Many mature law firms have learned that their attorneys are not the best bill collectors. The job belongs to the administrative staff. At least, it is the administrative staff that should be the front line for routine collection efforts. When meeting with a group of managing partners several months ago, one partner explained that when routine collection efforts fail, the firm still does not let the responsible attorney get involved.  A second member of the firm who has no responsibility for the client or case in question is assigned the role of being the “heavy”.  Will law firms sue to collect?  A growing number say “yes,” in spite of the countersuit risk.  They refuse to leave their money on the table.

 

There are four places to turn to reduce losses from the wasting value of billed but uncollected fees:

           

• Intake Policies and Procedures

• Billing Speed and Procedures

• Routine Collection Efforts

• Non-Routine Collection Action

 

The first rule is, of course, to screen out those prospects for your services that are likely to be a collection problem and to have a clear written understanding concerning how the client will be billed and how the law firm expects to be paid.  The engagement letter should also spell out the consequences for non-payment within the agreed upon terms. Take the extra step of adding to your engagement agreement information to be used in routine collection efforts–clearly state within the agreement who the law firm should contact to confirm receipt of the bill and who to contact in case of a missing payment. Uncollected fees for services are a loan to your client.  Where permissible, you can reduce that financial burden and head off possible collection problems through the following steps:

 

            Require advance payment

            Require an evergreen trust deposit

            Accept credit cards

            Automatic debit to the client’s bank account

            Installment payment agreement

            Etc.

 

The second rule is to bill promptly for services provided.  Your clients’ attitude is if you expected prompt payment you would have billed promptly.  If you take your time, they are going to take theirs.  Prompt billing conveys a sense of urgency. Consider the following steps for increasing billing speed in your firm:

 

• Bill more frequentl - weekly or every two weeks vs. monthly, etc.

• Use e-mail or e-bills vs. paper bills

• Agree that on-time payment does not waive client’s right to dispute charges.

• Insist that billable information be tracked and reported as worked

• Get time in on schedule¾daily, weekly, etc.  This discipline needs to be a job requirement—period

• Require fee earners to submit time accurately with correct spelling and grammar

• Go mobile with PDA devices, like the BlackBerry®.

• Use time tracking software that turns your e-mails, appointments, and calls into time entries without the need to reenter

• Use time tracking software that passes time entries directly to your billing system once the timekeeper deems them to be complete and correct

• Administration must be thorough and accurate in new matter setup¾get it right from the start (use software that automates much of the handling once a client is properly set up, i.e., prices automatically handling exceptions for you, pre-audits entries against engagement rules, produces multiple bill copies to multiple addresses for different purposes, e-billing, etc.)

• Test e-mail addresses and e-bill formats before the first billing!

• Have the accounting area plan ahead¾prepare a calendar of dates to run bills considering weekends and holidays.  Make it a priority and get it done.

• Run your A/R statements monthly but separately from the billing cycle

• Have your prebill formats set up to give the billing attorney all the information they need when reviewing the billing

• Do not run prebills for clients with A/R-only balances¾run only those that need actual review prior to sending

• Run prebills (draft bills) on colored paper so they stand out and are easy to identify

• As with time entries, prompt review and approval of prebills (draft bills) should be a job requirement with published turnaround times and performance should be measured—and billing attorneys held accountable.

• Attorneys should review bills only once¾get it right the first time

• Don’t send custom cover letters; send a status letter under separate cover.

• Implement procedures that provide for exact attorney and administrative review of initial bills to assure accuracy.  Your initial bill will set the client’s expectations.  Initial errors, incomplete information, deviations from the engagement rules will create an expectation that the firm’s bills require review, rejection, correction, and rebilling each and every time prior to payment.

• Invest in software that facilitates management and editing of prebills

• Accounting has to take the initiative to track outstanding prebills and retrieve unreturned prebills

• Editing bills should be almost as easy as editing a document and software should handle the accounting and retain original information, changes, and the final bill data.

• Use window envelopes when mailing bills

• Don’t waste a day by letting bills remain in your mailroom

• Negotiate fixed fees with advance payment and/or progress payments

 

The third rule is to always remember that the majority of past due fees are attributable to clients that pay a little late.  Be proactive and work collections before they become past due.  When all else fails, the account gets kicked up to the professional staff.  The accounting or administrative staff should never threaten.  Theirs is a softer role.  Persistence in asking for payment and following up when it isn’t received works in almost all cases.

