July 7, 2006
Law Firms Are Discounting Fees–Unintentionally!
By guest author Brian Ritchey, JD
Juris Professional Services Senior Consultant
I just returned from an engagement with one of our law firm clients where we discussed opportunities to improve the firm’s financial performance. Not surprisingly, one of the issues that partners were interested in was the opportunity to increase rates. Specifically, they wanted intelligence information to determine the competitive room for an increase.
The firm may need to consider an increase but our work disclosed that the firm had no formal structure in place for managing the collection of fees once billed. As you might expect they were also slower than most firms when it comes to billing for work already performed.
Studies show that there is only a 70 percent chance of collecting a 60-day-old receivable in full. You only have a 45 percent chance of collecting the full amount after 90 days. The value of uncollected fees declines over time—not only because of the time value of money, but because the prospects of collecting an account in full becomes unlikely. The older an account becomes, the more likely it will require an adjustment or write-off before you can get your money.
Based on data from the Department of Commerce, the net present value of uncollected receivables decreases by 10 percent after 60 days. The value drops by 20 percent at 120 days. Would you have offered those late paying clients a discount of ten or twenty percent? That is exactly what you are doing if inattention to collections encourages or tolerates late payment. Most firms are guilty of doing so. The average law firm takes 60 days to collect its fees after they are billed. That means, on average, you are unintentionally giving your clients a 10 percent discount.
You can increase partner income by focusing on collections:
Make prompt payment a part of fee negotiations. Faster billing and collection yields the same result as a rate increase. Firms who don’t consider the time it takes to collect a debt leave an important variable on the table when negotiating rates.
Get deposits and prepayments up front.
Get bills out the door faster. If you take your time billing for services, your clients will not feel a sense of urgency regarding your expectation for payment. Use technology to record billable time and events as they occur. Hold billing attorneys accountable to bill promptly.
Appoint a member of the administrative staff to call before bills are past due and keep calling until the money is in the bank. Use technology to alert the appropriate person when attorney intervention is required.
Law firms need to place more attention on collections. A commitment to faster billing and collection can yield the same result as a rate increase without the same client resistance.
Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.
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