The Evolving Role of the Law Firm CFO

A law firm is a business, and its financial results are more than monthly reports ' they are the vital signs of the health of the business. It's time for the CFO to take a higher profile role, and many are ready to do so. This may involve management skills, finding the time to look at the most important elements of the firm's cost structure from a fresh perspective and identifying opportunities to reduce costs outside of head count reduction. But the CFO may also need to take more of a leadership role, taking an unbiased, objective approach and a reassessment of all sacred cows that can undermine effective change.

The distinction between management and leadership strikes some as a false one. Linda Hill and Kent Lineback addressed the question recently in their Harvard Business Review blog. “Management vs. leadership ' it's a distinction we all hear over and over these days. It says management focuses on getting work done on time, on budget, and on target ' in other words, steady execution and control ' while leadership focuses on change and innovation.” [Linda Hill and Kent Lineback, "I'm a leader, not a manager!," HBR Blog Network, Dec. 14, 2011.]

In our view, the most successful law firm CFOs show both skill sets. As a leader working with the managing partner to establish a future vision and a change agenda, the CFO's knowledge of the firm's financial realities and his or her analytical skills are invaluable. As a manager implementing the plan to make that vision real, an ability to plan and execute is vital.

The Low-Hanging Fruit Is Already Gone

Firms have responded to economic pressures by completing several rounds of cost-cutting measures. Over the last three years, CFOs cut costs by squeezing suppliers and vendors, reducing head count and freezing spending. But rarely did they dig deeper. As competition in the profession continues to intensify and economic growth continues to stagnate, firms still need to find new ways to impact the bottom line.

It's Time to Apply More Strategic Thinking

Due to the increasingly competitive nature of the legal profession, many law firms have developed strategic plans to help them gain and sustain a competitive advantage. These plans identify specific implementation steps to achieve a long-term vision. The firm's financial expert, the CFO, must play a key role in this type of planning.

Ideally, the energy and inspiration of a strategic plan originates at the level of the managing partner and works its way down. Typically, this is an effort to properly position the firm for the long term by evaluating many factors including firm culture, the desires of the partners, areas of expertise, market threats, business opportunities and economic climate, to name a few. The CFO will be a key member of the planning team, providing financial information, comparing scenarios, and testing assumptions. This is the CFO's leadership role: to ensure that the vision of future financial performance is realistic, consistent with market conditions, and reflects the desires of the partners.

If a firm does not have a strategic plan, the CFO should embrace the opportunity to develop a financial plan that considers fundamental changes without sacrificing the core values that distinguish the firm from its competitors. These may include the cost components of the firm that are no longer reasonable given the current business climate. The most effective way for the CFO to articulate a desired vision is in terms of financial performance. For example, a goal of increasing average per-partner profits from $650,000 to $750,000 is one that everyone in the firm can understand and rally behind.

Multiple scenarios should be evaluated. These might include the expansion of existing services to a broader client base within a geographic region, diversification of services to include additional areas of law, geographic expansion by opening or acquiring other firms, or elimination of unprofitable service areas, practice groups, or personnel (see “sacred cows” reference above).

A critical part of this plan will be cost reduction measures. The CFO must influence the managing partner and management committee, to convince them that these measures will produce results. Don't ignore the unintended consequences that some cost reductions may create. For example, freezing spending in areas such as technology costs can have a whiplash effect. Technology ages very quickly and typically needs full replacement every three to five years. Falling behind on software licenses can have legal ramifications as well as costing the firm even more in upgrades.

Spirited debates should be expected, and a unified front must be displayed to the firm.

Implementation Can Be the Achilles' Heel of Any Project

Once the vision is articulated with the managing partner, and management committee support is in place, the firm will need to develop a detailed project plan. In our experience, law firm CFOs excel here. Here's where a strong CFO's “inner manager” kicks in. The plan should include 10 steps.

