Lawyers are not always on top of what they need to do to improve the financial performance of their firms or their teams. Figures and financial concepts do not always connect up to their everyday way of thinking and working. One way of helping to make that connection is to use computer simulation. In a simulation, the lawyer can learn by doing – trying out and experimenting to find what real-world actions lead to what financial consequences.

The challenge

It is not usually difficult for a law firm’s managing partner and finance director to work out what to do to improve their firm’s financial performance. True, the best course of action will vary according to circumstances. But the finance director is an expert whose mind is on this most of the time, and the managing partner usually has finance well up the agenda. Their challenge is not so much deciding what to do, as getting it done.

Nearly everything that a firm can do to improve its financial performance at an operational level requires action by people – usually lawyers – whose primary role is nothing to do with finance. Often the people who need to take action are nothing like as familiar with what to do and how to do it as the firm would like. Perhaps the finance director wants to reduce work in progress across the firm, or the managing partner wants practice group heads to improve realisation percentages. Or perhaps one office of the firm suffers from low utilisation compared to an apparently similar office elsewhere, and the partner in charge of that office needs to plan and take action. From the perspective of a trained finance specialist, or someone who is used to running the firm, all that may sound simple enough. So why do many firms find that these things are so hard actually to do in practice?

The first and most obvious reason is that many lawyers are unfamiliar with the basic financial concepts and tools used to run any law firm. Lawyers concentrate on bringing in work, doing it and supervising staff. They leave financial management to the experts. That is partly a matter of necessity, because they are so busy. Secondly, many lawyers find figures and accounts uncommunicative. Very possibly they got into the law because they preferred arts subjects to sciences and words to numbers. Figures don’t speak to them, and when the FD starts talking they find their eyes glaze over and they start thinking about wine, football or the garden.

A consequence of this is that many of the lawyers who rise through the ranks to become partners see two parallel worlds. A familiar world of matters, clients, meetings, e-mails, documents and phone calls. And a shadowy world of realisation percentages, debtor days and working capital requirements. The two worlds don’t connect. This is the heart of the problem. This disconnection between the worlds of figures and legal work means that, when the MP or FD asks a partner to take some action to improve financial performance, the partner concerned cannot easily make the connection between real-world actions and the effect in figures. They don’t see at once what action will affect which figures. Nor do they see the reverse: what effect behaviour on the ground has on the firm’s financial performance.

So the answer is training, right? Well… it isn’t quite as simple as that. Teaching lawyers the financial concepts they ought to understand and the actions they ought to take doesn’t hit the spot. These are intelligent, well-motivated people who want to act. Teaching them the theory doesn’t help. Their problem is connecting up the financial concepts and suggested actions to normal, everyday life.
This is where computer simulation comes in.

Why simulation?

There a number of good reasons to use computer simulation to help people get to grips with law firm finance – see box, ‘Why use computer simulation?’. Perhaps the most compelling are that learning by doing is more effective than learning by being told – the learner can practise as many times as necessary and a simulation is more fun than a lecture.

What it is – the technology

The simulations Sherwood PSF Consulting uses are in fact a family of simulations it has developed to cater for different situations – see box, ‘The range of simulations’. In addition to those in the box, a number of other types of simulation have been developed for individual law firms, but here we are looking at the financial sims only.

Each simulation has a technology aspect and an underlying financial logic. The technology is straightforward. Until recently, all the simulations have run as spreadsheets in Microsoft Excel (or OpenOffice.org). Now, though, we have begun to develop them to run as Adobe (formerly Macromedia) Flash files. More about that later, for the moment we will concentrate on the spreadsheet versions. Complexities such as the underlying formulae and logic are hidden from the users. All they see before them is a number of boxes with figures that they can alter. When they alter a figure, this feeds through to an indicator of the firm’s financial performance, such as the profit and loss statement, a management ratio or a graphic symbol.

Within the spreadsheet is a ‘base case’ that the learners cannot alter. Typically this is how things are at present. If the simulation is at the firm level, the base case will be the firm’s existing figures, or sometimes figures based on inter-firm comparisons. Similarly, if the sim is of a single department, the base case is based on that department’s existing figures, or on a comparable department. Take, for example, the PRICES sim. The purpose is to help lawyers and others explore the financial implications of work that is fixed price, or where the amount the firm can charge is constrained by the market. Examples are fixed-price corporate or real property matters, volume conveyancing and publicly funded (legal aid) work.

Figure 1 shows the learners’ initial view of the screen. The figures that they can change are the ones inside the boxes. A key issue in fixed- and capped-price work is capacity management – how heavily loaded are the fee-earners? In this sim, workload is indicated both as a percentage and as a coloured red/orange/ green flag, as can be seen in the right hand columns of figure 1.

Figure 2 shows the skeleton profit and loss and cash lock-up statements. Not shown are some indicators in the form of ratios and percentages that are tailored to those used in the firm that is the subject of the sim. We have experimented at various times with more complex simulation software, but we found that any advantages were outweighed by complexity for the user or in set-up.

