Make More Rain : cash flow issues, management

Associate Salary Increases & Firm Margins

Admin — Thu, 04 Sep 2008 17:20:23 GMT

It should come as no surprise to anyone that the most recent wave of associate salary increases have helped to erode law firm profit margins. Whether the wave begins in west coast technology firms, or east coast financial capital firms, its effects are felt beyond big law in the mid-size and regional firms headquartered in the mid-west and southeast. And, with 80% of law firm expense tied up in compensation and occupancy, the impact can be devastating. What is more surprising is the response of law firm leaders in this new economic environment. Reactions run the gamut from slash and burn tactics to taking it on the chin and silently watching margins erode. Formulating a balanced strategy and resisting the urge for an emotional response is critical. Consider the following.

First, is increasing associate salaries is an appropriate response to increased competition for the best talent in your market or just a follow the leader reaction? Associate salary increases typically begin in markets where competition is fierce for not only attracting the best talent, but also keeping that talent as the reality of billable hours requirements hits home. Increasingly, associates are not willing to trade work life balance for a big paycheck. This attitude is not pigeonholed in the bottom half of the law school classes, but pervades throughout. Are there other work life benefits your firm can offer to entice top talent?

Secondly, recent surveys suggest the demand for legal services have declined in the first two quarters of 2008, and making sure your lawyers are properly utilized is essential to maintaining profitability. As margins become slimmer, there is no room for unproductive associates taking up space. But are associates really the problem? Most associates have little control over the projects they are assigned and virtually no ability to generate new business. They, like everyone else in the firm, rely on the rainmakers to generate enough billable hours to support the business. Before taking a defensive posture and eliminating positions, look for ways to improve your business development efforts. Are you effectively cross-selling your services to existing clients? Do you place enough emphasis on developing new business and in the right sectors?

Lastly, in today’s competitive marketplace, passing increased costs on to your clients is rarely an option. Even in big law, where clients were thought to be less price sensitive, general counsels are scoffing at increased rates as a result of higher associate salaries. Can you blame them? That doesn’t mean you have lost the ability to control your average rates. The next time someone asks you for an alternative billing arrangement, consider the request an opportunity to control your own destiny. Look for ways to strengthen the value proposition, improve practice management at the matter level, and increase leverage.

Can you avoid the impact of associate salary increases? Not likely. But focusing on the positive economic aspects of your business, rather than going on the defensive, may help you roll through the downturn and leave you prepared for the eventual upswing.

- Rick Rawls

Managing Partner Advocate Summer Issue In The Mail

Admin — Mon, 30 Jun 2008 23:30:57 GMT

The summer issue of the Managing Partner Advocate is now in the mail. This issue is focused on ways to combat the effects of a contracting economy. Highlights include retaining talent, managing associates, planning for the unexpected, measuring marketing activity and measuring timekeeper profitability. There is also a guide to minimizing facilities costs written by guest author Luke Raimondo, an attorney and commercial real estate broker, and a guide on how much debt a law firm should carry.

The summer issue provides excellent guidance for law firms to help improve profitability even as the GDP struggles to grow. If you are a subscriber to the site, you may download the summer issue by clicking here. You may also have the advocate mailed to you at no cost by clicking here and requesting a subscription.

It is with great regret that I am leaving LexisNexis and will no longer be associated with the Managing Partner Advocate and More Partner Income. I took over the blog from Tom Collins in January of this year, a mere 6 months ago. In that time I have moved the site to a new host, completely re-built the blog and have enjoyed record numbers of readers, building on the solid foundation Tom Collins built over the past 3 years. I sincerely appreciate all of you who have read this blog and utilized it as a resource to help your firm.

This is my last post as editor of this blog. I have enjoyed my brief time hosting More Partner Income and hope that you have found value in the posts I have written.

Valuing Your Firm's Inventory

Admin — Fri, 27 Jun 2008 17:16:24 GMT

Most law firms understand intuitively that the value of inventory (both WIP and A/R) degrades over time, but by how much and how quickly? The ability to understand and answer these two questions is the first step in preparing a realistic, forward looking valuation model; one that can identify opportunities and drive action, rather than simply report on past performance.

To begin to answer the question of the future value of current inventory, it is important to realize there are two different forces diminishing a firm’s return on work performed, and both have the same basis: time. In essence the old adage “Time is Money” is true; as time passes, your inventory becomes less valuable.

