Comment: Law Firm ERPs – Foresight or Folly? By John Alber

dd--mOZg_400x400Should large law firms spend the money and time needed to implement Enterprise Resource Planning (ERP) software? Ten years ago, when several large law firms declared an intention to implement ERP software from SAP AG, I wrote an article suggesting they might want to reconsider. I argued that ERP’s present a risk/benefit choice for the firms adopting them. Given the numerous accounts of ERP implementations gone expensively and sometimes spectacularly awry, the risks posed by an ERP implementation were obviously substantial. Did firms accrue enough benefits to offset those risks? I said no then, that any benefits that could be achieved with an ERP could also be achieved using powerful database technology on top of existing software, and with substantially less risk and cost than would be involved in an ERP implementation.
The ERP fashion cycle has come full circle in those ten years and more large firms are now on the hunt for an ERP. Has the risk benefit calculus changed in that time? I still say no. Indeed, integrating existing best-of-breed law firm software into an enterprise platform with ERP-like functionality has never been easier. And that leads me to ask a fundamental question of the firm leaders now heading down the ERP path. But before I get to that, we need a little context.
What is an ERP, Anyway?
Enterprise resource planning is a term derived from the material resource planning (MRP) systems that were first created for and by manufacturing companies. MRP and ERP systems typically handle manufacturing, accounting, human resources, invoicing, logistics, distribution, inventory, shipping, and other such functions for a business. ERPs are called back office systems because customers are not directly involved with them — in contrast with front office systems, like customer relationship management (CRM) systems that can deal directly with customers, eCommerce systems that manage the selling process online, and supplier relationship management (SRM) systems that automate dealings with suppliers.
ERPs span the enterprise. They become the way of doing accounting, billing, collections, marketing, strategic management and everything else essential to a company or firm. While ERPs started in basic manufacturing, ERP software now serves a wide range of industries from service sectors like accounting firms, software vendors and hospitals to high tech industries and even government agencies.
Because of their scope, ERP software systems rely on some of the largest bodies of software ever written. And that complexity demands resources. Implementing such complex systems in a company usually involves outside help, in the form of legions of consultants, business analysts, programmers and the like. ERP implementations also necessarily involve contact with many, if not most, of the users in the enterprise.
If all this sounds expensive, it is. Reports from one UK law firm put the cost of SAP implementation at tens of millions of pounds, not counting the business disruption that is part and parcel of a project of such scale.
Risks and Rewards
If you get the idea that a project of such immense scale involves risks, you are right. Business and computer science schools now teach case studies recounting all the ways ERPs can go wrong. I will list some of those ways first. Before doing so, however, it is worth noting that a properly implemented ERP can offer many benefits. It can fundamentally change a business for the better. And case studies exist for the successes as well. We’ll talk about the benefits in a bit.
So, here are some of the risks:
Incompatibility with existing systems. If you replace all of the back office software in a business, how can the new software be incompatible with existing systems? It can because the old systems reflect an underlying way of doing business.
Think of Utley and Astrid in Accounting, those pillars of the firm. They’re the best, but they’ve been doing things the same way for 30 years. Those two are part of an embedded business process, and when you implement an ERP, you’re going to have to change how they and a lot of other people in your firm do business.
Changing a single embedded process is challenging in itself. But it becomes exponentially so because it’s linked with other embedded processes. Research on and experience with ERPs suggests that such change is extremely difficult to achieve, especially over the relatively short term of an ERP implementation cycle. And law firms, even the best of them, are not notably expert in change.
By the way, ERP vendors say that they can adapt their systems to the existing way of doing things. But ask yourself: why would you pay millions to perpetuate the existing way of doing things?
Culture wars. The point of ERPs is to implement “best practices” across the firm. For example, one of the things ERPs do best is to facilitate very granular profit center analysis. Are you ready to adopt a profit center view of offices and practice groups? And if you’re so ready, why haven’t you done it before now? Moreover, are you ready to undertake that cultural battle at the same time you impose the stresses of a huge system change? Some firms may indeed be capable of such comprehensive change. It’s safe to say that most aren’t.
Sheer scale. Implementing an ERP is a project of vast scale. Think of it as akin to building a skyscraper. It can be done, and done well, but only if the project is managed superbly at all levels. Failure at any stage brings the whole project down and the consequences can be apocryphal. What stopped Hershey from shipping chocolate for the first time in a century? An ERP implementation. That’s the scale of ERP failure.
Notwithstanding what the consultants tell you, you can’t outsource all of that project management. In a project of such scale, your own organization will have to manage processes, and do so superbly. Look in the mirror and ask yourself if your administrative and IT groups are up to that task. Be honest.
