The Law Firm CFO’s Role in the Strategic Planning Process
Planning for the future requires going beyond the numbers.
It’s been nearly 10 years since the start of the “Great Recession,” and some law firms still have not recovered.
Across the legal industry, demand growth is stagnant, pricing pressure is intensifying, and profit margins are declining. Cybersecurity threats, advancing technology, and compensation changes have impacted the bottom line. Facing all of these pressures in a hypercompetitive market with continued consolidation, law firm leaders have a heavy task on their hands: developing a strategic plan that positions their firm to survive — and thrive — in spite of the challenges.
The operationally focused managing partner usually takes the lead in planning. However, the chief financial officer also has an important role to play — and it goes beyond finance.
As a strategic partner, today’s law firm CFO should be involved in many areas beyond traditional financial management, including operations, risk management and information technology. He or she can support strategic planning throughout the process, from development of the plan to implementation, measurement and eventual evolution.
Developing a Law Firm Strategic Plan
Strategic planning can position the firm for future growth by comprehensively looking at factors such as market changes, industry trends, partner wants and needs, and firm culture. The strategic plan can drive decision making in many areas, including investments, cost reduction, business development, recruiting, compensation, identification of future leaders and professional development.
A chief financial officer can play a key role in the planning process from the beginning — checking that the vision of the future financial performance of the law firm is realistic, consistent with market conditions, and reflects the desires of the partners.
Developing a strategic plan starts with analyzing market potential and determining growth focus, two areas a CFO is well positioned to assist with through research, analysis and recommendations.
First, market identification looks at the potential for the firm to expand, either by offering the same services to a wider client base within the same market, by diversifying services or by expanding geographically.
Next, firm leaders need to define growth focus. The CFO’s expertise is instrumental in this process. In addition to providing financial information, he or she can analyze data, compare scenarios, test assumptions and recommend changes. Consider the following examples.
- If the growth focus is broadening the client base within the existing area, what size companies will the firm be targeting and in what industries?
- If the focus is diversifying services, will the firm achieve that by pursuing lateral hires, mergers and acquisitions, or significantly developing niche practice areas? Which major practice areas will the firm grow and which will it exit, if any?
- If the focus is geographic expansion, will the firm open larger offices within the same region or move outside of existing areas, and if so, where?
- After identifying the market potential and determining growth focus, the management team needs to develop a staffing plan, operating plan, and capital financing plan, among others.
As a key member of leadership, it’s important for the CFO to help build consensus among the partnership group by involving them in the strategic planning process. Clear and continual communication about the plan and opportunities for feedback from the partner group can encourage various stakeholders to get on board.
In cases where cultural issues may be impeding organizational growth, the CFO can play a role in changing firm culture to align with performance goals as defined in the strategic plan.
Implementing the Plan and Monitoring Performance
After the plan has been developed, it’s time to implement it. As a key player in supporting business strategy, the chief financial officer can communicate goals and expectations to the partner group.
The CFO can help practice area leaders meet their goals that are aligned with the strategic plan by:
- Providing data insights for decision making
- Identifying new opportunities
- Identifying potential growth restraints
- Providing access to capital
- Monitoring the market for changes
- Developing metrics to measure performance
- Recommending rewards to drive desired behavior
- Creating accountability through meetings and assignments
The CFO should lead the charge in gathering, analyzing and reporting metrics. Looking at the data regularly in the context of key performance indicators (KPIs) makes it possible to monitor performance, identify opportunities and mitigate risk. The person in this role should be a champion for technology, including business intelligence and practice management tools that can produce meaningful reporting and track KPIs in an automated way.
The CFO’s ability to identify and evaluate the firm’s strongest and weakest practice areas through various financial measurement tools can assist with strategic decisions in terms of where to grow and where to scale back. He or she can help the managing partner and management committee understand the elements that impact profitability and how closely the firm’s performance aligns with the strategic plan and business objectives.
He or she should also use data to identify opportunities to increase efficiency and better serve clients. The 2017 client advisory from Hildebrant Consulting LLC and Citi Private Bank states: “In a market where clients want the most efficient delivery of legal services, the market will reward law firms who focus on operational efficiency in its broadest sense — not just managing expenses, but transforming the way they run their firms and deliver legal services.”
With firms growing larger in an ever-consolidating market, data can be even more powerful. If a law firm’s strategic plan includes acquiring other firms or practices, the CFO should play a key role in the due diligence process, assessing the financial performance of potential acquirees. This role should include a deep dive into metrics to validate billings and collections, as well as overhead and financial commitments.
Evolving the Strategic Plan
As the market continues to change and pressures intensify, the strategic plan should evolve. The CFO can help lead those iterations in the planning process by continually contributing in the areas outlined above and moving beyond traditional responsibilities of financial reporting, planning and analysis.
Of course, all of this takes time. Having a strong team of finance and accounting professionals, whether in-house or outsourced, will enable the CFO to delegate some day-to-day responsibilities and free up time for directly supporting growth initiatives and becoming more of a strategic partner.