The first and most basic of the two forces is widely known and easily calculated. For our purposes, we will call it the Time Value of Money effect, or TVM. A dollar today is worth more than a dollar tomorrow. Anyone who has ever used a credit card, carried a mortgage, or borrowed or lent money in any fashion, understands this concept. However, many law firms simply disregard this as a cost against their inventory, or use such a low discount rate, as to make it negligible. When considering a firm’s discount rate, too often factors such as reasonable market expectations of returns and inflation are swept aside. In the model below we use a simple method (with two different Discount Rates) to determine the cost of time on a firm’s inventory: Amount X Daily Discount Rate X Open Days; where the Daily Discount Rate = Yearly Discount Rate/365 days.

The second, and in most cases much larger charge to your inventory, is what we will call the risk of default (this refers to both defaulting on receivables and not billing work in progress). This is the risk that a firm will not realize a portion, or the entirety, of the value of work performed. In most cases it is instinctively understood that receivables a year old are far less likely to be realized than those just billed. The same can be said for WIP. But how do we measure this concept? One possible way (and there are many) is to use available historical billing and payment patterns to develop a forward expectation curve. We can then apply this curve to our current inventory to determine the amount that is realistically likely to bill or collect. This method can be made more complex or simple depending on various assumptions and the level at which the expectation curve is developed to (i.e. practice group, type of work, client, etc) but the concept remains the same -- past performance is an indication of future performance.

In the example below, such a curve is constructed for a client based on a set period of time and then applied to four matters with outstanding A/R (a similar model can be built for the WIP side). A total of $200,000 has been billed over the life of this client, with $175,000 eventually being realized (or 87.5% seen at day 0). As might be expected, the majority of the collections (> 50%) have historically taken place within the first 90 days. The Fwd A/R Expectation Curve helps quantify the expectation of collection (or non-collection) as current A/R ages based on prior practices (i.e. at 240 days, $50,000 has been available to collect, but only $25,000 has been collected, giving us a historical realization expectation of 50%; therefore, if current A/R now ages to 240 days, we would expect to realize 50% and lose 50%). Of course, like any forecast, our model will not be 100% correct at each level of granularity, but it does provide a logical, and historically proven, method to value inventory, particularly at the firm level.

While simplified, the models above allow us a better understanding of a) how much of the work we have currently performed we expect to realize and b) the actual value of that work once we do realize it. Any questions, concerns, or comments on the above can be directed to Dschutz@redwoodanalytics.com.

Forecasting Collections and Inventory Management

Admin — Thu, 12 Jun 2008 07:00:51 GMT

In today’s unstable environment, driven by outside economic forces, higher associate salaries, and increased competition, law firm leaders are faced with the tough job of forecasting cash collections. Many existing forecast methodologies focus on production and collection realization. However, these models often fall short because they ignore the other drivers of collections, and do not provide any information about collections beyond the forecast period. A better model:

1) Forecasts bills and collections as they relate to inventory levels thus allowing analysis into the impact of the next period’s collection funnel,

2) Drives the forecast according to the speed of the billing and collection cycle,

3) Isolates the quality of inventory separate from collection timing by analyzing realizations at the time of collection.

A key aspect to understanding collections is to think of the process as an inventory funnel. Each month production is added to the funnel, increasing inventory available to bill and collect. At the same time, bills and collections, as well as write downs and write offs drain the funnel, thus reducing inventory levels available next period. By analyzing this inventory turnover, modelers can focus on the drivers of collections: beginning inventory, production, inventory turnover, and realizations. Consider the following example:

	Last Year		Forecast
Beginning Inventory	$50,000		$60,000
Production	$150,000		$170,000
Total Available for Collection	$200,000		$230,000
Written down/off	$10,000		$11,000
Cash Collected	$130,000		$150,000	(3)
Inventory Turnover	$140,000		$161,000	(4)
Ending Inventory	$60,000		$69,000

Inventory Turnover %	70%	(1)
Realization %	93%	(2)

1) Inventory Turnover/Total Available for Collection

2) Cash Collected/Inventory Turnover

3) Total Available for Collection * Last Year’s Inventory Turnover %

4) Inventory Turnover * Last Year’s Realization %

In this model, the total available for collection is beginning inventory plus production. By comparing the amount available for collection and the ending inventory, the modeler may derive the inventory turnover. Also, by looking at the type of turnover, collected vs. written down or off, the modeler can calculate realization. Applying Inventory Turnover % and Realization % to future inventory, produces a cash collected forecast based on all of the cash drivers mentioned above and provides a starting point for the next period.