Quality assurance processes. Some of the most successful ERP implementations have been accomplished by companies that have very polished, well-documented and comprehensive quality assurance processes. A company that has implemented ISO 9000 or an SQM (Service Quality Management) initiative successfully, for example, is in a much better position to implement an ERP than a company whose processes are undocumented historical relics.
That phrase “undocumented historical relics,” by the way, describes the processes by which most law firms are run. That was true ten years ago and it remains true today. Relatively few firms have undertaken a thorough review of internal quality processes, much less sought certification under an international standard like ISO 9000. I’m not advocating that most firms go out and try for certification. Rather, the point is that most firms have relatively ad hoc and undocumented business processes. That’s not an environment that invites a successful ERP implementation.
All eggs in one basket. An ERP is a single comprehensive system. That’s why you buy it. But if it breaks, everything breaks. Enough said.
Cascading errors. A fundamental error in an ERP has the potential to cascade throughout the system, with disastrous effects. That potential puts a premium on everything in the system being done correctly. To achieve that, you need experts and lots of them. You also need very well trained users.
Experts aren’t cheap. Speaking of experts, expect to pay a princely sum for experienced ERP talent. Then try to keep them when the market heats up, as it does every few years. A reminder: you will need more of these experts than you ever would have imagined.
Not best-of-breed. Because ERPs attempt to be all and do all, they don’t do any one thing particularly well. Legal accounting systems like Elite and Adherent are best-of-breed. Accounting staff may be irritated at them, but they are excellent at handling complex trust accounting, various lawyer roles, cost recovery and a host of other issues that are important to law firms. Moreover, those systems have been refined through several generations.
You can’t expect a generic ERP to be as refined, even if a vendor has tailored it for the legal market. For all its good intentions, a system integrator can’t match the resources or user experience of a specialized legal vertical provider. That means you may have to change the way you do business to accommodate the ERP’s limitations, or pay a fortune to customize the ERP’s accounting functions to suit your needs. The ERP vendors will tell you that all those things can be done, but, again, at what cost? And if your accounting system is already best of breed, why change it?
And here are some of the rewards:
Macro-level decision making. If an ERP and all the processes that feed it work, then you can truly manage your business at a macro level. Using traditional accounting systems, it’s usually quite difficult to get to that macro level, in part because important data you need to develop key business performance metrics is either not in the accounting system or, if it is, is not in usable form. ERPs synthesize important information from across the enterprise.
Transparency. This is a benefit that cuts both ways. When you adopt an ERP, it is possible to know almost anything important about the economics and basic processes of your business (and a good deal more that is utterly unimportant). That’s mostly good. Many law firms, however, operate with considerable lack of transparency. Partners may not know each others’ status, or perhaps what they are paid, or perhaps how many hours they bill. Once you have an ERP, everyone will know that all such information is easily available to someone inside the firm. That knowledge will start you down the slope to transparency, whether you are ready to go or not.
Integration. One of the key ideas behind an ERP is integration. With an ERP, your financial systems, HR systems, operational systems and other essential systems all operate off a common set of data and processes. Theoretically, when a new matter is started, the information about that matter cascades throughout all the systems that need to deal with matters. When a matter is closed, all the systems that need to know that it is closed do know. Theoretically.
Efficiency. Another theoretical benefit of ERPs is efficiency. If indeed information is aligned and flows throughout the enterprise, then you need fewer people to manage that flow, and the flow happens faster. Suppose that when you add an employee now, a paper process informs all the people and systems that need to know. That means each person notified takes that paper-based information and enters it in a separate system. That’s obviously inefficient. The ideal of an ERP is to enter data once and let everything else happen automatically. That’s obviously efficient. The question is whether the increase in efficiency (if it is indeed achieved — not all ERP implementations lead to efficiency) offsets the cost of implementation and the rather high cost of ERP operation.
Increased profitability or increased market share. When big, well-run businesses implement ERPs, this is what they are shooting for. I know from experience that delivering macro-level information to front-line lawyers can achieve remarkable changes in key performance results. With ERPs the question is at what cost? We will discuss alternative and lower cost ways to get this benefit below.
Brand. One of the first firms to attempt an ERP implementation said it was spending the money in order to adopt the same system its clients were using. If clients were integrating law firms into their ERPs, then mirroring client systems might be an effective operational strategy. But, in general, clients relate to their law firms using other, legal-specific, systems that often are not integrated into their ERP. So saying you’re adopting the same ERP as clients is really a brand statement, as in “Our brand is about trying to understand how you do business.” If you’re willing to spend a great deal for such a subjective brand benefit, who but your partners could contradict you?
Integrated Data Warehouses As Alternatives to ERPS
When Microsoft invests heavily in an area, you can be pretty sure that a sea change has already come to that area. And Microsoft has been investing heavily in enterprise-scale data warehousing for more than 15 years. It saw the potential to grab market share from SAP and Oracle and other ERP vendors by offering relatively low-priced (I said relatively) and very flexible data warehousing tools that deliver the benefits of ERPs without the attendant risks and costs. Indeed, since I first wrote about this, Microsoft has ventured even further into Oracle and SAP territory, with its own Customer Relationship Management (CRM) software, for example.
