By Nataly Kozanian, Project / Program Manager, Legal, Autodesk Inc. and Rudy DeFelice, CEO, Keesal Propulsion Labs (KP Labs)
As a technology company working with corporate legal departments on digital transformation, Keesal Propulsion Labs loves hard problems and often ask their most valued clients “what is hard, but shouldn’t be?”
Autodesk had a hard problem. Its corporate legal department manages relationships with over 70 law firms, with hundreds of matters active at any given time. As these vendors work on active matters, it creates an immediate expense for the Company that is not reflected in an invoice or in the Company’s financial systems. Managing the information around these accrued expenses in real time is a hard problem.
This is the story of how KP Labs and Autodesk abandoned the traditional vendor/customer relationship and created a co-innovation process to build a solution to this hard problem. And, what all that has to do with a 1980s all-female pop group.
Corporate legal departments have long had a requirement of tracking fees incurred by service providers. Historically, it was common to manage expenses as submitted by law firms – frequently a month or two after incurred – and to reconcile the budget based upon those expenses after the fact. Companies had a tolerance for expanding budgets as needed to cover expenses as critical as outside law firm costs.
However, that world is changing in many legal departments. Departments are under pressure to be aware of expenses in real time – to know what expenses are being accrued and to reconcile budgets throughout the year. The “wait and fix” model that was acceptable long ago is no longer satisfactory at modern, tightly-run legal departments.
Why Tracking Accruals Matters.
A more timely view of accruals is important for keeping actuals and budgets in line. As companies have become more sophisticated in monitoring expenses, there is more attention to understanding how budgets are comparing to actual results at any given time. Companies that require an accurate look at financial performance in real time have an information gap associated with accrued but unrecorded expenses.
Secondly, underreported accruals can lead to budget adjustments. Companies finding that accrued expenses for legal services are not as high as budgeted expenses are prone to reduce the legal department budgets during the year. Then, when the expenses are submitted through an invoice, a department whose budget has been reduced stands the risk of being over budget. This condition is not the fault of the budgeting process but results from the process of tracking accruals. So the legal department faces the twin problems of having its budget lowered based upon untimely information, and the prospect of ultimately being over budget (with all the internal consequences that brings).
The “Before” Picture at Autodesk
Anybody who deals with information systems knows the familiar “garbage in, garbage out” construct. We had a related problem at Autodesk. Our law firms did not provide us with timely or accurate accruals information. This wasn’t due to a lack of cooperativeness. The problem was that the system at our disposal – which was associated with our e-billing system and the manual process in conjunction with it – was hard to use and didn’t capture the right information. Therefore, we did not have accurate data to work from. The insufficient system led to bad data and inaccurate results.
Consequently, we engaged in a quarterly accruals collection, designed to close the information gap between expenses accrued and those submitted and reflected in our financial system. This activity included:
- Reminders: Sending out a series of reminders to our law firm providers asking them to provide data about accrued but unsubmitted expenses;
- Review and Correction: Our team manually updated records and compared to budget number to identify significant gaps;
- Reconciliation: Staff would compare invoices, information gleaned from the reminder stage and budgets to attempt to reconcile this information to give a timely picture of actual obligations of the department. This generally occurred during a hectic 10 day period between receipt and review of invoices and month’s end internal reporting.
Overall the process was unduly stressful, took many hours of staff time that could otherwise be devoted to value-added activities and in the end yielded imprecise information. It was a hard problem, ripe for innovation.
Our Co-Innovation Initiative
Autodesk raised the issue surrounding forecasting and accruals to KP Labs in mid-2019. We were talking about other areas of digital transformation, particularly workflow automation, when KP Labs’ Justin Hectus mentioned that KP Labs has made a real commitment to working with clients to solve hard problems. The idea was that it would devote resources – engineering, product development and domain expertise – to work with clients, without regard to short term profitability, to build solutions to challenging issues.
The Legal Ops Team raised the issue of accounting accruals. The parties discussed the existing tools and the gaps they left. We focused on the experience Autodesk staff had to endure monthly and the unsatisfactory result to which it led.
To KP Labs, co-innovation was more than a way to develop a solution to an accruals problem. It represented a superior method of creating products. In typical product development, a company builds a product and hope it meets the needs of the market. It is not in a position to have the depth of insights – or the access to real world users – that a customer has. Customers, on the other hand, do have insights and a testing audience. What they don’t have generally are the available resources to explore, design and build a product, nor the sales and marketing infrastructure that would enable it to leverage the investment required across a portfolio of customers.
This dilemma – that product developers lack the insights of the market and the market lacks development infrastructure – is a fundamental inefficiency in typical product development methods. The co-innovation approach solves for this inefficiency. Co-innovation brings the depth of the customer in terms of the problem and the depth of a company in terms of product development, together.