1. Project kickoff should be led by the managing partner at an all-partner meeting to ensure the project receives top leadership support from the outset. The kickoff should communicate the objectives and phases of the project plan.
2. Partner interviews follow, geared toward understanding partner needs and expectations relative to the discharge of their professional duties. Ask difficult questions to bring fresh and objective perspectives to all areas of the practice.
3. Financial analysis includes identifying key performance indicators for the firm ' Which measures really influence results? ' and comparing those indicators to published benchmarks. For more information on key performance indicators, see “The Vital Signs of Firm Profitability” by Steven A. Davis and Marc Feigelson in the November 2011 issue of Accounting and Financial Planning for Law Firms.
4. Staff interviews will help the management team understand lawyer utilization of staff resources. Modifying roles and assignments or automating tasks that are being performed manually can produce great productivity gains that translate to the bottom line.
5. Review organizational structure and functional areas such as human resources, information technology, marketing and accounting. There may be hidden synergies to capitalize upon, or duplication of efforts that can be effectively eliminated.
6. Look at all agreements and consider renegotiating. Review contracts, and service and maintenance agreements to identify possible cost saving opportunities in areas like real estate leases, office space usage, utility costs, facilities maintenance costs, insurance costs, off-site storage costs, benefit costs, benefit administration costs, payroll services, banking fees, IT software and hardware costs, cloud computing and storage fees, disaster contingency fees, and voice and data telecommunication contracts, to name a few.
7. Draft preliminary recommendations. Include measures that will produce short-term savings (four to six weeks), near-term savings (three to six months) and long-term savings (1+ years). Short-term savings will be an important tool to persuade skeptics and bring them on board with the longer-term initiative.
8. Preview with leaders. Meet with practice group leaders to present recommendations. Gauge support and anticipate resistance that may require managing partner leadership.
9. Review final recommendations with the managing partner. Discuss support and resistance to the plan and develop tactics to address any anticipated resistance.
10. Present recommendations to management. Recommendations typically include four categories. Organizational changes position the firm to support future growth and profitability. Changes to the operating model create efficient processes to compete more effectively. Implementation mobilizes the firm for long-term success, not just the quick hit. And metrics keep you on track and help identify adjustments as you proceed.

Lead Through the Numbers

Today's best leaders combine the vision of the change agent with the planning and organization of a project manager. The ability to influence and collaborate is emerging as a third skill set that powers their success. To enjoy real influence and take a leadership stance, the CFO must earn credibility throughout the firm. This involves building strong relationships with the managing partner, management committee, partners and functional department leaders. The CFO's intimate knowledge of the firm's financial performance, risks and opportunities is an excellent foundation for these relationships.

Relationship building isn't code for becoming a “yes-man”; objectivity and independence must remain a core value. For a financially grounded leader like a CFO, demonstrating measurable results is a natural way to build credibility and to support changes that may be difficult for others to accept. This becomes real influence, grounded in financial evidence. Through activities that increase partner/shareholder value, the CFO is elevated to a strategic role in the law firm's management committee. Management thus raises the bar within the firm in terms of measuring performance, and creating accountability.

Outstanding CFOs with all of these skills and the right personal chemistry ultimately become agents of change with insights that drive performance and help achieve better results. These talented financial executives can exercise the proper influence and shape attitudes and behavior. Yet financial leaders with these capabilities seem to be in short supply. Firms that want to harness the power of a strong managing partner/CFO relationship will find developing or recruiting such talent is well worth the effort.

Ralph MacNamara is a director with Kaufman, Rossin & Co., CPAs. He focuses his consulting practice on change initiatives for law firms. He can be reached at [email protected]. Michael Moore leads the Business Advisory Services group for Kaufman, Rossin & Co. He can be reached at [email protected].

Many law firm CFOs still have narrowly defined roles that focus on budgeting, financial modeling, internal controls and tax information reporting despite the dramatic changes the legal profession has experienced over the past three years. Multiple external pressures have combined to create a business climate marked by increased sophistication of clients purchasing legal services, increased fee sensitivity with clients pressing for discounts and decreasing differentiation among competing firms. As a result, many law firms have seen their revenues contract more rapidly than their cost structure.