 

The time to work accounts receivable is before accounts becomes a problem, not afterwards.  And the preferred way is to work them as low as possible in the organization.  Assign collection duty to someone in your administrative staff who has a friendly phone personality. If you are billing individuals, have him or her call and confirm that they received the bill.  Ask if they have any questions.  Remind them of the due date.  If payment isn’t received within days of the payment date, call back and let them know you haven’t received the check.  Ask if they mailed it.  If they haven’t, ask if they will place it in the mail that day or bring it by the firm's office.

 

If your client is a business, get the client's agreement for you to mail the bill directly to accounts payable with an information-only copy to your engagement contact. Let the client know that paying the bill on time will not waive the client's right to raise questions or dispute charges once he or she has reviewed their copy of the bill.  If the client insists that the bill be sent to their attention, find out the name, phone number, and e-mail address of their secretary (or assistant).  Have the person in charge of routine collection call the secretary after the bill is mailed and ask the secretary to be sure the bill makes it to the top of the contact’s to-do stack.  Let the secretary know you will call back in a few days to check on the status of payment.

 

If you can establish an awareness that if the bill doesn’t get paid, “that nice person” from the law firm will be calling”, you will find that your bills sail through the system.  Of course, to make it happen, you need software to keep up with collection activity and payment promises.  Working your fees receivable before there is a problem will dramatically lower funds tied up in accounts receivable; 80% of your excess investment in AR is from clients paying a little late.

 

Rule number four is that when all else fails and the client refuses to pay or simply hasn’t paid, there is usually a reason. Taking strong arm collection steps without knowing the reason is asking for trouble. When routine collection efforts fail to produce results it is time for one of the firm's legal professionals to get involved, but not the attorney or partner responsible for the case or matter. By having an uninvolved legal professional contact the client, the discussion is on a business level involving the unpaid balance. It is not on the professional level dealing with the case or matter. The pursuing attorney will be unfamiliar with the case details, and thus the discussion can not be redirected into a rehash of events.  Likewise, the pursuing attorney’s objectivity means that he or she can listen to the client's complaints or position without becoming defensive.  The objective should be to work out a payment plan or to reach a fair compromise and settlement of the bill. If the client has the ability to pay but refuses even after the efforts of the pursuing attorney, a next-step alternative is the Fee Dispute Resolution program of your state Bar.  When nothing seems to move an intransient client, the firm has to make the decision to sue and risk being sued or to just walk away. 

 

A growing number of law firm are willing to sue in spite of the countersuit risk.  They refuse to leave their money on the table.

 

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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The recent Law Firm Economic Survey conducted by Juris, Inc. illustrated the relationship between the fees charged by midsized law firms and their per-partner income. While that relationship might seem unsurprising, it should be thought provoking.

The above chart divides surveyed firms into quartiles according to per-partner income and then shows the comparison between their average fees. The actual realized blended rates, as well as reported standard rates, were lower for each subsequent quartile. Partners of law firms in the first quartile earned twice the per-partner income of the second quartile and seven times the earnings of partners in the fourth quartile. Is this a blinding glimpse of the obvious—law firms that charge more make more?

Here are the important questions: Are the lawyers in the top 25 percent of surveyed firms better lawyers? Are they smarter? Did those firms pick more profitable practice areas? Have they done a better job at branding?

Let me suggest a simpler answer. Midsized law firms with higher rates simply set them higher to start with! If we take a look at individual firms, we can find clear reasons why one firm can charge higher rates than others. But when I review the 2005 survey results, these reasons don’t appear to explain the aggregated results in the survey. The composition of each quartile appears to be similar mixes of practice classes and size.

Law firms regularly increase rates from year to year to cover increased operating expenses, including associate salaries. In most cases, such increases do not contribute to higher margins. They simply recover higher expenses. If a firm starts with lower fee rates, they tend to stay lower in spite of annual or periodic increases.

Midsized law firms need better information about competitive prices in the marketplace. Rather than think in terms of annual increases to the existing fee structure, they need to reset those fees based on market information. They need competitive and peer group intelligence. Traditional surveys provide some insight, but they are often 18 to 24 months behind the curve, and matching your individual firm to a meaningful peer group is an imperfect task. Better information is on the way through new benchmarking services such as those from Redwood Analytics, Peer Monitor and Juris Insight.

