A Law Society report in February 2023 identified five key areas of focus for the legal sector in 2023. Aside from changes in demand, winning new business and economic pressure there were two standout areas for culture and for software integration. However, what it neglected to mention was the potential impact of AI.

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Equipping law firms with the right technology perhaps would include case management and general practice management. HR and CRM systems, better analytics and more informed forecasting seem less of a priority, but that must change for law firms to better plan, better react and drive efficiency.

Considering the move to more remote working that began in 2020, there is a drive to become less reliant on printed documents and greater online collaboration. This also throws up the issue of cyber security – one could argue law firms are a prime target. But for law firms to drive the change for 2024 and beyond they need to look beyond those systems that improve the practice and operation of the business and to think more like businesses generally.

The customers of law firms are looking for more self-service solutions, which has a direct impact on income. For most industries, the move to self-serve has offered benefits to some and dictated a loss to others. The legal sector is no different in most regards, save one.

The legal sector is heavily reliant on personal interaction, building solutions bespoke to each client and with a singular focus on each interaction. This is changing as templates and downloadable services become more common. Working remotely means less face-to-face interaction and more that can be done offline.

The pressures on the sector are not just limited to more self-service and less one-to-one service. According to the same Law Society 2023 report, 44% of clients want reduced fees and 46% are moving to cheaper providers.

For law firms to adapt to this change they need to be nimble and flexible, both in the service they offer and in the way they manage their business forecast. For law firms, business forecasting means financial forecasting.

More change is yet to come

Self-service today is perhaps best demonstrated by online portals where small businesses and individuals fill out a template and are presented with the documentation they need; less in the way of advice and more in the way of documentation. But as AI evolves the ability to do more than simply complete document templates will evolve.

According to PwC 69% of law firms believe AI will have a positive impact on revenues and 62% have started investigating how to benefit from this opportunity (October 2023).

Generative AI offers law firms the opportunity to undertake more research, prepare documentation and complete labour intensive work at a fraction of the price and time. The gains made in terms of performance, however, will see a reduction in fees and fee earning time. As we have seen with online automation, generative AI will also provide much more to the end-user directly and the ability to bypass lawyers and law firms will benefit all, save perhaps for fee-earners.

Such is the likely impact of AI that many governments are running events to openly discuss the impact, very often built around ‘risk’. At VantagePoint, we have taken to asking our customers, and those in the finance function, what they believe will be the impact of AI on their business and to finance: see the results in our Raconteur article on the impact of AI here.

The first forays into generative AI perhaps have not been the best. After lawyers pursuing an injury claim used ChatGPT to help with their case, the judge threw out their claim and fined the lawyer. The AI was so generative, it made up the case references in the claim! Rightly so the judge saw fit to blame the lawyers, not the AI.

For many law firms, the lack of focus on leveraging technology needs to change. We may not be ready for AI-driven court cases but neither should law firms accept budget-holder forecasts completed in spreadsheets with a few models created that show an upside option and a downside option.

The impact of an AI Large Language Model (LLM) to replace the work done by several researchers and junior lawyers could be significant. In the UK we are already seeing AI as a billable item on invoices from some legal service providers. Companies slow to embrace this opportunity, and the associated impact on staffing numbers, may find they lose a competitive advantage. But that does not mean a rush to AI. A considered approach is needed.

Why finance needs to lead the change

According to Thomson Reuters, the legal sector tends to see a delay in the impact of global economic changes.

A lag in the impact of external factors may provide a benefit when it comes to forward planning. The time delay between understanding external factors and seeing the impact allows for better planning. Some parts of the legal sector are typically able to benefit from such a lag. Catering for the volatile global economy that we are seeing today, however, is still a challenge, even if law firms may be afforded the luxury of more time to plan.

For law firms to flourish a deeper level of understanding is needed, around financial performance, future HR trends and staff needs, and better collaboration across the business. Marrying automation with legal advice and guidance will deliver improvements but it needs someone to drive change.

The finance function is the single department in a law firm that can produce reports that measure performance. The finance function is the only department that has the tools to ask the question “what if…” for each of their clients. The finance function in the sector needs to transform itself from a business support team into a key influencer on future strategy and direction.

VantagePoint is a finance transformation and consulting company. Where we add value to law firms is in driving the change to allow law firms to react and respond better while delivering insight far more efficiently and with greater clarity. This allows better future planning, and multiple scenario modelling.

CFOs need to lead the change. Turning the finance function of any legal practice into a value-add part of the practice.

According to Raconteur

Further, “At a time when tightening margins across the legal industry are leading to a renewed focus being placed on ensuring profitability, top-tier CFOs are expected to look for proactive solutions.”