Redwood Analytics has helped law firms forecast collections using this and other methodologies since its inception. Our Business of Law Consultants are prepared to help law firm leaders take their forecasting to the next level by sharing best practices forecasting techniques, separating inventory turnover for billing and collection cycles, and capturing the seasonality of collections. In addition, our business intelligence solution is uniquely positioned to help law firms not only improve their forecast, but also their actual results.

Measuring Your Law Firm's Billing Cycle

Admin — Fri, 25 Apr 2008 07:00:14 GMT

One of the observations in the 2007 Law Firm Economic Survey by LexisNexis and a focus of the 2008 Survey (in progress) relates to cash flow. According to the 2007 Survey, all firms had a slow billing cycle. On average it took firms 170 days from providing a service to collecting payment on it. In non-service industries that would be a recipe for bankruptcy. Law firms enjoy high margins, so once the firm initially weathers the 80 or so days before the cash starts coming in, it can survive the slow cycle. Unless the cycle stops.

How will you know when clients stop paying? How long do you have until your cash flow reduces to a trickle? Measuring your billing cycle times is critical in answering these questions.

Long billing cycles hide what may be slowly killing your firm - inefficiencies, declining business, etc. If you aren't measuring your performance in converting work to cash, you may not know that your firm is in a crisis for several months, wasting valuable time to act.

Below is an example chart that shows how you can measure the billing cycle by just tracking your unbilled fees, billed fees, and collected fees.

To determine unbilled fees, take your work in process that is currently unbilled and not subject to mark-down (to the extent known) for the prior "rolling" 12 months. Do the same for fees billed and fees collected. From that you can determine your average days to bill, days to pay and average AR days fees outstanding. Lowering any of these numbers will increase cash flow and provide additional liquidity to the firm.

The above takes a look at the billing cycle from the firm perspective. You can also do this analysis on a timekeeper or practice area. Tools such as Juris' Active Information can not only track your billing cycle but can also drill down into the "why", exposing inefficiencies that are hampering your ability to maintain liquidity and giving you an opportunity to act to increase cash flow before it slows.

Click on the graphic above to download a spreadsheet to use with your firm's numbers. You must be a registered user to download content.

Cash Flow An Important Metric For Law Firms

Admin — Thu, 10 Apr 2008 07:00:03 GMT

No matter how much you work, until you convert it to cash it is worthless. The average days in the law firm cash flow cycle (from worked to collected) is 169 (source: 2007 Law Firm Economic Survey from LexisNexis). Shortening your cash flow cycle has a positive impact to liquidity and thus your cash flow cycle should be measured.

There are two metrics that need to be measured: days to bill and days to collect. Determining these numbers on a timekeeper level identifies those timekeepers who are efficient and those who aren't. The opportunity then is to set a standard and work towards compliance by all timekeepers.

What is this standard? It depends on the area of practice. Many insurance companies just won't pay under 60 days of accepted electronic invoice and will only accept these invoices quarterly. In this case, 150 days isn't so bad. Some areas of law (many domestic relations situations come to mind) should, by default, be prepaid. Any work in process should be billed immediately and applied against the prepayments. In these cases a cash flow cycle of 60 days should be cause for concern.

Tools such as Juris from LexisNexis' Active Information can help you track this key performance indicator so that you can improve your liquidity.

We have begun taking submissions for the 2008 Law Firm Economic Survey. If your firm is interested in participating, please contact Brian by clicking here.

Law Firm Pricing Management

Admin — Thu, 21 Feb 2008 08:00:46 GMT

One of the more common questions I hear asked by attorneys is how to set their rates. Many attorneys raise their rates periodically but not as part of a strategy to maintain or increase margin. Pricing management is addressed in detail in an article in Managing Partner Magazine titled Pricing Management. Noting that most firms still use a "reactive" approach to pricing, the article suggests instituting a pricing management function within the firm closely tied to the finance and marketing functions. A systematic approach is recommended that positions pricing with your strategic goals.

According to the article, firms should prioritize consideration of the price it will charge for its services and to ensure that the firm’s value and pricing propositions are constantly reviewed and improved upon, and communicated to clients at all levels of the firm. Firms should manage the pricing function around three levels: industry, practice and engagement level.

