Communicating Firm Finances to the Partnership

It's no secret that 2009 was a year where many law firms began to intensively focus on their finances. Unlike in the past, it is not just firm leadership taking a close look at the firm's books these days. The focus on finances has extended to law firm partners, involving a wider audience than the managing partner and management committee. In firms grappling with the severity of the economic crisis, legal management consultants, such as the author's firm, have noticed many encountering unexpected challenges when communicating the firms' financial results with the wider partnership. In some firms, for example, many partners have widely varying perspectives on practice profitability, office profitability, utilization, expenses, and overhead allocation. We have even found some partners from the same firm referencing different values for supposedly the same performance metric.

We believe most financial misunderstandings and shortcomings can be avoided if firm management were to use some fairly straightforward communication techniques with their general partnership. In this article we have compiled a few considerations for a law firm's head-of-finance (CFOs, EDs, etc.) to contemplate when communicating with his or her respective partnership.

Control the Message to the Partners

Many heads-of-finance report directly to the managing partner or members of the management committee. These partners in management are typically well versed in the firm's finances and strategy, and fully understand the financial reports produced by the finance department. However, sometimes the head-of-finance treats the general partnership as if they were equally adept in interpreting financial information as the firm's management. This is often not the case.

We have seen too many partners pull out a thick monthly or quarterly financial report filled with rows and rows of data and ask, “What am I supposed to do with this?” A member of the management committee may know how to extract relevant data from the oversized financial report, but it is risky to assume that the general partnership is similarly able to properly interpret the data.

Too much information in the hands of fiscal neophytes can result in unintended consequences. At a minimum, too much data can be overwhelming, resulting in inertia or paralyzing indecision, which to a head of finance looks like the report's information is simply ignored. A more harmful consequence is when too much information leads to misinterpretations or “overly-favorable” interpretations of the material. For example, we recently talked to a group of partners who had erroneously interpreted the data in the reports, leading them to believe that their practice is more profitable than it really is.

In many of these instances there is a clear need for the head-of-finance, in conjunction with the management committee, to control the key elements of the message they want to send to the partnership. This is not a spin-doctoring move; rather, it is an attempt to disseminate financial information in a summarized and focused manner that will help the partners drive business productivity and control costs. In firms that actively control their financial message, the reports provided to the partners will often focus on that specific partner's personal performance, as well as his or her assigned practice group. The areas of focus will help the partner identify underutilized individuals, assist in discovering business development opportunities (or cross-selling opportunities), and help the partner understand how to maximize profitability through staffing. These reports do not focus on how other practices are performing and instead give partners the financial understanding they need to improve their own practice. This type of financial management is often seen in the corporate world where financial reports tend to be business-unit focused, as opposed to companywide focused.

Using controlled financial reporting does not mean that financial information should be withheld or hidden from partners. Rather, it is to suggest that heads-of-finance, with firm management, work to emphasize a philosophy for the firm in which each practice group is focused on optimizing its own performance rather than using others' performance to justify actions and positions. It is common for groups within a firm to perform at different levels, and not all can perform equally. The goal is to win by having each group perform optimally, as opposed to groups winning in relation to or in competition with each other.

Beware of Long, Detailed Financial Memos

While law partners may be focused on details and nuances with regard to their client work, it may be wrong to assume they are as focused on details when it comes to non-client (internal) related matters. One head-of-finance we know became extremely frustrated because the partnership did not have the same level of concern he had regarding YTD profitability after he delivered his detailed financial memo. This disconnect was tied to the fact that the firm had prepaid a significant amount of the current year's expenses at the end of the previous year. Had the expenses not been prepaid, the current year's profits would be measurably lower. But the significance of the prepayments was lost upon the partnership because the head-of-finance had chosen to explain the situation in the middle of a long and overly detailed financial memo.

Many finance departments instinctively feel they have properly informed the partnership of a situation because they sent a very long and detailed memo on the topic. In reality, these types of memos may have the opposite effect because the partners are not directed to the most important facts. When faced with a long description of the nuances of firm finances, some partners simply tune out.

We have also found that long memos from the finance department are sometimes confusing to non-accountants. Often the authors of these memos focus on making sure the figures in the document are correct, but then spend little time translating the information into layman's terms and ensuring the core message is delivered consistently and properly. Too frequently, memos include a volume of text regarding what a head-of-finance knows about a particular situation, as opposed to an edited memo that focuses on what the partners need to know about the situation.

Since each firm's partnership has a different style and culture toward data, there is no one “best” way to communicate financial positions to the partnership. However, we see a clear trend in support of the “keep it simple and focused” approach to financial memo writing.

New Delivery of an Old Message Can Create a New Message

We know another head-of-finance who had a serious concern regarding the unprofitable nature of some of the firm's large clients, but despite repeated conveyances of this concern, the message continued to fall upon deaf ears. Our own analysis of the firm's client profitability confirmed the head-of-finance's findings, and we reported our conclusions to the partners. After the presentation, a significant number of partners thanked us for enlightening them about this critical information and told us that they were determined to re-evaluate the staffing and viability of the select clients. The old message from a new messenger refreshed it and called attention to its serious nature.

