Sunday, August 24, 2008

Thought, Actions, ROI – Almost Inseparable

With all of the frustrations conjured up each and everyday because of computers and software, one would be very hard pressed to confess they would rather return to a world without technology. The conveniences of modern day living is a direct result of technology. With all of its problems, software technology brings value to every use, to some degree. This value can be tied directly to the choices made as to the type of technology and its implementation.

Over the next week close to three thousand people will converge on Dallas Texas for the International Legal Technology Association (ILTA) annual conference. This educational based forum affords leaders from today’s law practices to acquire and share their knowledge with their peers. As an added benefit the forum presents an opportunity for these leaders to meet many of the companies who furnish their organizations with software technology.

With so many vendors presenting their latest solutions, one is very hard pressed to identify the right fit of software for their organization. This dilemma is easily dissected into its component parts. Vendors will proudly profess their value proposition; the value their solution brings to the market. This ‘value’ is demonstrated in all of their literature and hidden in their graphics, logos, presentation and even in their references. Very simply all software will provide user some value, even those camouflaging old technology.

With three or more vendors touting their value, it becomes difficult to select the ‘right’ solution. Or does it? Software selection is a two part process. The first and easiest part is to understand what is available in the market place. The second step in selecting the right fit is in understanding the environment where the solution will be used. This is the area where most organizations have and continue to fail.

Know thy self written by Socrates about 350 B.C. speak volumes on why some organizations fail and others succeed in implementing the SAME solution. This is also the reason why today’s market is filled with consultants selling their expertise under the realm of Six Sigma, Lean Manufacturing, BPR, JIT manufacturing and the list goes on. Armed with the knowledge of what is available, the leader should critically examine their current process which will lead to the ‘right’ fit.

A critical examination is more than a cursory review of how bills get created or how checks are approved. It is a full documentation of the entire process, followed by a critical examination asking ‘why’ at each step; why do we do ‘this’ like this? Six Sigma methodologies refer to this as the DMAIC sub-process. The sub process is outlined as: define measure, analyze, improve and control. The belted consultant would critically review the process asking ‘why’ at each step with a view to make the process more efficient and less prone to errors.
The greatest return on any software solution will not be derived by the solution itself but rather by the revising of the underlying business process. Overlaying a historical business process with new technology only acts to speed up the arrival at the ROI glass ceiling. There are so many examples of organizations changing the tools but keeping the old process. Take for instance the Dvorak Keyboard of the early 1900’s which allowed for higher typing speeds. However it was replaced by the QWERTY Keyboard because of mechanical constraints of manual typewriters. Notice, in today’s age we have yet to return to the Dvorak keyboard; we are too entrenched in history. The world of software is no different; firms continue to muddle through software acquisition and be satisfied with their 10-15% ROI, because of the mentality that the process has always been done this way and we cannot change it. However, the astute firm who reexamines their entire process, making the appropriate changes to streamline their process and enhancing the new technology, enjoys the 40-80% ROI. In the five years from 1995-2000, General Electric learned firsthand how the act of reviewing each process with a critical eye before launching yielded a $10 billion benefit!

A new look at an old process will immediately reveal historical inefficiencies. Once the process is re-scripted, then one is better prepared to ask the critical questions necessary to separate one solution provider from the next; this is what clarifies the difference between average and extraordinary returns on investment. So as you stroll through the vendor halls listening to vendor value propositions, recognize that you, and only you, control your true ROI with any new solution!

Thursday, August 14, 2008

My Caffeine…My Way!

Over the past several weeks, I have received numerous questions surrounding software selection and licensing. Therefore, I feel compelled to spend the next few weeks demystifying this entity we refer to as “software.” This will be accomplished to the extent that we get the solution we need, how and when we need it, as well as including some of the common ‘gotchas’ associated with acquiring software.

It is impossible to make it through a single day without using some type of software or even being the beneficiary of it. Software is such a part of our daily life whether we see it or not. It starts with the electricity and running of water which makes its way into our homes, the alarm clock in the morning, the cars we drive, elevators we ride, and even into the production and storage of the food we eat. But what is software? The term ‘software’ first made its presence into the English language in 1958. Since then it has become a widely used term, but the definition is somewhat illusive. Merriam-Webster defines it as: “the entire set of programs, procedures, and related documentation associated with a system and especially a computer system; contrasted with hardware.” While other dictionaries define it as anything from “not hardware” to “a codified set of commands that direct microprocessors to perform certain functions”, what ever the real meaning is. Software makes things in our lives work, be it phones or electricity; we have conveniences because of software.