Even with better information, individual law firms can have a difficult time restructuring rates. Compensation plans often lead to partner resistance toward anything other than moderate increases. Partners dependent on origination credit for a significant portion of their income can feel threatened by possible client defections. The best approach may be an incremental one. Reset fee structures for new business and develop an incremental plan to rework existing relationships over time. A helpful guide to price increase implementation was suggested in the prior post Law Firm Rate or Fee Increase Letter.

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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Recently Legalweek.com, among other news sources, disclosed that Clifford Chance was opening a service center in India to move 300 accounting and IT support jobs to India. The move is just the latest in Clifford Chance’s ongoing outsourcing initiative. When you look at the financial statements for law firms of any size, salaries constitute the majority of operating cost. Accordingly, when an organization turns to cost cutting for improved financial performance, it is salaries that are in the gun site. Outsourcing can save big dollars, but it doesn’t come without risks.

Off shore moves aren’t automatically good or bad. Some may improve capability and service quality. However, I was impressed by a quotation attributed to Russell Lewin, former managing partner of Baker & McKenzie, which included the remark, “…you cannot underestimate the way hidden cultures impact upon your operation.” The person on the other end of the phone may be smart and eager to help, but it can be difficult to communicate effectively across cultures even when both parties are speaking a common language.

Relying on outsourced functions can negatively impact the firm’s legal professionals, lowering their effectiveness and efficiency. If that happens, the move will prove penny-wise and pound-foolish. The biggest risk, however, is that outsourcing administrative and accounting functions will alter the client’s experience in dealing with the law firm. For the client, service quality involves more than just legal competence. For example, the timeliness, accuracy, and quality of billing procedures—including how questions and adjustments are handled—are an important reflection on the law firm.

In spite of service quality risks, the outsourcing trend continues in BigLaw circles and among the vendors and suppliers to those firms. According to one of the popular outsource companies, a leading U.S. provider of enterprise business software for major U.S. law firms is in the process of outsourcing its support center to them.

Consolidations and acquisitions have reduced the number of law firms and vendors serving them. Unfortunately, what usually comes next is higher prices and lower quality as fewer suppliers put their emphasis on cost reductions rather than market share increases for improved performance. Customers get less and pay more.

What does this mean for midsized law firms? While they are milking their cash cow, you have a rising star. Midsized law firms that emphasize service quality and lower cost for the customer can take business away from their larger competitors.

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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I just read a newsletter from the Boyens Group, Inc. and the title to the lead article hit home, “Plan your Work and Work your Plan.” The Boyens Group works with companies to optimize their sales processes. 

The formula for successfully making rain as a legal professional is as simple as the title to that article.  There are 365 days in a year over which that plan should be spread.  The point is that there is plenty of time in spite of the 1600 to 1800 billable hour load shouldered by attorneys in the average midsized firm.  It is all about setting small individual steps spread over a long time and carried out consistently.  You are not going to be able to call 20 people on the last day of the month and ask questions like the following:

• What else can we do for you?
• Who do you know that our firm might be able to help?
• How about meeting me for breakfast and giving me an update on the things keeping you  up at night?
• I read about the (anything) issue and wondered if that was something that concerns you?
• I know it’s your birthday; I called to see if I could buy you lunch to celebrate?
• The company is having a seminar about (anything) on (any date) . Do you think you will be able to attend?
• I have four tickets to (anything).  Would you and a companion join Bob (or Betty) and me at this event?
• I read about your promotion (or career move) and wanted to congratulate you and ask if there is anything I do to help you in your transition?
• I’m having an open house next Saturday. There are some people I would like to meet you; do you think you will be able to join us?
• Our environmental (or estate, litigation, etc) group has been doing some valuable things for other clients; may I come by your place next week and introduce you to the practice leader?
• Etc, etc., etc.

While you are not going to call 20 people on the last day of the month, you can develop the discipline to set aside 10 to 15 minutes every single day to make one call and do it and do it consistently. Have a target call for the day and two to five alternative targets in case your first caller is unavailable.

You don’t have to do it all alone!  Have a secretary line up your calls for you.  Here are some of the tasks you can delegate:

• Keeping  track of your growing list of contacts and prospects
• Keeping track of important dates – birthdays, anniversaries, etc.
• Scanning local papers, industry publications, client and prospect newsletters and web sites. Take advantage of RSS feeds for new releases and other sources.
• Keeping you informed and ready to make calls
• Taking the initiative to draft letters and provide you with addressed cards and notes to send regarding important dates and events
• Etc.