The reason we had greater success triggering a response from the partnership was because we presented the information in a more compelling manner. The head-of-finance had always used straight numbers to explain the situation, but we used a simple chart showing smaller clients generating significant profits and a few large clients generating losses. The contrast really struck a chord with the audience.

If a message does not generate the expected or needed reaction the first time around, the message delivered in the same format won't likely fare any better the second, third, or 10th time around. Consider mixing up the delivery method of the message to increase its effectiveness. Sometimes the simplest of changes, such as using graphs instead of narrative text or having a new person present the material, can result in the needed response.

Back to the Basics to Move Forward

From time to time partners may need to be re-educated about a particular topic before progress can be made toward a productive discussion or solution. There are times when misconceptions and misunderstandings are so prevailing and scattered that it is necessary to have everyone go back to the basics in order to find common ground before the group can move forward together.

We worked with one firm where the partners from different offices were up in arms over the allocation of overhead expenses to the various offices. Each faction believed they were unfairly subsidizing expenses that were directly associated with other offices. The head-of-finance had repeatedly informed the frustrated partners that the expenses being allocated in overhead were appropriate and that it was a fairly typical and generally accepted approach for law firms to use. The repeated assurances did little to comfort the partnership.

We decided that in order to settle the overhead topic, we would need to start at a very basic level and build up from there to make sure everyone was using the same terminology and had the same level of understanding on the topic. We started by explaining what “overhead expenses” were, what expense items were included in their overhead figures and what those expense items entailed. We then explained why those expenses should be considered shared overhead and why the allocation was done the way it was.

The exercise may have seemed rudimentary, but it left everyone using the same terminology and created a foundation for a productive discussion that otherwise would not have been possible. In the end, the partners were able to accept the fact that the allocation of overhead was not the issue; rather, it was the size of their overhead expenses relative to their current size that was smothering the firm.

We have seen a number of situations in which a dispute is actually due to lack of understanding as opposed to an actual difference in ideology or strategy. In these instances, it can be beneficial to bring everyone back to the basics to identify where the differences really lie.

Conclusion

As firms continue to be challenged by the economy, it can be assumed that partners will remain focused on finances. Communications from the finance department must be clear, purposeful, and allow little room for misinterpretation. We hope that the suggestions we have presented will assist finance departments to deliver the type of communications that will help lead firms to a prosperous year.

Jonathan S. Kuo is a consultant with Hildebrandt Baker Robbins, a global management consulting firm that specializes in the legal profession. Kuo is based in Washington, DC, and can be reached at [email protected].

It's no secret that 2009 was a year where many law firms began to intensively focus on their finances. Unlike in the past, it is not just firm leadership taking a close look at the firm's books these days. The focus on finances has extended to law firm partners, involving a wider audience than the managing partner and management committee. In firms grappling with the severity of the economic crisis, legal management consultants, such as the author's firm, have noticed many encountering unexpected challenges when communicating the firms' financial results with the wider partnership. In some firms, for example, many partners have widely varying perspectives on practice profitability, office profitability, utilization, expenses, and overhead allocation. We have even found some partners from the same firm referencing different values for supposedly the same performance metric.

We believe most financial misunderstandings and shortcomings can be avoided if firm management were to use some fairly straightforward communication techniques with their general partnership. In this article we have compiled a few considerations for a law firm's head-of-finance (CFOs, EDs, etc.) to contemplate when communicating with his or her respective partnership.

Control the Message to the Partners

Many heads-of-finance report directly to the managing partner or members of the management committee. These partners in management are typically well versed in the firm's finances and strategy, and fully understand the financial reports produced by the finance department. However, sometimes the head-of-finance treats the general partnership as if they were equally adept in interpreting financial information as the firm's management. This is often not the case.

We have seen too many partners pull out a thick monthly or quarterly financial report filled with rows and rows of data and ask, “What am I supposed to do with this?” A member of the management committee may know how to extract relevant data from the oversized financial report, but it is risky to assume that the general partnership is similarly able to properly interpret the data.

Too much information in the hands of fiscal neophytes can result in unintended consequences. At a minimum, too much data can be overwhelming, resulting in inertia or paralyzing indecision, which to a head of finance looks like the report's information is simply ignored. A more harmful consequence is when too much information leads to misinterpretations or “overly-favorable” interpretations of the material. For example, we recently talked to a group of partners who had erroneously interpreted the data in the reports, leading them to believe that their practice is more profitable than it really is.

In many of these instances there is a clear need for the head-of-finance, in conjunction with the management committee, to control the key elements of the message they want to send to the partnership. This is not a spin-doctoring move; rather, it is an attempt to disseminate financial information in a summarized and focused manner that will help the partners drive business productivity and control costs. In firms that actively control their financial message, the reports provided to the partners will often focus on that specific partner's personal performance, as well as his or her assigned practice group. The areas of focus will help the partner identify underutilized individuals, assist in discovering business development opportunities (or cross-selling opportunities), and help the partner understand how to maximize profitability through staffing. These reports do not focus on how other practices are performing and instead give partners the financial understanding they need to improve their own practice. This type of financial management is often seen in the corporate world where financial reports tend to be business-unit focused, as opposed to companywide focused.

