Make More Rain : cash flow issues, disaster recovery

Measuring Law Firm Profitability

Admin — Thu, 14 Feb 2008 08:00:00 GMT

One way to get an idea of your firm's financial health is to report on the firm's profitability. There are many ways to calculate profitability depending on what you are looking to track. In this example, we are taking into consideration the value of fee earners against their cost. The value of an attorney, for the purposes of this post, is the billed rate per hour.

You determine attorney cost per hour by taking the salary of the attorney, the cost of their dedicated resource(s), the cost of their work space, the cost of equipment used, and other incidental costs (not billable to the client) incurred by the fee earner. This can be sticky for some firms where principals may not be agreeable to apportionment of cost. In cases like this or where the firm is more evenly apportioned in staff and office use, a less accurate but easier calculation would be to add up all the general ledger cost accounts (excluding fee earners' payroll), divide by the number of fee earners, then add salary. It is better to do the work and determine actual cost.

Once arriving at a cost per fee earner, reduce to a cost per hour (by dividing cost per fee earner by worked hours billed per year) and then you can use this to subtract from the attorney's billed rate to get the profitability rate. This is excellent indicator of the value of your billable rates and by extension the attorneys charging these rates.

With profitability reports like the one above that is part of Juris' Active Information product, you can determine how much value (in terms of dollars) you are getting for every billable hour worked by the fee earner. You can set margin per fee earner and track the profitability rate against the target margin as well. Efficiency is an important key to higher profits. A report such as this in a historical context helps you track efficiency of the fee earner.

To take it one step further: you can use, for analysis purposes, the collected rate to compare to the cost per attorney. You shouldn't make this analysis until the invoice has been zeroed out (either by payment or adjustment), so this is not really a good indicator of current profitability. But it can be helpful in a profitability analysis of a given client or fee earner. Again, tools like Juris' Active Information can track collected rate and thus make calculating all the formulas above automatic.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

Achieve a 97% Overall Realization on Legal Fees

Admin — Mon, 01 Aug 2005 19:45:57 GMT

Sometimes the best ideas come from paying attention to what other businesses and professional service firms are doing successfully.

One of Juris,Inc.'s Regional VPs related to me her recent experience dealing with a lobbying firm. She met with the firm a of couple weeks back and when talking about realization, they said that they had a 97% overall realization. That number is significantly higher than most of the law firms she has been working with. So she dug a little deeper. Here is what she found out…..

Around 85% of the firm’s billing is retainer billing. Most of the billing is monthly, although some is quarterly. Monthly the firm analyzes on a case by case basis what work and costs have been expended against the retainer billed. Based on the analysis the firm renegotiates the retainer amount for future periods. The important point is that the firm collects the retainer in advance and usually by wire or electronic payment!

The lobbying firm indicated that most of their clients prefer retainer bills since they can budget accordingly each month.

The typical law firm has an overall realization rate around 92%. On the average they take 78 days just to bill for work performed. The impact on realization of moving more clients to a retainer relationship with an agreement that the retainer could be renegotiated monthly or quarterly for changes in the volume would have a material impact on the firm's financial performance. If those retainers are billed in advance the impact on cash flow is dramatically higher since the typical firm takes 60 additional days to collect once they have finally mailed a bill to their client. For a 50 timekeeper firm that is averaging $320,000 billed annual amount per timekeeper, an increase of 5% in realization would increase total partner income by $800,000. If your firm averages a higher billing rate, the increase would be higher.

Would your clients go for that? There is no question about it. Your corporate clients are under the gun to manage their budget. They are willing to pay in advance for a billing arrangement that lets them forecast legal expenditures for the coming quarter. Click here to see the posting on July 15, 2005, for details.

Law Firm Growth Prospects - 2005 Survey Results

Admin — Fri, 29 Jul 2005 18:21:01 GMT

Surveyed law firms are very optimistic on growth prospects over the next three years. 64% of firms surveyed indicated that they had moderate to aggressive growth plans over the next three years. Moderate to aggressive growth was defined as 10% to 50% increase in the number of lawyers.

The optimism seems well founded as 70% of firms grew revenue last year (31% grew between 11% and 20%) and 41% of surveyed firms grew partner income greater than 10% last year. 66% of firms grew partner income overall.

