This article is not intended to be a tutorial on the subject of how to select and implement a computer system or personal computer network. Rather, the intent is to focus on one limited aspect of law office automation: client accounting software. More specifically, the article will discuss the important factors that must be considered when evaluating off-the-shelf client accounting software packages for use in the small- to mid-sized firm.
The article assumes that potential purchasers of the accounting software have assessed their particular firm's requirements and developed some reasonable assumptions with respect to priorities, volumes and future growth. With this perspective and assumption in mind, a next step in the selection process entails identifying potential vendors, and then evaluating their respective client accounting packages. Client accounting software, for purposes of this discussion, encompasses the activities of professional timekeeping, client disbursement accounting, billing, accounts receivable control, and management/financial reporting.
Before entering into a discussion of how to evaluate client accounting software packages, it is helpful to review the basic elements of financial control in a law practice. It is important to have this perspective, as any package to be acquired must be able to monitor and track these essential elements of control.
Financial success in a law practice requires a combination of the following factors:
1. There must be sufficient volume of business to keep the
lawyers productively occupied on billable client matters.
This also implies that the lawyers (and
paraprofessionals) are working a sufficient number of
hours on behalf of clients;
2. Careful management of individual cases so that excessive
(and potentially unbillable) time is not devoted to a
matter;
3. Establishment of realistic, hourly billing rates that
reflect the target rate, or standard, that you expect
each timekeeper to achieve. The rate should reflect the
experience and legal specialty of each timekeeper given
the firm's geographic area and client base;
4. Regular billing (monthly, if possible) and a minimization
of "discounting" of the value of the time and service
provided;
5. Prompt followup on any unpaid client statement;
6. Establishment of a realistic profit plan and expense
budget. Keep office expenditures within the guidelines
established in the budget. Manage cash resources by
investing excessive cash balances.
The key to financial success in a law practice lies first in
understanding the importance of each of these vital factors and
secondly, having the information necessary to measure performance
in each "key" area. Adequate client accounting software programs
will provide management with the five essential management controls
that are necessary to help ensure financial success. A brief
discussion of these controls follows below:
1. Control of Lawyer (and Paralegal) Time Utilization.
Effective control of utilization requires periodic
reporting of at least the following information on a
monthly basis:
a. Total chargeable time for each timekeeper.
Comparison to a goal or target is beneficial.
b. Total non-chargeable time for each timekeeper.
Segregation of time by major categories is
beneficial. Examples of major categories include
firm management, associate recruiting, pro bono
work, etc.
c. Each element of information should be presented for
the current month and cumulative fiscal year-to-
date.
2. Control of Unbilled Work-in-Progress. Control of work-
in-progress means keeping track of work performed for
clients for billing purposes and guarding against
excessive accumulations of time on a particular case or
matter. Some basic information is necessary to inform
the attorney of accumulated time charges.
Work-in-progress reports, or detailed billing worksheets
as they are often called, should be segregated by billing
lawyer for all cases for which each respective lawyer is
responsible. By so doing, the length of any particular
report is reduced and the responsible attorney reviews
only those cases for which he/she is responsible.
Another beneficial work-in-progress report that many
systems are able to provide is a summary report
reflecting the unbilled time and cost investment for each
case or matter. This report also should be sequenced by
billing lawyer, with subtotals printed for each partner's
cases.
3. Control of Billing Variances. Simply defined, a billing
variance is the difference between the value of time
worked at standard rates as compared to the fees billed
for that time. The more meaningful figure is the
realization percentage which is calculated by dividing
the fees billed by the standard time value. This is a
vital management tool as it can point out profitable (and
unprofitable) timekeepers, billing lawyers, cases and
areas of legal specialties.
When clients ask us to analyze their financial
performance to identify underlying problems and recommend
solutions, this is one of the key figures we develop. In
our experience in working with private law firms, it is
not unusual to observe realization performance in the 70%
to 80% range. Well run firms achieve realization in the
range of 80% to 90%. Very well run firms, with good
management and controls in place, will often exceed 95%
realization.
A proper system also should be able to provide an
analysis of collection variances. Collection variance is
the difference between time value billed and the amount
that must be written off as uncollectible.
4. Control of Accounts Receivable. Control of accounts
receivable means knowing which clients have paid their
bills and who still owes you money. A proper system must
be able to generate a schedule, sequenced by billing
lawyer for all cases assigned to each billing lawyer,
showing how much money is owed by clients with an
indication of the age of each unpaid bill. Minimum aging
categories should reflect which bills are current, and
those which are 30, 60 or 90 days or more past due.