Many CFOs will have to spread their wings in 2012. The real challenge ' and opportunity ' facing today's law firm CFO is not improving his or her technical expertise, but rather gaining the support of law firm management to implement real, impactful change.

Is Your CFO a Manager or a Leader?

A law firm is a business, and its financial results are more than monthly reports ' they are the vital signs of the health of the business. It's time for the CFO to take a higher profile role, and many are ready to do so. This may involve management skills, finding the time to look at the most important elements of the firm's cost structure from a fresh perspective and identifying opportunities to reduce costs outside of head count reduction. But the CFO may also need to take more of a leadership role, taking an unbiased, objective approach and a reassessment of all sacred cows that can undermine effective change.

The distinction between management and leadership strikes some as a false one. Linda Hill and Kent Lineback addressed the question recently in their Harvard Business Review blog. “Management vs. leadership ' it's a distinction we all hear over and over these days. It says management focuses on getting work done on time, on budget, and on target ' in other words, steady execution and control ' while leadership focuses on change and innovation.” [Linda Hill and Kent Lineback, "I'm a leader, not a manager!," HBR Blog Network, Dec. 14, 2011.]

In our view, the most successful law firm CFOs show both skill sets. As a leader working with the managing partner to establish a future vision and a change agenda, the CFO's knowledge of the firm's financial realities and his or her analytical skills are invaluable. As a manager implementing the plan to make that vision real, an ability to plan and execute is vital.

The Low-Hanging Fruit Is Already Gone

Firms have responded to economic pressures by completing several rounds of cost-cutting measures. Over the last three years, CFOs cut costs by squeezing suppliers and vendors, reducing head count and freezing spending. But rarely did they dig deeper. As competition in the profession continues to intensify and economic growth continues to stagnate, firms still need to find new ways to impact the bottom line.

It's Time to Apply More Strategic Thinking

Due to the increasingly competitive nature of the legal profession, many law firms have developed strategic plans to help them gain and sustain a competitive advantage. These plans identify specific implementation steps to achieve a long-term vision. The firm's financial expert, the CFO, must play a key role in this type of planning.

Ideally, the energy and inspiration of a strategic plan originates at the level of the managing partner and works its way down. Typically, this is an effort to properly position the firm for the long term by evaluating many factors including firm culture, the desires of the partners, areas of expertise, market threats, business opportunities and economic climate, to name a few. The CFO will be a key member of the planning team, providing financial information, comparing scenarios, and testing assumptions. This is the CFO's leadership role: to ensure that the vision of future financial performance is realistic, consistent with market conditions, and reflects the desires of the partners.

If a firm does not have a strategic plan, the CFO should embrace the opportunity to develop a financial plan that considers fundamental changes without sacrificing the core values that distinguish the firm from its competitors. These may include the cost components of the firm that are no longer reasonable given the current business climate. The most effective way for the CFO to articulate a desired vision is in terms of financial performance. For example, a goal of increasing average per-partner profits from $650,000 to $750,000 is one that everyone in the firm can understand and rally behind.

Multiple scenarios should be evaluated. These might include the expansion of existing services to a broader client base within a geographic region, diversification of services to include additional areas of law, geographic expansion by opening or acquiring other firms, or elimination of unprofitable service areas, practice groups, or personnel (see “sacred cows” reference above).

A critical part of this plan will be cost reduction measures. The CFO must influence the managing partner and management committee, to convince them that these measures will produce results. Don't ignore the unintended consequences that some cost reductions may create. For example, freezing spending in areas such as technology costs can have a whiplash effect. Technology ages very quickly and typically needs full replacement every three to five years. Falling behind on software licenses can have legal ramifications as well as costing the firm even more in upgrades.

Spirited debates should be expected, and a unified front must be displayed to the firm.