Getting the basics right

For law firms, it is becoming ever more important to better understand their current and future financial position. Firms need to better prepare in an ever more volatile world, where fees are being challenged and new ways of doing business are becoming ever more common. Gaining insight into the challenges ahead and learning how to maximise the opportunities available begins with deeper financial insight, through first understanding the current state, and then planning for the future. We call this FP&A: financial planning and analysis.

FP&A is the process by which a law firm can manage its budget, forecast future performance, scenario plan for future potential circumstances and scenarios and provide insight to support strategic decision-making. Finance professionals working in this space need to have good analytical and communication skills.

In simple terms, the role of financial planning and analysis within a law firm would encompass the following:

· Financial forecasting: Providing a future view of the financial performance of the company

· Financial modelling: Applying multiple scenarios to better understand the impact of changes to the current state

· Strategic planning: Providing financial input to the law firm's overall strategic objectives

· Budgeting.: Tracking performance against target for better short-term planning

· Risk management: Giving insight into the law firm’s financial stability

· Financial reporting: Reporting of the above, dealing with ad-hoc inquiries. Sharing insight to different stakeholder groups (internal and external).

FP&A requires a systematic approach to data gathering, preparation and planning. Processes, augmented by technology, can deliver meaningful insight in a fast and efficient way. Allowing law firms to respond and react quickly, and to plan for all eventualities through multiple scenario modelling and what-if analysis.

Adding real value

For most law firms financial forecasting is a function of current performance and customers, and very often on simple spreadsheets. Scenario planning and detailed forecasts are rare.

· What if your largest client were to leave, or maybe ask for a fee reduction?

· What if non-cyclical work suddenly increased?

· What if one client demanded significantly more resource?

· What happens if there is a downturn in your key market or sector?

· What if a key resource left the firm?

Merely answering these questions based on an operational response is no longer enough. Winning a new client or a significant new piece of business from an existing client may not be in the best interests of the law firm. Historically, a win is a win. More billable hours are always seen as a positive outcome. However, that may not always hold true and as the face of competition changes so should an understanding of what is good business versus what is just more business.

Typical forecasting is layered. The variety of different inputs to the forecast and the respective weights and influence they have, varying over time, make the process complex and, to a degree fragile. Technology can significantly reduce the manual work required and allow constant changes and adaptations, as well as reversion to previous forecasts and analysis of the inputs and data used to generate a financial forecast.

Why law firms need a value-add finance function

It is typically found that all firms are required to create value. For most that is a financial return to investors and other key stakeholders. For many firms, value can be measured in terms of social value. For law firms, this is no different in the vast majority of cases.

The finance function has primarily been responsible for managing business finances and planning for future financial state through budgeting and forecasting. Moving beyond this to provide value-add insight will aid and improve decision-making for the law firm.

As we have discussed challenges in the financial performance of a law firm, existing and emerging technologies that will challenge their operating model, and the drive for more remote working, more remote customers and the war for talent are set to confront law firms in 2024 and beyond.

Currently, for many law firms, there is a lot of manual process. According to Dav Masaon of Zanda:

But manual processing is not just about the time it takes or the amount of effort. In our article ‘Excel: Heaven or Hell’ we identified 12% of spreadsheets contain errors. The war for talent and the potential impact of manual work dictates that automation is a must. Not just the ability to do more, but also to bring control and consistency, and allow for greater scrutiny of the output

Gaining an advantage through automation should be an opportunity to do more and elevate the finance function, rather than purely to do the same today. According to ERPM Insights creating a value add finance function is “...about creating a finance vision that is aligned with the business and supports the organization’s strategic direction.”

The finance function, therefore, needs to provide the insight needed for law firms to plan and forecast better. To understand the impact of new regulations (e.g. Global Minimum Tax) to develop scenarios to suit the needs of the business, to regularly undertake performance evaluations to direct future strategy and to respond to impacts imposed upon the law firm (e.g. client demands). The finance function needs to do all of this in an efficient and consistent way while using less talent and with a fragmented, hybrid working team.

At VantagePoint, we recognise that change can be hard. We understand that not everyone buys into finance transformation or sees the true potential early on. We try to make it as easy as possible for our clients to better understand the need for finance transformation and to commit to making the change that is needed.

For law firms, 2024 promises to be a year of significant change and one that will provide challenges as well as offer opportunities. We have already led a finance transformation project in over 100 companies including several well known, large and niche law firms. Ask us how we can help start finance transformation in your law firm.

Our initial priority is always to consider how we can achieve the best results in the sustainably shortest lead time – creating short and long-term value for the business and the clients we work for.

Upcoming event...

On 7 March we're hosting an event with CCH Tagetik where futurist Tom Cheesewright will explore what the future looks like for finance teams in the legal sector, against the backdrop of the Parliament Chamber in Middle Temple, one of the four Inns of Court.

If you'd like to join us, register your place through the link below: