We re starting a law firm: What should we do about IT? An independent guide In association with Virtual Practices, the hosted legal software and outsourced legal cashiering service from Solicitors Own Software Ltd.
Introduction Hundreds of enterprising people start new businesses every year in lots of different sectors and with different motivations. Some are lifestyle businesses, designed to provide the business owners a reasonable income for example hairdressers or florists. Others have ambitious growth plans, raise venture finance and go on to create entirely new business models. Increasingly, solicitors are spinning out their own practices sometimes because they see all the hard work they put in going to subsidise the partners salaries, other times, they simply want to do something for themselves. But, according to common wisdom, 50% of all start-ups fail within their first year and only 5% make it past year five of this exciting new journey. Over the next few years, in particular, we can expect to see a whole tier of law firms disappear as newly created competition from the Legal Services Act begins to bite. The decisions you take early on can make all the difference between success and failure as a start-up, particularly when they relate to cash flow and the sorts of investments the business might make in premises, staff, IT and office equipment. Ask yourself the following questions: Why are you starting the business what s your motivation? The answer affects everything from the company structure (partnership, incorporated practice or alternative business structure?) to finance, location and the choice of systems that will support it. Company founders tend to find, particularly in the early days, that running a business consumes their every waking hour: are you ready for that? 2
What s your unique offering? With the impact of the Legal Services Act and Alternative Business Structures, solicitors need to think carefully about new sources of competition, including accountants, business advisors and even supermarkets. Positioning yourself to provide non-commodity services like employment advice and contracts, can protect margins. Above all, you need to be constantly aware of profitability. What administration support should you be looking for? A key issue that requires attention upfront, whether it s providing top-notch personal service to keep key clients onboard or an efficient back-office to ensure services are delivered at the lowest cost possible.when partners have come out of a big firm to set up on their own, the complexity of accounting and IT systems that can meet client and regulatory needs can be underestimated.will you, for example, hire a legal cashier to manage the bookkeeping or is that something you plan to handle yourself and what systems do you have in place to run the books? This guide introduces a new combination of hosted services and outsourced business process support (sometimes called a bureau service), which can free up company founders to focus on the core business offering. 3
1 Why worry about IT? With so many things to think about, from renting office space to putting together a business plan and bringing in business, IT and admin issues can take a back seat. But in fact they are fundamental to the smooth running of a legal start-up, as this section explains. Do you need an IT network and what s it likely to cost? If there s going to be more than a couple of partners in the firm, you're probably going to want to share documents and information with one another so you can distribute data and work collaboratively on different cases. A sole trader could feasibly manage all their applications on a laptop locally. But such a set-up is very restrictive and, as soon as you start employing staff to fulfill administrative tasks, effectively unworkable. The costs of an IT network for a small business have come down dramatically in recent years, but still add up to several thousands pounds.they include: The server a separate, super-powered PC which holds all the shared files, administers back-ups and manages the network The infrastructure all the cabling, hubs, routers and switches that connect the network together The applications that run the business, including not just Microsoft Office, but also practice management, client management (CRM) and accounting software 4
Maintenance, which can end up being the biggest cost. Hiring a specialist IT resource or contracting a third party to manage it for you can be time consuming, difficult and expensive Can t you hire a reseller to manage all this for you? Resellers and IT support firms will happily install and take over the running of your IT network.what s more, you can contract with them to provide certain service levels, so they will for example, guarantee a next business day fix if anything goes wrong. However, such an arrangement will end up costing you slightly more than managing the network yourself as these providers strive to make a margin. And while you can get some great finance deals from equipment suppliers, the assets will remain on your books, locking you in to a cycle of ongoing costs and equipment replacement. 5
Risk management Another important consideration when running your own IT network is around back-up and disaster recovery (DR).The legal profession has very strict requirements about managing risk because of the area it operates in. Exposure to the risk of a fire, flood or other disaster has to be carefully managed, back-ups of business-critical data made and disaster recovery procedures put in place. DR is an area that s routinely neglected by small businesses. For a legal start-up, a natural disaster which compromises business critical data would simply put it out of business without the right contingencies in place. 6
2 Software as a service There's a lot of confusion about software as a service (SaaS) or hosted services and indeed it means different things to different service providers. But in truth, much of the hype surrounding web services,web 2.0 and browser-based computing simply distracts from what is in principle a simple proposition, uniquely suited to a small business or start-up. This section explains what SaaS is and what it isn t and how it can help ease the pain and expense of setting up in business. What is Saas and what isn t it? The principle behind SaaS is simple. Instead of buying, installing and maintaining your own software, service providers run it for you and you access it over the internet. It s not actually a new concept, but Web 2.0 developments, including.net and web services, have made it easier for service providers to separate the software into a browser-based front end and a back-end database, accessible over the internet and holding all the information. The wider benefits of the SaaS set-up are explored in the coming sections, but suffice it to say it s similar to having your own applications but without the hassle of running them locally and maintaining all the hardware and networking needed to support them.the software you rent could be anything from Microsoft Office to Oracle, but typically for a legal start-up would include legal accounting and practice management applications. Crucially, too, you don t own the software yourself, but just rent the use of it, in the same way you don't own the utility substation but pay for the energy you use. And like the utility 7
