Features - ERPs or Data Warehouses for Law Firms?

John Alber is the Technology Partner for Bryan Cave LLP, a diversified practice firm with offices across the U.S. as well as in the UK, Middle East, and Far East. A former technology company CEO in the transportation sector, he leads the firm’s Client Technology group and sets technology strategy for the firm as a whole.



At least two large law firms have now decided to implement Enterprise Resource Planning (ERP) packages (in both cases, software from SAP AG), and are now in some stage of implementation. Anyone who reads the business press is aware that ERP implementations can lead to catastrophic results, as happened not long ago when a well known chocolate company found itself unable to fulfill orders following an ERP implementation. There are also many accounts of companies, especially manufacturing companies, successfully implementing ERPs, with attendant benefits. Clearly, ERPs present a risk/benefit choice for the businesses implementing them. The question I address here is whether the benefits of ERP outweigh the costs and risks for law firms.

My answer is no. I believe that, while ERPs definitely have a place in business, law firms present among the highest potential risks of failure because their business and IT processes are relatively immature. At the same time, modern data warehouse technology allows law firms to achieve many of the benefits of ERPs at a fraction of the cost and at much lower risk. To my mind, there is no question. ERPs are not appropriate for law firms. Data warehouses definitely are.

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. 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 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. I will list those 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. We’ll talk about that in a minute.

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 reflected an underlying way of doing business.

Think of Marty and Betsy in Accounting. They’re the best, but they’ve been doing things the same way for 20 years. They’re 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 embedded processes is challenging because they’re highly linked with other embedded processes, not just because some people who perform the processes are rigid. Research on and experience with ERPs suggests that such change is very difficult to achieve, especially over the relatively short term of an implementation cycle.

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? 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, ala the chocolate factory. 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. 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 $125,000 and up a year for experienced SAP 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, it is usually the case that they don’t do any one thing particularly well. Legal accounting systems like Elite and CMS are best-of-breed. They handle 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. 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 want 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. My own view is that delivering macro-level information to front-line lawyers can actually achieve this. The question is, once again, at what cost? We will discuss alternative ways to get this benefit below.


Data Warehouses As Alternatives to ERPS

When Microsoft invests heavily in an area, you can be pretty sure that a sea change is coming. Well, Microsoft has been investing heavily in data warehousing for some time now. It sees 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. And Microsoft isn’t alone here. A number of other data warehouse vendors have sprung up to serve special markets, including the legal profession. Redwood Analytics, for example, licenses a number of sophisticated and powerful data warehouse tools to law firms.

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 warehousing approach taken at my own firm, Bryan Cave. Then we’ll compare the costs and benefits of data warehouse systems with ERPs.

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, new matters, 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 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. Redwood’s data warehouse, for example, is designed to sit primarily atop existing accounting systems. It has a relatively narrow but very powerful focus on finance issues facing law firms. Our own data warehouse (which now incorporates Redwood’s technology) draws on almost all of our enterprise systems (Peoplesoft, Elite, DTE, LegalKey, etc.), because we want to know things about business processes beyond our accounting system. A good data warehouse is flexible enough to accommodate such breadth.

How data warehousing works. Our warehouse process begins by automatically harvesting essential data from our 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 our warehouse data comes from many disparate sources, disparities have to be addressed and “rationalized” before the data can be used. In our firm, the rationalization process began in the years leading up to the adoption of our warehousing tools. As we implemented or updated various applications, we looked at how the data was structured and made changes, where necessary, to permit us to relate data from one application to that from another. For example, we implemented employee IDs throughout our enterprise applications and transitioned lawyers and staff to that form of identification. As a consequence, we can now relate things such as compensation information across systems based on those IDs.

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, we continue to rationalize and scrub it prior to bringing it into the warehouse.

Our own data warehouse is capable of producing an almost limitless array of data. Delivering such a vast store of data to our decision-makers (our 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 half dozen essentials of our firm’s business, is the only means by which we could hope to have any impact on the direction of the business.

Starting with the business strategy. How did we find those half dozen essentials — the core “business intelligence” we needed to operate our firm? The central determinant of business intelligence 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.

My own firm’s experience is instructive in this. Long before we began coding our data warehouse system, we analyzed our strategic plan and emerged with six key performance indicators that would both track and drive the progress of our plan. Those were: contribution to Profit per Equity Partner, leverage (expressed as a ratio of hours), effective rate, realization, billings and collections. And when I say "we" selected these measures, I mean the firm acting at the level of the chairman, the executive committee (our board) and the operating group (our executive team). 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 on behalf of them.

The warehouse interface. You have a number of choices as to how you get at the information in a data warehouse. One way we get at the data is to use custom queries that are generated by programmers. If those queries need to be run regularly, we create a custom report that users can launch themselves when they need information.

Obviously, most accounting staff and virtually all of our lawyers will not be able to generate custom queries themselves. To address those audiences, we have two solutions. For accountants with skill in Excel, we can create pivot tables that let them explore various combinations of data easily. For lawyers, however, we have taken a completely different approach. We distill our key performance indicators down to an easy to use “dashboard” that each of our relationship, responsible and originating lawyers can access. That dashboard lets lawyers model new engagements, compare existing clients and matters, and drill down into the details of engagements.

The pace of cultural shift. Notice that in our own warehouse initiative, there is cultural shift involved. We adopted key performance indicators such as contribution to PPEP, added “large organization” attributes such as employee IDs, began increasing transparency with our dashboard, and took other steps that are strange and new to law firms. However, that cultural shift is minor league compared to the shifts that an ERP can force at every level of a firm. And it was a more gradual shift. We implemented our 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, Marty and Betsy in accounting are still happy. In fact, they’re even happier than before because our automated reporting reduces their workload. With an ERP, one or both of them might have considered retirement: the stresses can be that large.

Conclusions

Data warehouses are not inexpensive. There are significant software license costs, and we still need expert staff to operate the warehouses and the query tools that sit atop the warehouses. However, we have spent a minute fraction of the amount we would have spent on an ERP. And I challenge any of the firms who have implemented ERPs to demonstrate an ROI that justifies that cost difference. We get the essential information we need quickly and easily now. We have introduced a number of efficiencies (eg, by automating many reports) and expect to have more over time. We have jostled the firm culture, but we haven’t thrown it into an uproar the way an ERP implementation can do.

So, tell me again why you want an ERP?

Note:  This article was first published in Accounting and Financial Planning for Law Firms, in the November 2005 issue.