Implementation Can Be the Achilles' Heel of Any Project

Once the vision is articulated with the managing partner, and management committee support is in place, the firm will need to develop a detailed project plan. In our experience, law firm CFOs excel here. Here's where a strong CFO's “inner manager” kicks in. The plan should include 10 steps.

1. Project kickoff should be led by the managing partner at an all-partner meeting to ensure the project receives top leadership support from the outset. The kickoff should communicate the objectives and phases of the project plan.
2. Partner interviews follow, geared toward understanding partner needs and expectations relative to the discharge of their professional duties. Ask difficult questions to bring fresh and objective perspectives to all areas of the practice.
3. Financial analysis includes identifying key performance indicators for the firm ' Which measures really influence results? ' and comparing those indicators to published benchmarks. For more information on key performance indicators, see “The Vital Signs of Firm Profitability” by Steven A. Davis and Marc Feigelson in the November 2011 issue of Accounting and Financial Planning for Law Firms.
4. Staff interviews will help the management team understand lawyer utilization of staff resources. Modifying roles and assignments or automating tasks that are being performed manually can produce great productivity gains that translate to the bottom line.
5. Review organizational structure and functional areas such as human resources, information technology, marketing and accounting. There may be hidden synergies to capitalize upon, or duplication of efforts that can be effectively eliminated.
6. Look at all agreements and consider renegotiating. Review contracts, and service and maintenance agreements to identify possible cost saving opportunities in areas like real estate leases, office space usage, utility costs, facilities maintenance costs, insurance costs, off-site storage costs, benefit costs, benefit administration costs, payroll services, banking fees, IT software and hardware costs, cloud computing and storage fees, disaster contingency fees, and voice and data telecommunication contracts, to name a few.
7. Draft preliminary recommendations. Include measures that will produce short-term savings (four to six weeks), near-term savings (three to six months) and long-term savings (1+ years). Short-term savings will be an important tool to persuade skeptics and bring them on board with the longer-term initiative.
8. Preview with leaders. Meet with practice group leaders to present recommendations. Gauge support and anticipate resistance that may require managing partner leadership.
9. Review final recommendations with the managing partner. Discuss support and resistance to the plan and develop tactics to address any anticipated resistance.
10. Present recommendations to management. Recommendations typically include four categories. Organizational changes position the firm to support future growth and profitability. Changes to the operating model create efficient processes to compete more effectively. Implementation mobilizes the firm for long-term success, not just the quick hit. And metrics keep you on track and help identify adjustments as you proceed.

Lead Through the Numbers

Today's best leaders combine the vision of the change agent with the planning and organization of a project manager. The ability to influence and collaborate is emerging as a third skill set that powers their success. To enjoy real influence and take a leadership stance, the CFO must earn credibility throughout the firm. This involves building strong relationships with the managing partner, management committee, partners and functional department leaders. The CFO's intimate knowledge of the firm's financial performance, risks and opportunities is an excellent foundation for these relationships.

Relationship building isn't code for becoming a “yes-man”; objectivity and independence must remain a core value. For a financially grounded leader like a CFO, demonstrating measurable results is a natural way to build credibility and to support changes that may be difficult for others to accept. This becomes real influence, grounded in financial evidence. Through activities that increase partner/shareholder value, the CFO is elevated to a strategic role in the law firm's management committee. Management thus raises the bar within the firm in terms of measuring performance, and creating accountability.

Outstanding CFOs with all of these skills and the right personal chemistry ultimately become agents of change with insights that drive performance and help achieve better results. These talented financial executives can exercise the proper influence and shape attitudes and behavior. Yet financial leaders with these capabilities seem to be in short supply. Firms that want to harness the power of a strong managing partner/CFO relationship will find developing or recruiting such talent is well worth the effort.

Ralph MacNamara is a director with Kaufman, Rossin & Co., CPAs. He focuses his consulting practice on change initiatives for law firms. He can be reached at [email protected]. Michael Moore leads the Business Advisory Services group for Kaufman, Rossin & Co. He can be reached at [email protected].