There is a high correlation between the growth in lawyers and expectations for growth in fee revenue. Accordingly, firms clearly believe that they will be able to grow fee revenue by at least the same percentage as growth in lawyers. To the extent that firms also expect gains in realization, productivity, and billing rates, it follows that managing partners are looking for fee revenue growth and profits per partner that exceed just the growth in the number lawyers.

The survey was conducted by Juris, Inc, and the Managing Partner Forum. In addition to grow related issues, the survey covered a broad range of operational and organizational topics. For a copy of the survey results, together with commentary, you can e-mail me, collins@Juris.com.

General Counsels Have a Budget Problem

Admin — Fri, 15 Jul 2005 17:57:00 GMT

Solving the General Counsel’s Budget Problem

Nat Slavin who writes the "Interactions" section in Corporate Legal Times often hits the mark. Sometimes, it is with a curve ball. His July article is about bid fixing—the increased frequency of general counsels asking law firms to rebid their work to retain the corporation’s future business. Why? It is because the corporate world lives by a budget. Law departments, once exempt from budgetary discipline, are now expected to deliver on target like any other cost center.

That discussion turns into the observation of the root cause for bid fixing. Slavin observes that law firms are failing to address their client’s economic needs.

On average, law firms take 78 days to bill for work performed and another 60 days passes before the client pays for work performed. Under those conditions, law departments cannot realistically budget or forecast future expenditures. In short, law firm fees are eight months behind actual performance of the legal work performed on behalf of the client.

Don’t think your corporate clients place any value on the free cash float. They don’t. In fact, they don’t understand how anyone would do business that way; and second, it often results in a blown budget, putting general counsel in a bad light with the company’s CEO.

Slavin puts it this way, “Until law firms start billing in advance of the legal work they provide, businesspeople will never be able to bridge the gap between budgeting and actual expenses.”

The author points out that law firms should be able to predict 90 days out and bill that amount. It is a risk firms should be willing to take to reduce the tension between the client’s legal department and the company’s CFO.

For the complete article, refer to the July issue of Corporate Legal Times. If you would like to comment or pass along your experiences to the author, e-mail Nat Slavin at nat@cltmag.com.

Pricing pressures in the corporate world may be more about uncertainty than price itself. Solving that problem for the general counsel can reverse recent trends and actually increase realization and per-partner income.

I Have a Question for You

Admin — Thu, 14 Jul 2005 18:20:39 GMT

The question is, “Do you subscribe and read publications for corporate counsels?" Periodicals like Corporate Counsel, Corporate Legal Times and Metropolitan Corporate Counsel can tell you what your clients and potential clients are thinking about and what they are looking for in a legal service provider.

The information in periodicals aimed at General Counsels and their team can give you a competitive edge by providing insight into strategies that major corporations are pursuing to control cost. They tell you what traits attract the legal service consumers and what turns them off. They tell you the shared weakness in-house counsels see among your competition. Weakness you can exploit to your competitive advantage.

Publications aimed at private law firms contain articles about trends already impacting law firms. Publications aimed at in-house counsels contain articles about trends and strategies that will impact you and your competitors down the road. Reading what your customers and prospects are reading gives you a competitive edge. Likewise, it pays to read the trade publications for the industry of important clients or prospects so that you know the legal and business issues that are important to CEOs.

Knowing yourself is important and knowing your customers is a must for client growth and retention.

The Likelihood of Full Collection Decreases With Age

Admin — Thu, 26 May 2005 17:58:00 GMT

Since I have been on a soapbox about the 138 days (4.6 months) that the average law firm takes to bill and collect for work performed, Beth Keno shared some of her research with me. Beth Keno is a Juris representative in the Michigan and the greater Chicago market areas. Her research is in connection with a speech she will be making at a regional bar association conference.

As a reminder, the typical law firm takes 78 days to bill for services performed and another 60 days, on average, to collect that bill. In addition to excessive investment in uncollected services, long delays result in unnecessary adjustments, write-offs and bad debts. Statistics show that an invoice over 60 days has only a 70% chance of being collected in full. After 90 days, the chance of collecting the invoice in full drops to 45% and after 120 days, it falls to 20%.

The average overall realization (the percent of services rendered that actually get collected) for US law firms is 91%. 9% of the firm's revenue goes down the tubes and most, if not all, is a result of the long delay between rendering that service and collecting for it.

The 2.8 months of unbilled fees results entirely from a combination of inadequate tools and procedures, plus a lack of management discipline and enforcement. In short, you can fix it and it is easy to do. The additional two months it takes to collect the bill can be shortened, but is beyond the total control of the firm. However, one of the things a firm must understand is that if you are going to take almost three months before you bill your client, that client is not going to have a sense of urgency about paying the bill.

Speeding up payment starts with faster billing, followed by implementing procedures that create a sense of urgency for payment.

Don’t wait for bills to become past due. Have a member of the administrative staff call and confirm receipt of the bill. The engagement letter should clearly set out payment terms and provide that payment does not waive the client’s right to dispute charges later.

Invest in the right tools. Collection software will track all collection activity between the firm and its clients. That software will let you know when payment promises have not been kept. When integrated with your client accounting system, collection software will automate dunning communications, lowering cost as well as shortening collection time.

Days to Bill

Admin — Wed, 25 May 2005 18:27:00 GMT

Hardly a day goes by without a discussion with a law firm partner about funds tied up in unbilled and uncollected fees. While those partners can't put their finger on the exact number, they understand the long delay results in unnecessary adjustments and write offs.

I find it hard to understand why the typical US law firm would allow 78 days to go by before issuing a bill for services performed. Or the fact that, on average, it takes an additional 60 days to collect that bill. That is 138 days or 4.6 months. Iezzi uses 4.7 months in the sample business models included in his book Results-Oriented Financial Management.

Does it make any sense at all to let 78 days go by before billing a client for work performed? It doesn't. Unlike 60 days of billed services tied up in fees receivable, "days to bill" is 100% controllable by the firm. This is a management problem. It results from defective procedures and/or inadequate tools. The truth is this is a problem that is easy to fix. All it takes are the right tools and management's determination to solve this problem with a no-return policy. It takes a top-down, or collective, determination not to accept lax billing practices:

It begins with client intake and the engagement letter:
- Negotiate trust deposits and/or prepayments together with minimum trust deposits
- Agree on billing frequency/monthly or every two weeks
- Set the billing period to end one to three days prior to the billing frequency. For example, to be billed on the 16^th and the 1^st of each month for the service period ending on the 15^th and the end of each month.
- Document payment terms
- Agree as to E-bills vs. paper bills
- Identify the person to receive bill
- Identify the person to contact to confirm bill receipt and payment schedule
- Agree that on-time payment does not waive client's right to dispute charges
- Provide for penalties for late payment
- Negotiate progress payments.
It depends on consistent internal discipline:
- Fee earners are expected to submit time accurately with correct spelling and grammar. In short, editing should not be required.
- Get the right tools to timekeepers and insist on zero tolerance that billable information has to be tracked and reported as worked. Having your time in on schedule, daily, weekly, etc. is a job requirement, period.
- Pre-bills have to be distributed by 10:00 a.m. for the day following the end of the service period.
- Pre-bills must be returned to accounting by the day following distribution. If not returned, bills will be mailed or e-mailed as is.

If as a result of management's determinate, time to bill is reduced from 2.6 months to 1 month, it would mean that a firm with $12,000,000 in annual fee revenue would have a one-time increase in revenue of $1,600,000. That freed-up cash becomes available for distribution to the partners and/or for a reduction in debt with a corresponding decrease in interest expense.

If "days to bill" is 100% controllable by you, why let this money remain beyond the reach of partners? Why not fix the problem?

Whatyasay?

Admin — Tue, 24 May 2005 17:45:22 GMT

An article by Lydia Ramsey in the April/May issue of the ALA News caught my eye. She noted that some studies report that words account for only 7 percent of the message you convey. The remaining 93% is non-verbal. 55% percent is based on what people see and 38% percent is transmitted through tone of voice.

Her message was enough to send me off to check out the Web site of Lydia Ramsey’s company, www.mannersthatsell.com. What I found was a gold mine.