During the first thirty years of its life, software meant ‘you get what you get and you can’t throw a fit!’ Because for a long time people lived with the reality that any automation was better than none at all since the manual approach was much more difficult. However, as benefits of software were recognized more people entered the software development field, which resulted in new and innovative technologies being produced; ultimately making their way to market. The market turned into a ‘you get what you want’ arena; but at a price. This ‘having it my way’ fed the software production engine more and more fuel through the 1980’s to today. The resounding theme through all of this expansion was, you have to pay for what you want. As each product offered different strengths, one would have to choose the product that met the highest number of their functionality need; then put out the money. They often paid the price for functionalities they didn’t need or even want, simply because that was how the product was packaged.

From the late 1960’s the costs of purchasing (licensing) software was very subjective, with a common theme of ‘expensive’. Essentially software companies were on the pharmaceutical model, recoup all the R&D costs per unit sold. Sometimes their model was flawed and the company went broke, other times the model was profitable and the company flourished. As more firms caught on, the competitive pressures clarified the model and produced other options for recouping the R&D costs.

Today there are a plethora of options to get the needed functionality you need at the ‘right’ price. Following are a few of the most popular models.

The Classical Model has the user paying a lump some amount of money for the software package. This package would often include other components that the user may or may not want. Sometimes in this model there are additional fees, such as support and maintenance. If it is consumer software, the price on the package is the price you pay. However, if it is enterprise software, the book price is the starting point for negotiation.

A progressive variant of the Classical Model is known as the SaaS Model. The acronym stands for Software as a Service. Here the user only pays for the use of the software when and if they need it. This model began gaining popularity after Microsoft launched the SaaS model in 2000 for its Office Suite of products. This allowed organizations to ‘rent’ software applications on an as needed basis; the savings were phenomenal! No longer did firms need to buy (license) the entire suite of Office Professional, they could, a la carte, satisfy their users needs.

In the early 20th century, there was a rise of the Free Culture and the Open Source Culture. The Free Culture created the concepts of Freeware, Shareware and Public Domain software to the world. The Free Culture was, and continues to be, a hard core group of software engineers who, through different motivations, goal is to put solutions into the world. Freeware tends to provide specific functionality, such as converting MS Word documents into another format, and is made available to the public for a voluntary fee. Shareware is a little more advanced than Freeware in that it has limited capability and is offered on trial, where the full version can be purchased at any time. Public domain software is completely free for anyone to use, however they want.

It was the Free Culture and the Public Domain movement that gave rise to the Open Source Model. In this model, software is provided free or at a nominal charge to the public, more often than not, under a licensing agreement, however, the user has access to the ‘software code’ which allows them to make changes to the software. With the Open Source Model, the user can now add functionality that they specifically need. Until this point, adding ‘your own’ functionality never existed. Another progressive thought introduced with Open Source was that newly added functionality must be returned to the public domain, where everyone can enjoy the new functionalities. According to the Law & Life: Silicon Valley blog posting of April 4, 2008; by 2012, 90% of businesses will use the Open Source Model in some capacity.

In addition to the diversity of software features available one must recognize there is also diversity in getting what you need. Over the coming weeks, the journey of selecting YOUR software solution and how to acquire YOUR solution will be addressed. Recognize that your working environment isn’t rigid any more; you have options! The classical model often binds you to a ‘packaged solution, the SaaS model allows you get ‘what you need, when you need it’ for a fee, while the Free Culture presents the low or no cost alternatives. With that said your email needn’t originate from within a suite of products; it could be used ‘as and when needed’ or can be the Java Open (Source) Office completely free solution.

I am glad I can have my mocha java latte, with cinnamon!

Thursday, August 07, 2008

Credits Calling from the Abyss

It is amazing that the life blood of modern day commerce rests on a system devised over 500 years ago. In 1494, Luca Pacioli documented the technique of double-entry bookkeeping, and from then became know as the ‘Father of Accounting’. One could only speculate that his reasoning for this technique was to accurately reflect the transactions of a business at any point in time. Over the years the complexity in commerce imposed tremendous challenges to double-entry bookkeeping; however the Pacioli model remained steadfast through generations.

Today’s methods of recording transactions are tremendously more complex than that practiced in the early 1500’s. However, accounting bodies all over the world actively postulate the best and fairest means by which to record complex transactions. With the rapid globalization of commerce, the International Accounting Standards Board works tirelessly to instill some order in complex global transactions.