Make your secretary a hero. You are a team doing this together.  Share the accolades for the successes. None of us can succeed alone.

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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I was drawn to Robert Cialdini’s book INFLUENCE: The Psychology of Persuasion by an article in the August 2006 Harvard Management Update by Martha Craumer

Look for advice about rainmaking and the experts will let you know it is about relationship building. Ask how to build relationships and they will tell you it is about giving. That is often described as being of value to others. Robert Cialdini puts it in even simpler terms. Doing something for someone gives you power and influence over them. Craumer directs us to “Do a favor—even a small one”.

In her article, Craumer reports that Cialdini’s research shows that the size of the initial favor has little bearing on the size of the favor we feel obliged to perform in return. Further, she notes that “the study shows that in spite of the uneven quid pro quo, we also seem unable to refuse the favors of others.”

A favor is a powerful influencing tool, one easy for the influencer to exploit. The exploitive power of a favor comes from what Cialdini calls the reciprocity rule—the obligation (or propensity) to receive in combination with the obligation (or propensity) to repay.

Martha Craumer’s article is about management and leadership—tactics for getting your point across subtly when traditional direct approaches do not work. The practice of doing favors (doing something for others) is a rewarding habit to develop.

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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Most managing partners in midsized law firms have a difficult time exercising authority. They lead, but not everyone follows. Then what? To be an effective manager/leader, you must hold a seven-card suit. The seven cards (sources of the ability to lead) are: experience, authority, ability to reward, ability to punish, charisma, systems and goals.

There is the problem. Most managing partners do not hold all seven cards. They can influence. They can mediate. They do contribute in spite of the limits on their authority. But, unless the partners have dealt the managing partner a full hand that includes all seven cards, they will not hold the mantel of leadership.

The good news is that managing partners, even with limited authority, make the law firm better as a business. The bad news is that the law firm partners could do better if they would deal the full seven-card hand to their managing partner.

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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Young law firms sometimes try to get by on a shoestring and get caught in Flintstone as they grow. One day the partners wake up and realize that they are doing things the hard way and are losing money in the process.

One of our client services people visited a firm recently that characterizes their own use of technology as closer to Flintstone than NASA. In spite of their growth, the firm still wrote checks by hand. A/R was on a spreadsheet. Vendor bills were paid as soon as received because it was the only way they could keep up with bills and clients’ expenses. There were no management reports. Everything went to an outside accountant who prepared tax returns that doubled as financial statements.

A lot of money was falling through the cracks. Staying in Flintstone wasn’t so much a matter of money as it was the lack of time to address the needs of the law firm. The partners were too busy being accidentally successful. Still, they knew they were pushing their luck. They needed better control, management information and systems in place that would improve productivity and prospects for long team success.

The message to be learned from this real life experience is a simple one - don’t push your luck. Don’t count on being accidentally successful! Invest in a law firm business system for a healthy and profitable law firm. The right system isn’t an expense. The right system makes money for the partners.

 

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I spent a weekend meeting with law firm administrators and law firm administrative and accounting staff. I was struck by how many law firms have hands-off policy for the administrative staff when it comes to collections.

 

The typical firm waits an average of 4½ months before they have completed the billing and collection process—that is how long it takes to get the money in the bank. Pardon the expression but that is nuts. Attorneys are the wrong people to play the collection role. Collection is an administrative function. The professional staff should get involved only after administrative efforts fail.

 

Many mature law firms have learned the above lesson. When meeting with a group of managing partners a couple of months ago, one partner explained that when routine collection efforts fail, the firm still does not let the responsible attorney get involved. A second member of the firm that has no responsibility for the client or case in question is assigned the role of being the “heavy”. Will law firms sue to collect? A growing number say “yes” in spite of the countersuit risk. They refuse to leave their money on the table.

 

The administrative and accounting group I was meeting with agreed that collections start with client intake. That is where the firm sets the expectations for payment. Payment policy should be clear. The client should sign off including signing off on the stated consequences of late or nonpayment. I believe the engagement agreement should also clearly state who the law firm contacts to confirm receipt of the bill and who we contact in case of missing payment. This is also where you can practice proactive collection:

 

Require advance payment;

Require a Trust deposit;

Accept credit cards;

Automatic debit to the client’s bank account;

Installment payment agreement;

Etc.