Lydia Ramsey is a business etiquette speaker and trainer. She is the founder of Manners That Sell, a firm offering keynotes, seminars and workshops to corporations, professional associations, government agencies and colleges and universities.

Go to the Web site and select articles by Lydia for some wonderful tips and insight that will improve relationship building and rainmaking skills for every member of the professional staff in your firm. You can, also, sign up for her free newsletter. After all of the free-bees, you may want to engage her for a firm meeting or retreat. Here are just some of the articles by Lydia Ramsey that are available at www.mannersthatsell.com:

Body Language Speaks Louder Than Words--Body language is a critical aspect of communication, especially in a business setting. You may not be aware of what you are saying with your body, but others will get the message. Make sure it's the one you want to send.

Sealing The Deal Over The Business Meal--Maximize your business success by paying attention to the small but important rules of dining etiquette.

Stand Out In Business The Write Way--Build your business and stand out in a crowd by sending handwritten notes whenever possible to existing and potential clients.

A Clothes Encounter In The Business World--Follow these professional business attire tips for both men and women because we are judged by the way we dress.

The Top Twelve E-mail Mistakes That Can Sabotage Your Career--What is this e-mail explosion? Are there rules for managing these messages and being a professional and polite user of electronic mail?

Successfully Meeting and Greeting: Ten Strategies for Getting Off to a Good Start--A day in the life of every businessperson is made up of a series of meetings and greetings. Learn the top ten strategies for getting the most out of these encounters.

How To Seal The Deal In Seven Seconds--Ten savvy tips to help you close a sale in seven seconds. Whether you are face-to-face, over the phone or via the Internet, these tips will help you make a terrific first impression.

Office Party Tips--Office... party: two words that can send shivers up the spine this time of year. So make time for some tips on how to handle your office's annual bash.

Nine Questions To Ask Yourself Before You Head To The Office Party--Office parties are riddled with opportunities to make or break your career. Ask these nine questions to prepare yourself to make the best of the office parties.

Five Stumbling Blocks To Successful Networking and How To Overcome Them--The ability to connect with people is essential to success in any business. Consider these five stumbling blocks and how to overcome them to help you get the most out of networking opportunities.

For the full articles go to www.mannersthatsell.com.

Billing through the twenty-fifth

Admin — Fri, 08 Apr 2005 16:39:00 GMT

Why wait until the end of the month to start your billing process. Your billing period can just as easily be the 16th through the 15th of every month or, my preference, the 26th through the 25th of each month.

The typical law office has a 7- to 10-day bill preparation cycle. If you bill through month end, it may be the 15th of the next month before the bill actually gets in your clients’ hands. Individuals typically pay their bill once a month and a lot of small businesses pay on the 10th or 25th of the month. By changing the monthly bill period, you can improve the chances that your bill will be included in the next check writing session.

And wouldn’t it be nice if all the month-end crunches we have to go through were spread a little more evenly across each month? Why focus everything on the month end time. There is nothing written in stone that says your billing period has to be the natural calendar month.

Come to think of it, there is nothing that says you can’t bill every two weeks. You know the old 80% rule, 80% of your fee revenue is likely to come from only 20% of your active matters, why not bill that 20% every two weeks. Think about it.

Invisible Expenses

Admin — Mon, 21 Mar 2005 21:15:07 GMT

I was cleaning out my “C” drawer the other day -- which is where I put ”B” things that haven’t made it to my “A” list. If they never do, I eventually toss the “C” items. I came across an article by William Brennan of Altman Weil, Inc., discussing “Invisible Expenses". He rightly noted that write-downs of billable time can be one of the largest “expenses” of a law firm.

Think about it. If you had to show write-downs on your financial statements, how would it stack up against other expenses of the firm? The industry mean for realization of billable effort worked is around 90%. You may be better than average or worse. But, if you average and collect $15,000,000 in fees annually, that is after write-downs, adjustments and uncollectibles of almost a $1,700,000. Brennan noted that just write-downs of billable time averages about $30,000 for every lawyer in the firm. For a 40-attorney firm, that means an expense of $1,200,000 every year.