And Microsoft isn’t alone here. A number of other data warehouse vendors have sprung up to serve special markets, including the legal profession. IntApp, for example, has created a number of sophisticated and powerful data warehouse and data integration tools for law firms. And those are game-changers in the consideration of ERPs.
Obviously, something is afoot here. A good way to understand why businesses in all sectors have flocked to modern data warehouses is to explore how they work in practice. To do that, I’ll describe the data warehouse approach taken at one firm, Bryan Cave (from which I recently retired). Bryan Cave has repeatedly been recognized as one of the most innovative firms in the world, in significant part based on the strength of its internal and client-facing business intelligence systems. So, let’s look at how Bryan Cave got there.
Same problem, different solutions. The problem that both ERPs and data warehouses attempt to solve is the difficulty of discovering the truly important information about a business — the essential “business intelligence” (BI) that decision makers need to operate well. If you have neither an ERP nor a warehouse, then essential information to help you learn what is working in your business and what is not is buried in your accounting system and other enterprise systems (HR, matter intake, time entry, etc.). You have to get it out somehow before you can use it. An ERP goes about making that information accessible and useful by totally replacing all existing systems with a single system. The idea is that with a single system all these separate processes can talk to each other and produce important information as a result.
A data warehouse approach, on the other hand, leaves all your existing systems in place, but connects them in such a way that you can derive essential information about your business.
Data warehouses, by the way, are far more than report generators. You can buy report generators for your accounting and other systems, but still not be able to get essential information. Data warehouses assimilate information from enterprise systems and reorganize it in fundamental ways, so that you can draw important conclusions about your business.
Data warehouses can be narrow or broad. Some are designed to sit primarily atop existing accounting systems, with a relatively narrow but very powerful focus on finance issues facing firms. The Redwood platform (now owned by Aderant) is one such example of that approach.
Bryan Cave’s warehouse draws on almost all of its enterprise systems (HR, accounting, conflicts, new matter intake, time entry, etc.), in order to discover and analyze information about business processes well beyond the accounting system. A good data warehouse is flexible enough to accommodate such breadth.
How data warehousing works. Bryan Cave’s warehouse process begins by automatically harvesting essential data from all enterprise systems. That data then moves to a central, integrated repository. The data is batch updated and maintained across reporting intervals to preserve data history. Since the warehouse data comes from many disparate sources, disparities have to be addressed and “rationalized” before the data can be used.
At Bryan Cave, the rationalization process began in the years leading up to the adoption of its warehousing tools. As the firm implemented or updated various applications, it looked at how the data was structured and made changes, where necessary, to relate data from one application to that from another. For example, the firm implemented employee IDs throughout all enterprise applications and transitioned lawyers and staff to that form of identification. As a consequence, Bryan Cave could relate things such as compensation information across systems based on those IDs. But rationalization went far beyond IDs and included a complete re-architecting of data structures.
It is not enough to rationalize data in this way, however. Data must also continually be “scrubbed” to resolve issues that arise over time. Someone may simply enter data incorrectly. That needs to be caught and corrected before it reaches the warehouse. In this way, as data continues to evolve and change both structurally and with respect to content, the firm continues to rationalize and scrub it prior to bringing it into the warehouse.
Starting with the business strategy. Bryan Cave’s data warehouse is capable of producing an almost limitless array of data. Delivering such a vast store of data to decision-makers (front-line lawyers), however, would have been a disaster. They would not have known what to do with it, and they would not have used it. Extreme distillation, right down to the six or eight essentials of the firm’s business, is the only means by which one can hope to have any impact on the direction of the business.
How did Bryan Cave find those key performance indicators (KPIs) — the core business intelligence it needed to operate the firm? The central determinant of BI has to be the strategy of the business using that intelligence. And that strategy has to be informed and shaped by the intelligence produced by the BI system. If this sounds like something of a loop, it is. Businesses can only focus on a few things, and those things may shift over time as the business recognizes opportunities and mistakes and alters course. It is imperative for BI to be in this loop.
Bryan Cave’s experience is instructive in this. Long before it began coding its data warehouse system, the firm analyzed its strategic plan and emerged with a few KPIs that would both track and drive the progress of the plan. Those evolved to become: collections (in three categories), margin percentage, leverage (expressed as a ratio of hours), bill speed, collect speed and billable hours. These measures were settled upon at the level of the chairman, the executive committee, the management committee and senior firm executives. Selecting key performance indicators must occur at that level because, for such measures to be effective, the firm’s leadership must believe in and proselytize very actively on behalf of them.