example, you expect the lights to come on when you press the switch, regardless of any technical problems that might have occurred. The benefits of Outsourcing (or Bureau services) Dealing with legal accounting is a complex process.that s why specialist applications have emerged that meet the Solicitors Accounting Rules, ensuring that money is kept in the right funds and managed accordingly. Providing SaaS applications only takes away half of your overhead, since with most set-ups you would still need to employ a legal cashier to administer the software. Some providers go a step further and provide a full bureau service, so all you have to do is enter details of money coming in and out and the service provider will do the rest, posting it to different charts of accounts, reconciling to your bank account and reporting back on your profitability as cases progress.the outsourced bureau is a well established practice in other areas, such as payroll, where companies just fill in employee details and the service provider does the rest. And as in the payroll example, it has proven particularly successful where complex and changing regulatory requirements are involved. You benefit from the expertise of the service provider in the area and a well trained accounting clerk ensures your postings stay within the regulations. Practice management and case workflows The next logical step in a bureau service offering is to add case management, managing all a firm s client data and document production. Rather than spend valuable time cutting and pasting client and matter details into a word processing system, a case management system manages the workflows around a particular legal process, automatically producing the relevant documentation at the correct time. As with the accounting, the bureau approach ensures that the firm is meeting best practice.the system can even be 8
programmed to the client s particular workflows, for example sending out a reminder e-mail if documentation hasn't been received after a set time has elapsed. 9
3 Cash a start-up s lifeblood The number one reason cited for the high failure rate of startups is that they run out of capital. But that s not necessarily because they are undercapitalised more that they don t spend what they have wisely when it matters most.this section examines how you can save money early on in the life of your business. How much can I save by outsourcing? Bureaus usually charge either a fixed rental or usage fee or sometimes a combination of the two.they take on the major upfront investment of setting up a new client and set that cost against a minimum contract period. Over the period of the contract, the total sum you re paying may be similar to what you might have invested setting up the system in-house, but the cost is spread. Also, bear in mind that you have to factor in maintenance costs and offset the salary you would have paid a legal cashier to run your books in-house. If you re not careful about the services you are contracting to buy, you could also end up paying various additional costs on top of that basic per-month rental. So look for a transparent tariff of all the additional costs, including set-up costs and charges for additional reports you might request. Predictability: your best friend It s well documented that most IT projects end up running over budget and past their deadline.the predictability that you get from a rental contract then provides you with a figure to put in the budget that you know is going to remain 10
constant for the duration of the contract (unless either side breaks the terms, in which case it s easy to escape from it). Service level agreements, the pillars on which the whole contract is supported, provide a business with the assurance that action will be taken as quickly as is specified.the extra efficiency means you don t have to wait for a legal cashier to work through their pile of outstanding paperwork before a payment is processed again providing better cashflow when you need it most. And because you re accessing information over the internet, you can usually look at the accounts at any time of day and they will be up to date. Getting more for your money Perhaps the greatest benefit the outsourced bureau service provides for a start-up business is access to enterprise-class software. As in most disciplines, you get what you pay for in applications software.while there are some cheap and cheerful software packages for the legal start-up, the depth of functionality which allows you to map exactly how your business is going to work, the inputs and outputs you expect from the system will only come with a reasonable application software investment. Bear in mind too that upgrading the hardware and software is the responsibility of the bureau and you should expect to always be on the latest version of the application. 11
4 Growing business Strong growth may or may not be high on your agenda when you start a business, but somewhere down the line, the chances are your enterprise is going to start expanding, raising a whole new set of considerations. Reporting: the importance of business intelligence When you undertake a piece of work for a client, particularly if you operate on a fixed fee basis, how do you know that it s going to be profitable? The simple answer is that you don t but based on similar work you ve done in the past, it s possible to build a comprehensive picture of the cost of your time and level of resource you should be committing to a particular job to ensure it remains on track to make you money. At month end, a business requires in-depth reporting on its financial health from profit and loss accounts, balance sheets, trial balances and cash flow statements. Combining that with client and time recording data enables a business owner to answer important questions such as: Are we bringing in the right mix of fee-earning business? Are we charging enough billable hours? Are we working too long on certain cases? Who are our best-performing employees who are our most profitable clients? 12
Saving your time and the bottom line A lawyer should not be taking the time to manage their own accounts but many do, and this means they are distracted from the day-to-day task of running the business and earning fees.think about how much time you could save if you weren t constantly inputting data into spreadsheets, putting together invoices and updating client records. Do a simple sum on the number of hours per week you spend doing this kind of admin and now consider how much money you could earn from that time. Now factor in the opportunity cost the cost to the business of you not actively pursuing new business and you can quickly see the impact on the bottom line. What happens if I outgrow my service partner? Once you get to a certain size (probably around 20-30 employees) it can make more sense to bring legal accounting back in-house.with a service provider that can cater to much bigger legal businesses, it s a fairly straightforward task to transfer the server in-house, hire a legal cashier and start administering it yourself. But you need to ensure first of all that your partner is big enough to cater for future growth, effectively future-proofing your business for whatever the coming years have in store. 13
Glossary Bureau service: An outsourced business service, usually accessed by the user through a browser-based front-end, where the service provider fulfils some value-added services at the back end, such as updating accounting ledgers Business Intelligence: A combination of reporting and analysis that provides insight into what's driving the business forward (or holding it back) CRM: Customer (Client) Relationship Management: A system that manages information relating to customers, including marketing and sales contact and ongoing support Disaster Recovery: A set of procedures that is put in place to recover data and systems in the event of a disaster such as a flood IT network: The file server, cabling and switching that enables PCs to talk to each other Software as a Service (SaaS): A method of delivering (usually) business applications over the web. Users do not own the applications but pay a rental fee for using them. Also known as hosted services 14
Virtual Practices is happy to answer any questions you may have about your IT choices. Please contact us at 2 Widcombe Parade Bath, BA2 4JT DX 8045 Bath T 01225 787700 F 01225 787701 www.virtualpractices.co.uk