Costs advanced should be segregated from fees on the
schedule.
Experience has shown that it becomes increasingly
difficult to collect a bill that is 30 days or more past
due. Therefore, in order to facilitate timely
collection, a proper system must be able to generate
monthly reminder statements for invoices that are 30 days
or more past due.
5. Control of Administrative Operations and Cash Flow.
Control of administrative operations begins with a
revenue plan and an expense budget. Simplistically
stated, a revenue plan is a projection of fees that will
be collected during the fiscal year. It is based on an
assumed level of chargeable hours worked, billed and
collected for the aggregate of all the professional
timekeepers in the firm. Likewise, an expense budget is
an estimate of how much money will be expended for
ongoing operations (such as staff compensation, rent,
recurring operating expenses, etc.) and expended for
specific programs (such as recruiting a new associate,
renovation or relocation to new office space, acquiring
office automation and technology, etc.).
Effective control evolves around first having the
information to inform management that adverse trends are
developing (such as revenues below plan or expenditures
above plan, etc.) and secondly, taking the appropriate
action necessary to correct the problem. A proper system
can help meet the first objective by providing a monthly
income statement that reflects, for the current month and
through the fiscal year-to-date, the results of
operations compared to the plan.
A current month and year-to-date cash flow statement
provides management with control over sources and uses of
cash funds received and disbursed. It is important to
know, for example, how much cash was received from
partners' capital account contributions to meet cash
needs, or how much funds were used to increase working
capital reserves.
These are the five basic controls with which every well-managed firm must be concerned and which must be monitored on a regular basis. If a prospective software package being considered is deficient in any area, it is advisable to continue the search for a better package that can provide the information, and thus, the control.
A comment about the work "information" is appropriate. Many systems we look at purport to provide "management information". What, in fact, many systems do is merely sort the various files and print long computer reports listing detail data that nobody looks at. To be of any practical value, management information must be prepared at a summary level for each management control. As discussed earlier, effective management revolves around spotting the deviations from the norm and then taking appropriate action. Of course, the underlying detail information must be available to facilitate problem analysis.
In addition to providing proper information relative to the five essential control areas, there are other questions that must be answered in light of each firm's particular requirements. Some additional requirements you may want to consider include the following:
1. How does your firm divide income? If it is based on
objective factors such as billings, collections or new
business generated, then you may require the following
reports to be generated by any prospective system:
a. Year-to-date fee billings and/or collections by
billing lawyer;
b. Year-to-date fee cash receipts by working lawyer
(timekeeper);
c. Year-to-date fee billings and/or collections by
originating lawyer.
2. Do your clients require itemized bills that reflect the
details of services rendered? If so, consider the ease
with which the text service description can be edited.
3. Do you require multiple billing rates for each
timekeeper? If so, determine if this requirement can be
met by designating a case rate or an optional "A", "B" or
"C" rate.
4. Does your firm have a sizable contingent fee practice?
If so, you will want the system to be able to report your
investment in unbilled work-in-progress by area of law as
well as by billing lawyer.
5. Does the system provide for adequate "bill-to"
information on the final client bill? Many companies,
notably insurance companies, require claim number, name
of the claims manager, date of injury, date of loss,
etc., in the "bill-to" heading.
6. Do you have a policy of charging interest on past-due
bills? If so, can the system accommodate your policy
(i.e., 30 days or more past due, simple or compounded
interest, etc.)?
7. Does the system provide adequate controls and audit
trails so that the system can be balanced? If not,
continue looking for software.
8. Does your client require phase and/or task-based billing?
Does the client require phase or task-based budgets, for
which the limits cannot be exceeded?
9. Does your client require a recap of case-to-date and
year-to-date billing for each matter?
To conclude, it goes without saying you should deal only with a reputable vendor that has an established track record. Always ask for and verify the references where the vendor has installed similar systems. Look at the documentation that accompanies the system. Is it usable and understandable or merely something put together by a programmer and, therefore, possibly meaningful only to a programmer? Finally, beware of buying "futures." Sales people in this industry are well-known for attempting to sell a solution that will be available with a "future release" of the software. Experience has shown that "futures" seldom live up to the expectations promised by the sales person in order to close the deal.