The advantages of using Microsoft Excel or OpenOffice.org are set out in the ‘Competing products’ box. In summary, Excel is everywhere and the sim can be counted on to work at once on loading. Recently, we have begun to develop versions of the sims in Adobe Flash. This allows more impressive graphic effects, including levers, knobs and gauges.

Also, the sim can be run with no technology more complicated than a web browser. The Flash file can be made available on a web server, or locally on the learner’s computer. Figure 3 shows part of a barristers chambers simulation in Flash – in this case anonymised to show the fictional Barry White QC.

What it is – the underlying financial model

The underlying financial model is important because it is a world view on which we base the sims. If the world view is wrong, the sim will behave differently from real life and there will be – at the very least – some highly disappointed customers. Imagine using an aircraft simulator to practise landing a jumbo jet. The pilot goes to fly the real aircraft. They push a lever, for example to lower the undercarriage. It must do the same thing as in the sim or their training has been worse than useless – it has taught them to do something that does not work. A learner using one of the sims needs to find that the real world back at the desk behaves as it did in the sim.

The reliability of the financial logic that underlies the financial sims is treated very seriously. Broadly speaking, Sherwood PSF uses three logical models: one (RULES) for law firms in an hourly charging environment; a second (PRICES) for law firms or teams charging on a fixed- or capped-fee basis; and a third for barristers chambers (SURE), based largely on hourly charging, but excluding the possibility of using employed assistants, which of course is not allowed under current practice rules. When using the sims, Sherwood PSF makes explicit the models – the financial world view – on which they are based. It is important that learners don’t believe there is some black magic at work. If anyone wants to explore the models further, or to test or challenge them, it is important that they should be able to do so. Explaining the underlying model to the learners has a second important function. It helps those who learn best by seeing the ‘big picture’ – how things connect together – rather than descending too quickly into individual aspects of finance that may otherwise seem disjointed to this type of learner.

The sim in use

The computer sims would be of limited value if learners just sat in front of them and typed in numbers. To overcome this ‘videogame effect’, the learners are put in groups of three or four, each with one shared laptop. They are required to discuss and agree on every change before entering that change in the sim. Typically, a training session involving use of one of the sims includes the following:

• Very basic instruction about the screen layout and what numbers can be changed.
• A session working on a generic problem, designed to help learners discover for themselves what the various financial ‘levers’ do, and which have the most powerful effect.
• A debrief about what they have discovered.
• An explanation in a structured way about how to improve performance – which suits those who prefer their information in logical order or who like ‘to be told the right answers’.
• A second session working on the sim in which the learners tackle a real-world financial challenge – usually one that their firm faces. Can they put into action what they discovered earlier for themselves or what they have been told? How easy is it to solve the problem? The emphasis is on what practical action they need to take, rather than just ‘how the figures will change’.
• A debrief and discussion with emphasis on the practical action that the groups decided to take and what they will do next.

One of the successes of the computer sims is that they help learners see and really grasp two things: the financial results of familiar actions, and the actions to be taken in the familiar world to bring about desirable financial results.

How realistic does the sim need to be?

This is a good question and has been hotly debated. My own view is that a sim needs to be realistic but does not need to be excessively detailed and exact. Let me explain what I mean. First of all, avoid unnecessary detail and exactness. It is difficult to paint an exact picture of a law firm’s or barristers chambers’ finances. To do so would require modelling every possible variable in lifelike detail: how quickly hundreds or perhaps thousands of individual clients pay their bills, the different time-recording foibles of a dozen different five-year-qualified litigation solicitors, and so on. Not only would this be difficult, it would be counter-productive. The whole point of a sim is it strips away the unnecessary complexity of real life, leaving the learners free to concentrate without distraction on the essential things that make a difference – the levers and gauges that are prominent in the sims. It is important not to strip out necessary complexity, though – as Einstein put it, things should be made as simple as possible, but not any simpler.

What do I mean by realism? This is the point I made earlier – that a pilot has to find the real aircraft behaving like the sim taught them it would. So in the financial sims, if the learners increase the number of assistants and find that fees rise by a certain amount in the sim, do they find the same happens in the real firm? At this level, the aim is for the sims to feel very realistic indeed.

Success story

These computer simulations have been developed and used for some years now, with firms of all sizes and on public courses with groups from different firms at the same time. They really help people get to grips with financial management. One law firm partner told me that it was in a session on the sim that ‘the penny finally dropped’ about how law firm finances work. Groups are always seen enthusiastically imagining and planning action, rather than treating the sims as a theoretical exercise.

Having said all that, one of the best aspects of using these computer sims is that they are fun.

Julian Boardman-Weston is a former practising barrister and then solicitor who has been working as a legal business consultant since the early 1990s. He is one of the founders of Sherwood PSF Consulting.