Interestingly enough the bulk of the accounting problems faced by today’s organizations are not rooted in complex transactions, but rather the most rudimentary type of transactions. Over the past month, many organizations shared some of the difficulties facing their accounting departments. The two most prevalent difficulties were billing and cash receipts. Although both of these transactions seem so very simple; today’s business has created a wealth of unnecessary complexity from simplicity.

Payments come into all organizations by way of some type of negotiable instrument. For the most part, the person empowered to deal with these payments have been trained to know what to do. Often this training is ‘hand-me-down’ knowledge and is therefore often diluted. Very simply the negotiable instrument should be placed into the bank and the payment recorded in the organization’s financial records. However, I have seen organizations hold onto payments until they can ‘figure out’ how to treat them for accounting purposes; sometimes days if not weeks. Somehow organizations don’t realize that securing the payments and recording the receipt of funds are two very separate functions. The banking of negotiable instruments is a treasury function and is of paramount importance. The second most important activity is properly recording the receipt of funds. It is in the recording of these payments that organizations have conjured up a huge amount of complexity.

The best clarifying agent for the recording of cash receipts comes directly from accounting principles, known as GAAP. The one differentiating factor in dealing with incoming cash receipts is to determined if: a) revenue is earned and therefore payment due, b) or revenue is not earned and payment is not due. If the customer has remitted payment for goods or services rendered, revenue was earned and therefore the payment is due. Therefore recording of the receipt of funds becomes very simple; relieve the customer’s outstanding debt in the organization’s ledger. Even something this simple causes organizations anxiety. A moment spent examining the customer’s payment should provide insight to what bill they are paying. If this information is not readily apparent, it is the responsibility of accounting team to make contact with the customer to get the correct information. This simple customer exercise ensures that both the client’s records and the organization’s records properly reflect the transaction.

The receipt of payment when revenue is not earned and payment is not due, is experienced by many organizations in many different markets. In this situation, the customer is advancing payment for a specific purpose, often to be in compliance with the terms of engagement. Depending on the type of organization these funds could bring with them a whole host of special rules. In manufacturing or construction, these funds could be a deposit on an upcoming invoice. Therefore in the financial systems for these types of organizations there would be a method to reflect the receipt of these funds as a credit on the customer’s account.

In more service type establishments such as the practice of law, land title agencies, or real estate organizations there are specific rules as to the treatment of non-earned customer receipts. Each of these types of organizations must follow protocols as determined by their governing body. Often these rules differ by local jurisdictions and definitely by country. In my career I have had the greatest exposure to the cash receipts rules of legal practices. From my experience, commonwealth countries have the strictest rules by which client monies must be managed. In these countries essentially all non-earned cash receipts must be segregated from the firm’s operating funds accounting and a sub-ledger for each client must be maintained; in exceptional detail.

Law firms’ cash receipts can be sifted down to three main three types: a) payment for outstanding bills, b) payment for disbursement on a transaction, and c) payment as a retainer to an engagement. Very simply, the payments received are either in consideration of a bill or are not. Funds received as part of transaction type b or c create a tremendous amount of frustrations for most US firms simply because they are not related to a bill.

The treatment of unearned payments (b & c) is really very simple. The American Bar Association (ABA) has dedicated an entire section of their website to addressing these types of payments The site also provides links to local state bar association statutes and even foreign statues for dealing with these types of transactions. In addition to the ABA’s treatment there is an excellent book that adds clarity to managing law firm cash receipts: Accounting in a Law Office by Kenneth Laundy. In his book, Laundy demystifies all of the theories between earned and not earned cash receipts and their related treatment to remain in compliance with statutes. Firms must understand that unearned funds are NOT the property of the firm. Therefore they must be segregated from the firm’s operating funds and managed through the firm’s billing system sub-ledgers, by client. With that said a retainer is not earned revenue until billable hours or disbursements are added to the client’s ledger and a bill is produced. Equally, just as receipts as part of a settlement to litigation are NOT the property of the firm and therefore must NOT be comingled with the firm’s funds.

Cash receipts are the most fundamental part of any business. Their management should be as easy as Pacioli documented in 1494, they shouldn’t get lost in the abyss of complexities. There are governing bodies abound that provide direction for record keeping. So, simply deposit the instrument into a bank, properly record the transaction in the financial ledgers and… move on!