What is the answer? The answer is management. First and foremost, you have to have the information you need to manage and that should come from your law office business system. You want to know who is writing off billable time and whose work are they writing off and why? You must hold people accountable to justify their action. That justification will point you to the solutions. The firm will need to have the determination to implement the solutions which usually involve either changing the people or getting the people to change. Information is one thing, getting information in time to make a difference is another. Your law firm business system should track who is pulling their weight and who isn’t in all respects. Ideally, it should be able to send the appropriate person in your firm an automatic message when excessive write-downs are occurring ¾ not just measure write-downs after the damage is done.

Collection Tip - Honey vs. Vinegar

Admin — Sun, 20 Mar 2005 21:20:04 GMT

The time to work accounts receivable is before accounts becomes a problem, not afterward. The preferred way is to work them as low as possible in the organization. Use honey instead of vinegar.

Assign honey duty to someone in your administrative staff who smiles over the phone. 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 it is a business, try to get agreement to mail the bill directly to accounts payable, with a copy to your contact regarding the firm’s services to the firm. 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 you have to send it to your client contact, find out the name, phone number and e-mail address of their secretary (or assistant). Have the person in charge of dispensing honey 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. What happens when the honey doesn’t work? That’s when your business software needs to be smart enough to automatically notify the appropriate person in the firm that their intervention is required.

Using honey will not eliminate the need for dispensing vinegar, but what is astonishing is that you will dramatically lower funds tied up in Accounts Receivable by working accounts before they become a problem. It is the old 80/20 rule. 80% of your excess investment in AR is from clients paying a little late versus real collection problems.

Concentrate on what matters for Better Cash Flow

Admin — Wed, 16 Mar 2005 23:53:53 GMT

Every firm would like to improve cash flow.

One simple approach to getting better results is to implement a system that helps focus resources on the areas that can have the most impact on results. This doesn’t mean necessarily the “worst” performers (i.e. slowest billing attorney, slowest paying client or vendor with the worst terms). Instead, you should segment these groups into categories based on their materiality or impact on the firm’s cash flow. Usually, it’s fine to establish 3 groups – groups A, B and C. Once done, you put your time and effort into the A group, with less time and effort on B, and maybe little or none on group C.

Let’s say you have 20 billing partners. You intuitively know some of the billing attorneys are better than others about getting their bills out quickly, but you never really have ranked them based on the total dollars that each bills. So, you decide to focus your efforts to reduce WIP by finding out which attorneys need the most improvement. Using billing system data, you rank each attorney by average monthly fees billed AND by average days to bill and split them into three groups:

Group A — >10% of the firm’s fees

Group B — 5% to 10% of the firm’s fees

Group C — < 5% of the firm’s fees

You, then, decide you want Group A billers to get bills out in 20 days or less, Group B 30 days or less and, Group C, you won’t worry about pestering unless they are 60 days late on billing.

Then rank each attorney for groups A, B and C by how quickly they typically bill. Group A might look like this:

Attorney 1 — 17% of annual fees and 45 days average days to bill

Attorney 2 — 12% of annual fees and 15 days average days to bill

Attorney 3 — 11% of annual fees and 28 days average days to bill

For Group B, you only have 1 attorney who takes more than 30 days, and she bills 7% of the firm's annual revenues, and in Group C, no attorney failed to meet the requirement.

Based on your criteria, you can now focus your efforts on 3 attorneys who manage 35% of the firm’s billings. Develop an action plan to get these 3 individuals billing in 10 to 15 days and think of the huge improvement on cash flow!

For collections, simply apply the same sort of process by grouping your clients into A, B, C groups based on their percentage of fees for the firm. Then further segment these groups, based on 6 months to 12 months payment history, into “always on time 30 days or less average days to pay", “mostly on time or 45 days or less average days to pay", and “always late 60 days or less average days to pay".

By doing this segmentation, you could focus your collection efforts on a small percentage of clients which will have a big impact on collections. For your “A” group, you could formulate a completely different communication process to make sure bills are paid on a more timely basis.

You can use A, B, C type segmentation to manage just about anything for better results. The bottom line is to measure performance, focus on the things that have the most impact on the element of performance being measured, and then put 100% effort and thought into improving performance for the more focused group.