Why CFOs really matter to law firms
Martyn Draper, Head of Finance Practice at Totum Partners, explains how the finance function in law firms includes an increasing set of responsibilities
The work of CFOs and finance directors in the legal sector is undergoing rapid change. Not only are they required to manage traditional priorities of the role, but they must now also juggle an ever-broader array of operational, transactional and commercial responsibilities. In addition, there is an urgent need for them to look to the future of finance and understand how this will change alongside enhanced technological capabilities that have developed more rapidly during the pandemic.
Added pressure from clients as a result of Covid-19 and increasing competition for top talent in the legal sector have combined to make these assorted challenges increasingly difficult to navigate. Notwithstanding all of this, in providing input into various aspects of its strategic planning, the evolving CFO looks set to play a pivotal role in the future success of the post-Covid law firm.
Finance functions: a widening remit
According to the Thomson Reuters Legal Market Report 2020, a remarkable 91% of leaders in the legal sector expect that technology will be key to future cost-cutting.
It is of little surprise, therefore, that Totum’s research further suggests that the top priority for finance functions over the next two years, cited by over half of survey respondents, is to invest in technology. More specifically, 79% of respondent firms are planning to upgrade their practice management systems (PMS) and a further 87% anticipate more widespread technology investment.
These figures indicate that there will be significant investment in upgrading a range of existing systems, as well as investment in new technology. Nearly a third of respondents are looking at robotics and artificial intelligence (AI), which is currently used by just 5% of them, while 57% plan to invest in pricing tools, which are currently used by 31% of respondents.
Finance directors in the legal sector are also seeking to develop a new generation of support services personnel with ‘value-adding’ roles. Our research suggests that almost two thirds of CFOs and finance directors headquartered in the UK want to recruit for new roles in finance business partnering, pricing and business analysis. These positions are intended to increase the commercial and strategic expertise available to finance teams and to support their operations at the highest level of law firm leadership.
However, traditional functions also continue to be a paramount prioritity: maintaining cash flow and improving profitability, reducing lock up days, improving working capital processes and educating fee earners in financial hygiene are among the top priorities for finance teams.
The modern finance function in a law firm is invariably significant, both in terms of size and influence on the wider partnership, as financial management plays an increasingly important part in the business of law. Our research suggests that a broad range of finance roles also require a wealth of operational, transactional and commercial expertise.
Equally, law firm CFOs are increasingly valued in their capacity as management level decision makers who can effect change in every aspect of a firm’s strategy. The traditional finance role that focuses exclusively on revenue and profit has therefore evolved from operational to strategic. Moving beyond financials, today’s law firm CFO focuses on positioning the firm for growth, mitigating risk, and optimizing processes as they seek new ways to remain competitive. Wherever possible, they are leveraging technology to increase efficiency and enhance performance.
Such a diverse and evolving set of responsibilities creates myriad challenges for CFOs and finance directors as they deal with the impact of the pandemic and its aftermath. Research suggests that their top two challenges are increased pressure from clients to reduce fees (76%) and the economic impact of lockdowns (42%). Although fees are a perennial source of contention, the pandemic has naturally added further pressure.
Simultaneously, CFOs and finance directors also face fierce rivalry when hiring new and potential staff members. Indeed, more than a quarter of them are concerned about competitors poaching their current staff. Evidently, competition exists between firms to hire and retain top talent, including the finance function, which is traditionally perceived to be among the most stable. In our experience, high quality finance candidates in the legal sector are always in demand, but perhaps even more so as firms find their feet following a year of lockdowns and continued uncertainty.
Overall, finance functions in law firms are expected to grow, which will further exacerbate competition for top talent. A third of respondent firms intend to increase headcount in their existing finance function in the next two years, with 9% of them planning a headcount increase of up to 20% over the next 12 months. Meanwhile, a further 13% are planning to put an entirely new team into the function.
The future of the finance function
As elsewhere, finance teams are recovering from a very challenging 16 months. When asked about the biggest impacts of Covid-19, respondents drew attention to managing team wellbeing, adjusting to remote working and motivating their team – familiar issues faced by business leaders across every industry and sector.
Beyond the pandemic, law firms are focused on implementing new skills and capabilities. In a tight labour market, finance teams may well face difficulties in sourcing the right people to maintain and grow these important functions. Leaders will need to think creatively to ensure that they can source the breadth of talent required to manage the many facets of modern legal finance. To succeed, they may need to look beyond the professional services sector. Notably, almost a third of law firms have made strategic hires from outside the sector during the past two years.
CFOs and finance directors cannot simply discard the pandemic from their memory. Lessons – positives included – will have been learnt along the way that will help finance teams to develop. Some 44% of respondents think that Covid-19 has had a positive impact on billing, for example.
These lessons will continue to shape the future of the finance function. Going forward, respondent firms across all revenue brackets are looking to introduce some form of hybrid working patterns. This will undoubtedly affect finance operations, including investment in and use of technology, as well as greater flexibility in hiring from a broader pool of talent.
In looking ahead, finance leaders in law firms must continue to juggle the traditional elements of their function with an enlarged commercial remit, underpinned by technology. As financial leadership positions extend their reach into other aspects of law firm management, their development will play a vital part in driving firm-wide business success and growth.