two basic determinations: 1) that the current system cannot be modified or upgraded to meet your current expectations at a reasonable cost; and 2) that a better system can be obtained at a reasonable cost.

Here are the key factors to consider in making those determinations. For each factor, careful diagnosis is necessary to identify root problem causes. After all, poor results may not be the fault of your accounting software if you have inadequate hardware, unsound operational procedures, computer virus infections, or a poorly trained staff.

Has Your Current System Become a Liability?

To assess the status of your current software application, it is important to look at both internal and external factors. These factors include performance reliability, functional shortcomings (and new technological advancements), staff productivity, internal systems incompatibilities, and vendor support.

Unreliable Performance

Is performance degrading? There may be several possible reasons. The system may be running out of usable storage space, causing processing slowdowns or even crashes. If you need to purge data from your system frequently, then there most likely is a space problem.

In one multi-office law firm, the accounting system froze whenever two offices attempted to run accounts payable at the same time. IT would then have to reboot the system before allowing staff to restart their work. Often data would be lost, and work would have to be redone. Only after many attempts to solve the problem did the vendor conclude that the firm had outgrown its version of the software. Unfortunately, the crashing problem was not the only complaint users had, so the firm hesitated to upgrade to a newer version. Instead, they took a hard look at the features of their current system, the upgraded version, and other software options available.

Meanwhile, to keep operating with their current system, the firm established a rotation system across offices in order to prevent crashes. This workaround solution deferred a more substantial investment, but at the price of lowered accounting staff productivity. For example, expense checks had to be written manually whenever it was not an office's rotation day; and that inefficiency was later compounded when those checks needed to be entered into the accounting system. These inefficiencies, plus increasingly evident requirements for real-time information, soon led the firm to invest in substantial hardware enhancements and technology-efficient accounting software.

Sometimes apparently capable application software can have performance deficiencies due to non-obvious design constraints. One firm's system, installed only 4 years earlier, slowed down considerably at peak usage times. Worse, time entries were occasionally lost (causing the increasingly frustrated staff to re-enter time).

When the system finally started crashing, the firm determined that it needed to upgrade its operating platform to meet the requirements of other software programs. Analysis showed that a specific data file was reaching its capacity, causing excessive processing by the software.

While new software was being investigated, this firm's accounting and IT departments kept the accounting system “alive” by purging some data altogether and transferring other historical data offline. It was recognized, of course, that the now-offline historical data would no longer be easily accessible, but this workaround tactic also had a more serious long-term effect: data offloading had to be repeated several times, so when the firm finally moved to a new system, multiple database files required conversion. That made the system transition more complicated and expensive than it otherwise would have been.

Beyond the adequacy of the accounting application software and its data structures, performance depends on efficient hardware and operating systems that meet the accounting system specifications. It is also important to ensure that the network is free of viruses, and that all software upgrades and maintenance fixes are up to date.

If accounting system performance problems persist after attention to all these technology issues, then it may be time for a change.

Functional Obsolescence and
Technological Advances

Are you spending more time performing tasks outside the system, or often explaining to users that “the system can't do that”? As the needs of the firm and its clients evolve, the accounting department must be able to adapt to meet them. These needs may include the ability to create custom billing templates, to generate electronic bills, or to capture important financial details for quick reporting to management. If recurring tasks and reporting requirements routinely take disproportionately large efforts to complete, then a system change may be necessary.

One medium size firm, already experiencing steady growth, landed a very significant client that would provide lucrative work. But the client had specific billing data and format requirements that the firm's accounting system could not meet. For example, single bills needed to be created, but multiple parties were each going to pay a portion of each bill. The system's accounts receivable module, however, supported only one amount for the balance due, with no breakdown between the parties who would be paying the invoice.

The firm's accounting staff therefore had to manually calculate payment-share line items, and assemble both bills and management reports offline, outside of the firm's normal accounting and billing system. The parties all had separate addresses, which were also kept outside the billing system, so even bill mailings had to be done manually. Further, because the bills were prepared outside of the accounting system by the partner's secretary, who then manually recorded the transactions within the system, transcription errors were made; so the total amount recorded in accounts receivable did not match what was sent to the client. Accounting therefore had to keep a separate spreadsheet record of who paid their portion of the bill.

The firm controller correctly concluded that this situation would predictably get worse, and that his firm needed to move to a more sophisticated accounting system with a “multi-payor” feature.

The following example may be categorized as both a functional obsolescence issue and an internal systems incompatibility. Two firms of relatively equal size and profitability agreed to merge. In the course of the merger discussions and due diligence process, the two firms determined that one firm's system was better suited for billing functions and other client-related activity. The terms of the merger were reasonably complex, however, and these terms were not provided to the controllers of either firm. The merger was therefore completed without anyone knowing whether either of the respective firms' systems would be adaptable to capture transactions and provide accurate management accounting reports to the partners.

When merged operations began, the system designated for all billing proved incapable of automatically capturing details in a manner that would provide accurate reporting. The accounting department had to reconstruct the first month's transactions in order to provide appropriate information to the partners. This reconstruction was time consuming and difficult, however, and the resultant lack of timely and accurate reporting exacerbated some financial disappointments of the merger. The firm began losing partners and eventually dissolved. In hindsight, it was determined an upgrade to a more sophisticated system with enhanced data capturing capabilities would at least have resolved the accounting issues.

In some older systems for time entry and posting of costs to client accounts, batch processing imposes a heavy demand on the system (and users) at the end of a week or month. Online, real-time processing delivers client bills more quickly, while also enabling attorneys to view work in process and compare progress with budgets. Even with upgrading, however, design constraints of some older systems may not permit this type of process improvement.

Law firm accounting systems have been designed with a primary focus on effectively processing the volume of transactions that occur in a professional service organization. During the last few years, however, we have seen improvements in the reporting capabilities of these systems. Excellent managerial accounting reports are vital for growing law firms, and should be an important consideration in any decision to upgrade a firm's accounting system.

As noted above, older accounting systems can prove costly through functional obsolescence or inefficiencies. Moreover, necessary upgrades to a firm's network operating platform may not support accounting software that runs on old technology.

But technological advancements exert pull as well as push: even perfectly working older software may become unsatisfactory due to rising expectations. For example, computer research vendors such as Lexis-Nexis and Westlaw now provide firms the capability to download client cost and billing information directly from their Web sites; this transaction data can then be uploaded into a time-and-billing system, eliminating the tedious and error-prone process of manual posting – if the time-and-billing system is advanced enough to accept such an upload.

Other vendors such as Federal Express, DHL, UPS and many other courier companies similarly support automatic data capture. FedEx, for example, can provide a CD with billing data that can be uploaded into a receptive time-and-billing system.

More sophisticated systems, in addition to posting costs to the time-and-billing system, can also create an accounts payable voucher; the only remaining step is to print the check! A process that previously took several steps and a fair amount of manual effort has thus been greatly simplified.

Other features that are attracting firms to upgrade accounting systems include capabilities for:

• Web-based time entry, which provides the ability to enter time from any location with Internet access;
• Easy, point-and-click enhancements that are more user friendly throughout the system;
• On-line reporting of employee reimbursable expenses; and
• Improved abilities to electronically push reports out to system users.

Lost Productivity

If accounting staff are becoming less productive with each passing year, and more manual reports are being produced to provide information to management, there is a problem. As noted in the examples above, workaround solutions to system reliability or functional capability problems inevitably cause staff to be less productive.

Be certain, however, to eliminate the possibility that lack of productivity stems from inadequate training. In our experience, low staff productivity and perceived system inadequacies are more common with second- or third-generation users of the software. Frequently, the training of these staff members has been inferior to that provided during initial system implementation. Additionally, accounting manuals often are not prepared; this lack of documentation can lead to serious deficiencies in accounting procedures when staff turnover occurs.

Internal Systems Incompatibilities

A technology upgrade within the firm such as a conflicts program, records management or document management program that does not work in concert with the time-and-billing functions of the accounting system can cause problems. Your firm may be failing to benefit from new capabilities because your accounting system is an older, incompatible version that conflicts with a newer technology platform, as discussed in the example above.

A merger or implementation of a new line of business may also cause compatibility problems. Unless both parties use the same accounting system, it will probably be necessary to upgrade or replace one or both of the old systems to achieve the desired efficiencies.

One of the more common merger strategies for large general practice firms with litigation expertise has been to acquire a smaller patent boutique firm. This type of merger will put a strain on your accounting system: you will want to merge data from the acquired firm, but the billing and process requirements of a patent firm differ from a general practice firm. Accordingly, anytime a firm contemplates a merger, one of the due diligence steps should include a review of requirements for the systems and related IT investments that will need to operate in a merged environment.

Likewise, if the firm engages in an ancillary business with specific accounting requirements, such as government contracting, the current system may not be built for the different reporting requirements.

Vendor Support

Has your software vendor discontinued providing maintenance upgrades for the version of software you are still using? If your vendor no longer markets actively in the legal industry, or cannot provide the timely and effective support you need, then a new system should be considered before your old one has a substantial problem that seriously affects accounting operations. This is another reason why delaying the inevitable change to an upgraded system may prove much more costly in the long run.

Is a Better System Obtainable?

Obviously, you would not retire your accounting system without having a replacement system set up first. Moreover, you'll want a replacement system that is superior overall, not just better with respect to the prior system's problem areas.

Planning for a replacement system should therefore be done systematically, starting with a requirements assessment.

Requirements Assessment

We recommend the following five steps for a requirements assessment:

1. Brainstorm about ideal system capabilities that could improve client service, help lawyers manage their work and fees, improve staff efficiency, and enhance business decisions.

2. Identify and evaluate current accounting-process bottlenecks. For example, what improvements would permit more timely billings to improve cash flow? Which accounts payable processes take an inordinate amount of time for a relatively minor quantity of disbursement dollars (expense reimbursements)? What improvements would speed budget preparation?

3. Summarize the weaknesses of the current system, as discussed previously.

4. Select the “must have” improvements from your brainstorming ideas, process improvement opportunities and current system weaknesses.

Also consider future growth plans with their associated requirements, eg, plans to open an international office and the associated requirement to capture accounting data in a foreign currency. Other potentially needed capabilities may include such features as enhanced reporting, online time and expense entry, expanded general ledger chart of account capacity, multi-company features, multiple billing template designs, and simultaneous cash and accrual accounting.

Some desired capabilities may be available on other systems, while others may require custom development. Well-tested off-the-shelf software is preferable, since custom development adds much uncertainty regarding timely delivery, cost, and error-free performance.

5. Calculate the budget required for a new system that meets all current minimum requirements, along with the capability and support to handle projected needs. Estimate an acceptable investment cost for new software, based on business operations, profits, and projections.

For less sophisticated software, estimate that implementation and training will equal the software cost; for more sophisticated software, estimate even higher.

Internal resource staff time is often overlooked and underestimated. Depending on the complexity of the new software and associated business process changes, plan on 10 to 20 hours of internal staff time for every implementation and training hour contracted from the vendor.

Apart from the accounting application software, consider hardware and operating system upgrade costs, including any implementation and training cost for the firm's IT staff.

Determine how much current and historical data will be need to be extracted, converted to the new system's format, and reconciled – and at what cost. Vendor support for extracting and importing converted data should be a major factor in vendor selection. The decision related to historical data conversion can also have a substantial effect on the total implementation cost.

Finally, be sure to quantify gains and savings from enhanced productivity and reliability. Use these as input to your assessment of the proposed system's cost-effectiveness.

Deciding to Proceed

If you've determined that your old accounting system has become a liability and that system replacement should be affordable, then you're ready to focus on acquiring a new system.

Detailed guidance for RFPs, sales demos, and the like are topics for another article. But it will be important for the acquisition team to retain the key perspective of the analysis thus far: that replacing the firm's accounting system be treated as a strategic, not a tactical, decision.