This commitment to the co-innovation process is a central part of our identity at KP Labs. We are structured to support this kind of activity, since we are profitable from other business lines. Also, KP Labs’ investor is Keesal Young & Logan, a law firm committed to having a long term impact in the industry. Companies with traditional financial investors and capital structures, by contrast, tend to have shorter term growth needs, standing in the way of the freedom to experiment. This commitment underscores the “labs” component in KP Labs’ name and is central to who we are. This structure and mindset makes co-innovation with forward thinking clients possible.
In The Lab
Autodesk and KP Labs jumped in the lab for several months, exploring the best way to solve the accruals ‘hard problem’. Nataly led the inquiry from Autodesk’s side and gathered a group of stakeholders to shed light on the problem from many angles. As a recipient of Autodesk’s Fearless Innovator award in 2018, Nataly had credibility within the Company which helped create internal enthusiasm for the project. KP Labs spearheaded the requirements analysis, product design and development under the leadership of Dillon Knowlton, its head of technology. Since KP Labs is affiliated with Keesal Young & Logan, a 50 year old California law firm, we had a perspective of the problem from the law firm side. This was important since law firms were the entities with control of the data. So if the solution was not conducive to their use, encouraging participation through a compelling user experience, we knew it would not succeed.
Together, we created a solution to tracking accruals that was easy to use for the law firms entering data, flexible for the Legal Ops team who could track data in real time and issue information requests to firms through the system, and comprehensive enough to provide a leadership view of the entire accruals situation.
The system provided a simple interface to view matters and enter estimated accruals. This captured accurate data while being easy to use.
The system also created a dashboard to give the Legal Ops team a view of the accruals position by law firm.
Accruals in The Wild
We introduced the system first as a pilot to a group of 13 of Autodesk’s law firms. The response was enthusiastic right out of the gate. The initial pilot group recognized that the system, designed to solve a problem for Autodesk, gave considerable consideration to the law firms’ experience as well. It made their lives easier too. As a result, the relationships were strengthened and the data going into the system was more reliable and timely.
We ran the pilot for about 3 months. During that time, KP Labs made a variety of refinements to the product. Autodesk realized business impact from the new system in three areas:
- Better Data. The primary driver for exploring the accruals problem was that Autodesk did not have timely and accurate accruals information from its many law firms. This had presented a problem for the Legal department and the Company in terms of reconciling forecast and accrued expenses.
Accrual Summer led to a dramatic increase in the nature and accuracy of accruals data. Autodesk expects its forecast inaccuracy will decrease approximately $234,000 in our first full fiscal year based upon the findings in the pilot. Since the system was designed with our law firm partners in mind, it made the process easier on their end, so Autodesk was able to be a great partner to its firms while getting better results.
- Significant Time Savings. During the 3 month pilot period, we experienced greater than a 50% reduction in time spent on accruals related activities. As familiarity with the product increases, it is expected that those savings will also increase. This time savings (and quality of life increase) will more than pay for Autodesk’s investment in the project.
- New Capabilities: In addition to the significant time savings Accrual Summer has yielded, it has also provided new capabilities to Autodesk. Primary among them is the ability to forecast accruals. The prior system did not capture the data necessary or provide the interface to enable forecasting. Accrual Summer was designed with this need in mind, which gives us greater visibility to anticipated legal spend.
Based upon our experience during a 3 month pilot, Autodesk knew it had a winner. Therefore, we rolled the system out to our entire group of 70 law firms. The accruals process was tamed.
What Does This Have to Do With an All-Female Pop Band From the 80s?
One thing that was left for us was to come up with a name for the system. We wanted it to say what the system did, while keeping the playful spirit that characterized our time co-innovating in designing it.
That’s where KP Labs’ co-founder Justin Hectus came in. Justin has been in legal technology his entire career, but his alternate ego is as a music producer. He’s managed bands and produced dozens of festivals and performances over the years. He brings that passion for music into his day job. Accordingly, many KP Labs products have a reference to a song or band.
For this project, Justin went back to the misspent hours of his youth watching MTV, enjoying the British pop band Bananarama perform their hit “Cruel Summer”. With a nod to the energetic, joyful tone of the song, the product name “Accrual Summer” was born.
Where This Goes From Here
Autodesk has incorporated Accrual Summer as an important element in its ongoing legal and finance operations. The parties are sharing the Accrual Summer story, as an example of the power of Co-innovation in building solutions to hard problems. It is a model that KP Labs is using in a variety of clients to create innovative answers to problems.
We’re talking to peers in the market, finding out if Accrual Summer can help in their departments too. Nataly had a strong feeling from her experience at prior companies that the accruals problem was common. Part of our collective ethos in this endeavor was to move the industry forward through our experimentation.
Last, we’re exploring other areas where our co-innovation methodology can solve other hard problems and sharing the value of that methodology with the market. It is a model that worked for Accrual Summer. We think it is a solution for all seasons.
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