Using controlled financial reporting does not mean that financial information should be withheld or hidden from partners. Rather, it is to suggest that heads-of-finance, with firm management, work to emphasize a philosophy for the firm in which each practice group is focused on optimizing its own performance rather than using others' performance to justify actions and positions. It is common for groups within a firm to perform at different levels, and not all can perform equally. The goal is to win by having each group perform optimally, as opposed to groups winning in relation to or in competition with each other.

Beware of Long, Detailed Financial Memos

While law partners may be focused on details and nuances with regard to their client work, it may be wrong to assume they are as focused on details when it comes to non-client (internal) related matters. One head-of-finance we know became extremely frustrated because the partnership did not have the same level of concern he had regarding YTD profitability after he delivered his detailed financial memo. This disconnect was tied to the fact that the firm had prepaid a significant amount of the current year's expenses at the end of the previous year. Had the expenses not been prepaid, the current year's profits would be measurably lower. But the significance of the prepayments was lost upon the partnership because the head-of-finance had chosen to explain the situation in the middle of a long and overly detailed financial memo.

Many finance departments instinctively feel they have properly informed the partnership of a situation because they sent a very long and detailed memo on the topic. In reality, these types of memos may have the opposite effect because the partners are not directed to the most important facts. When faced with a long description of the nuances of firm finances, some partners simply tune out.

We have also found that long memos from the finance department are sometimes confusing to non-accountants. Often the authors of these memos focus on making sure the figures in the document are correct, but then spend little time translating the information into layman's terms and ensuring the core message is delivered consistently and properly. Too frequently, memos include a volume of text regarding what a head-of-finance knows about a particular situation, as opposed to an edited memo that focuses on what the partners need to know about the situation.

Since each firm's partnership has a different style and culture toward data, there is no one “best” way to communicate financial positions to the partnership. However, we see a clear trend in support of the “keep it simple and focused” approach to financial memo writing.

New Delivery of an Old Message Can Create a New Message

We know another head-of-finance who had a serious concern regarding the unprofitable nature of some of the firm's large clients, but despite repeated conveyances of this concern, the message continued to fall upon deaf ears. Our own analysis of the firm's client profitability confirmed the head-of-finance's findings, and we reported our conclusions to the partners. After the presentation, a significant number of partners thanked us for enlightening them about this critical information and told us that they were determined to re-evaluate the staffing and viability of the select clients. The old message from a new messenger refreshed it and called attention to its serious nature.

The reason we had greater success triggering a response from the partnership was because we presented the information in a more compelling manner. The head-of-finance had always used straight numbers to explain the situation, but we used a simple chart showing smaller clients generating significant profits and a few large clients generating losses. The contrast really struck a chord with the audience.

If a message does not generate the expected or needed reaction the first time around, the message delivered in the same format won't likely fare any better the second, third, or 10th time around. Consider mixing up the delivery method of the message to increase its effectiveness. Sometimes the simplest of changes, such as using graphs instead of narrative text or having a new person present the material, can result in the needed response.

Back to the Basics to Move Forward

From time to time partners may need to be re-educated about a particular topic before progress can be made toward a productive discussion or solution. There are times when misconceptions and misunderstandings are so prevailing and scattered that it is necessary to have everyone go back to the basics in order to find common ground before the group can move forward together.

We worked with one firm where the partners from different offices were up in arms over the allocation of overhead expenses to the various offices. Each faction believed they were unfairly subsidizing expenses that were directly associated with other offices. The head-of-finance had repeatedly informed the frustrated partners that the expenses being allocated in overhead were appropriate and that it was a fairly typical and generally accepted approach for law firms to use. The repeated assurances did little to comfort the partnership.

We decided that in order to settle the overhead topic, we would need to start at a very basic level and build up from there to make sure everyone was using the same terminology and had the same level of understanding on the topic. We started by explaining what “overhead expenses” were, what expense items were included in their overhead figures and what those expense items entailed. We then explained why those expenses should be considered shared overhead and why the allocation was done the way it was.

The exercise may have seemed rudimentary, but it left everyone using the same terminology and created a foundation for a productive discussion that otherwise would not have been possible. In the end, the partners were able to accept the fact that the allocation of overhead was not the issue; rather, it was the size of their overhead expenses relative to their current size that was smothering the firm.

We have seen a number of situations in which a dispute is actually due to lack of understanding as opposed to an actual difference in ideology or strategy. In these instances, it can be beneficial to bring everyone back to the basics to identify where the differences really lie.

Conclusion

As firms continue to be challenged by the economy, it can be assumed that partners will remain focused on finances. Communications from the finance department must be clear, purposeful, and allow little room for misinterpretation. We hope that the suggestions we have presented will assist finance departments to deliver the type of communications that will help lead firms to a prosperous year.

Jonathan S. Kuo is a consultant with Hildebrandt Baker Robbins, a global management consulting firm that specializes in the legal profession. Kuo is based in Washington, DC, and can be reached at [email protected].