The warehouse interface. Much of the art of creating a data warehouse comes when you try to get the data out. Bryan Cave began that process with custom reports produced for a select audience. At the start, reporting was done using Microsoft’s Reporting Services and Analysis Services. Both are extremely robust tools that most law firms likely already own (but under use). And they can form the foundation of an effective data warehouse.
Those early custom reports matured over nearly 15 years into a fully-fledged business intelligence suite accessible, to varying degrees, by every level of the firm. It became an essential tool not just for back office types, but also managing lawyers, practice leaders, relationship lawyers, associates, paralegals and managers of all types.
Utilization of that business intelligence suite rose from about 10% of partners in the early years (which is fairly typical for such systems) to more than 85% of all lawyers. In the process, it became an essential part of the firm’s everyday business.
The data warehouse and the intelligence it spawned left Bryan Cave extremely well prepared to handle the rapid market changes in the wake of the Great Recession. And it became the foundation for a sophisticated Practice Economics Group and a client-facing consulting group.
Would the same have been possible with an ERP? Maybe. But I believe that the time, energy and expense sunk in the implementation of an ERP would, as so often has happened, have made the ERP an end in itself. Bryan Cave would not have gotten to the question of how to weave KPIs into the fabric of the firm. It would not have had the tremendous flexibility necessary to experiment with different approaches to distributing business intelligence.
The stakes of an ERP implementation are so high that mistakes have to be avoided. But the path to creating an essential business intelligence system at Bryan Cave was littered with micro failures. They could be kept micro because of the inherent flexibility of data warehouses. And they could be kept cheap because Bryan Cave wasn’t using expensive ERP talent and outside consultants to conduct its experiments.
The pace of cultural shift. Notice that in Bryan Cave’s warehouse initiative, there is cultural shift involved. The firm adopted KPIs such as margin, added “large organization” attributes such as employee IDs, began increasing transparency with its financial suite, and took other steps that are strange and new to law firms. However, that cultural shift is minor compared to the shifts that an ERP can force at every level of a firm. And it was a more gradual shift. Bryan Cave implemented its key performance metrics and warehouse systems gradually, over a period of years. Because an ERP replaces everything at once, you haven’t the luxury of gradualism. At some point, you simply have to cut over.
With the warehouse approach, the pillars in accounting are still happy. In fact, they’re even happier than before because automated reporting reduces their workload. With an ERP, one or both of them might have considered retirement: the stresses can be that large.
Data warehouses are not inexpensive. Significant software license costs may be incurred, and a firm needs expert staff to operate the warehouses and the various tools that sit atop the warehouses. However, Bryan Cave spent a minute fraction of the amount it would have spent on an ERP. And I challenge any of the firms who hope to implement ERPs to demonstrate an ROI that justifies that cost difference. Bryan Cave gets the essential information it needs quickly and easily now. It has significantly improved KPIs. It has developed many client-facing applications using the warehouse. It has introduced a number of efficiencies (e.g., by automating many reports) and expects to continue to improve over time. It has jostled the firm culture, certainly, but hasn’t thrown it into an uproar the way an ERP implementation can do.
And now the question for those firms that want an ERP: What are you thinking?
About John Alber: John Alber serves as Futurist for the International Legal Technology Association. He also writes, speaks and consults, focusing on finding practical ways to reshape the delivery of legal services to suit a future demanding excellence far beyond substantive legal skills. Prior to his current role, John led Bryan Cave LLP to become one of the most innovative firms in the world, serving as its Strategic Innovation Partner for more than 16 years. While at Bryan Cave, he also served for 7 years on the firm’s Operating Group (its management committee).
He retired from Bryan Cave and currently lives aboard the 50 foot trawler Barefoot Lady, plying U.S. and Caribbean waters between a few carefully chosen engagements At Bryan Cave, John created one of the first Practice Economics consulting groups, one of the first law firm departments focused on developing client facing technology and one of the first in-firm legal process outsourcing (LPO) organizations. The groups he created developed innovative web-based, client-centric applications that delivered legal advice to clients, managed complex workflows and even created pleadings automatically. They also developed client-facing knowledge management, project management, project estimation and business intelligence systems and highly technology- leveraged alternative staffing solutions for engagements of all types.
John has written and spoken widely on legal innovation subjects and received a number of awards, both in the legal field and in information technology generally. Among other awards, he received ILTA’s first ever Premiership Award, was named American Lawyer Media’s first ever ‘Champion of Technology’, was given a Lifetime Achievement Award by Law Technology News and recognized as one of the ‘Top 25 CTOs’ in the world by Infoworld. In addition, while under his leadership, Bryan Cave received recognition as a CIO Magazine ‘Top 100 Company’ and was twice recognized as ILTA’s Most Innovative Firm.