 

Always remember that the majority of past due fees are attributable to clients that pay a little late. Be proactive and work collections before they become past due. When all else fails, the account gets kicked up to the professional staff. The accounting or administrative staff should never threaten. Theirs is a softer role. Persistence in asking for payment and following up when it isn’t received works in almost all cases.

 

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I have discussed both the flat project fee and the fixed fee for the continuing services method of billing. I just don’t have the patience to deal with each of the so-called other alternative billing methods. Aside from the contingency method, which we all understand, the rest are mere variations of the hourly billing method. Each is an attempt to soften one or more of the shortcomings of the billable hour. Each falls short of addressing the underlying issues behind the love-hate relationship we have with the hourly billing method. If you want a blow by blow list of alternatives, purchase the ABA’s publication Winning Alternatives to the Billable Hour.

I started this series of postings by saying we would search for the missing Alternative Fee Arrangement -the one that faces the underlying cause behind our dissatisfaction with the hourly billing method:

• The customer does not know in advance their cost;
• Law firms do not benefit from efficiency and technology investments.

In spite of its shortcomings, hourly billing accounts for 90% of law firm fee revenue. As bad as hourly billing is, the alternatives are considered worse by most law firms and their customers. The hourly billing method makes doing business easy. Whereas, alternative fee arrangements (alternative billing) requires the parties to agree on scope and negotiate price. That takes effort. Neither law firm nor business clients have been willing to consistently invest that effort. They have become comfortable with hourly billing in spite of their misgivings about it.

Hourly billing will never disappear for the above reasons but AFA (Alternative Fee Arrangements) can benefit both law firm and client in ways that the hourly bill can never do. For that reason, I would suggest that firms should use it offensively when and wherever they can.

The protocol for the missing alternative consists of the following elements:

• Advance payment;
• Fixed amount to include reasonable fluctuations in scope;
• Provision to quote and bill separately for material variations in scope that could not be reasonably anticipated or that were excluded in the initial scope definition. 
   

Why advance payment? If we are going to propose an alternative to the hourly bill, we should also tackle another major problem with the current billing method. The typical law firm takes 78 days to bill for work already performed and then waits another 60 days to get paid. That is inconsistent with how the rest of the world does business. And I can tell you firsthand that the law firm’s business clients do not consider that delay meritorious. They consider it sloppy and unbusinesslike. There are reasonable variations to the "paid in advance" approach. You might bill in installments based on milestones, but those installments should be billed at the milestone arrival, not its passage. If you are providing bundled services for a month at a time or a quarter at a time, bill in advance for the month or quarter.

I have written enough about the flat fee or fixed fee arrangements. Which, in addition to contingency, are the only real alternatives to the hourly billing method. Let me just say again that for them to work, the law firm has to accept the risk of normal and customary fluctuations in scope. The only scope changes that should be outside of the services covered by the fixed fee should be material items that, because of their magnitude, were singled out from the beginning as something that would be priced separately or that the material changes could not be reasonably anticipated.

Wherever it is proposed, the AFA’s objective is never to lower the cost to the client—although it may, particularly in the long run. The AFA value proposition is certainty of cost. That is how it should be positioned by the law firm. It should provide the client with certainty and provide the law firm with the opportunity to benefit from internal efficiency.

The final question becomes, “How is the price determined?” Is the price determined based on the value to the client, competitive alternatives available to the client or by adding up the cost to the law firm and adding a profit component?

The answer, of course, is all of the above and none of the above. Law firms are subject to reasonableness constraints. But even without that imposed professional constraint, the long-term laws of economics prevent the unfettered use of customer value in setting price. Set price too high and your client will go elsewhere when they get the opportunity—and they will. But let’s be honest, most attorneys do not have just one hourly rate. High client value should call for use of your best people, after hours access, overtime work, etc., and all of those factors should go into your pricing¾the highest level of services should provide the highest level of profits. Low value work should use the lowest cost talent that can, under supervision, perform competently and should, wherever possible, eliminate intensive people handling through systems and technology.

Pricing is magic. You have to learn the art and apply it fairly in a way to maintain integrity. Pricing always is influenced by value, cost and competition.

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