Industry Level: invest in understanding how variables drive supply and demand for legal services in your particular industry of practice.
- Systemic drivers: focus on short and long term considerations in the industry affecting client demand.
- Service delivery: leverage your firm's technology and skills as value that sets your firm apart
- Client patterns: how often they are a source of new business, how well they pay, etc.
- Talent supply: look into alternatives in how services can be delivered to be more cost effective.
- Pricing Czar: A finance director or equity partner should be dedicated to reviewing these drivers and organizing a pricing strategy and structure that meets the financial needs of the firm.
Practice Level: understand the markets that your firm and its practices operate.
- Testing client perceptions: client interviews, surveys, etc to better understand client need and provide better value.
- Discriminating among clients: develop rates that fit the client and practice area, not one-size-fits-all.
- Objectively reviewing fee schedule: periodically check market position as well as reputation of key partners by conducting blind study of key clients.
- Central pricing function supporting practice-group leaders: remove discretion in pricing except at practice group level - discounting should be first approved by pricing czar.
Engagement Level: getting the best price for each matter
- Training: partners need to understand the effect even minor discounts have on the bottom line; develop skill in communicating value.
- Tools: having proper tools to measure performance so as to maximize profitability based on comparison of historically similar matters.
- Systems: develop processes to review efficiency and improve on it to better price similar matters in the future.

Though some feel trapped in their pricing scheme, firms can and should plan how they price their services. With a well-conceived and implemented pricing plan, firms can be proactive and systematic in developing a pricing structure aligned with their strategic plan.

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.

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.

Debt Management for Law Firms

Admin — Mon, 11 Feb 2008 08:00:48 GMT

Jim Cotterman, in a recent post, writes on how much debt a law firm should carry:

1. Total debt (including capitalized leases) should be no more than 100% of the net book value of the fixed assets; 90% is okay, but 80% or less is much better.

2. Lines of credit should have a zero balance at year-end and for most of the year. The credit line should not be used to pay partners or be used as the first source of working capital. It should be there to augment working capital, covering unusual economic conditions (i.e., negative economic performance beyond one standard deviation of norm). An available line of credit equal to the funds required to cover one month of payroll (including owners) is one rule of thumb.

Cotterman has written on the subject before. Click here to read an article on law firm debt he wrote in 2003.

As the potential exists for law firms to dip into reserves to offset economic challenges, setting your metrics now to prepare for managing debt can help you avoid financial crisis.

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.

Cash is the Life Blood of a Law Firm

Admin — Tue, 23 Oct 2007 17:11:27 GMT

Partners want all available income distributed every year. But doing so leads to trouble.

One of the toughest jobs managing partners have is the task of convincing partners to leave something on the table every year. Businesses need capital to sustain operations and for growth. James Cotterman lays out the argument for you in his article Firm Capitalization, appearing in the October issue of the online magazine Law Practice Today.

Cotterman even gives you a short quiz to determine if your firm is headed for trouble.

Law firm leaders in midrange law firms often underestimate the impact of cash on their actions. Few really understand the cash gap created by billing and collection practices. In some firms, that gap approaches half a year. The cash gap related to legal staff additions is even greater due to the learning curve and the required filling of the pipeline of billable work. It is quite literally possible to grow yourself out of cash.

Operating cash requirement arise from:

Client Cost Advanced: Client advances can range from about $20,000 per attorney to $100,000 depending on the type of practice

Fixed Assets: The main categories of fixed assets include technology, communications and facilities improvements. The average net investment for midrange firms is around $40,000 per attorney.

Growth: Speaking to a group of administrators in May 2007, Cotterman explained that one of the principle causes for the outflow of funds relates to what Cotterman calls the "pipeline". Even if the additions to the team are immediately fully productive (and they never are), the pipeline has to be filled before income (cash) starts flowing. The typical law firm takes 60 to 70 days to bill for work performed and another 60 to 70 days to collect billed amounts. And as already noted, we aren’t just talking fees. Client expense advances, especially in certain practice areas, can be material. There are only three places for that money to come from—cash reserves, borrowed funds, or the partners. The fact is law firms don’t have unrequired cash reserves. Remove funds intended for partner distributions, and law firms usually have cash reserves of less than two weeks running time. That leaves borrowed funds, which, if available, have to be guaranteed by the partners, or the partners' pocketbooks.

Retirement: Retirements over the next 10 years are going to put new or at least heavier strains on cash than previously experienced. Unprepared firms may find the load too burdensome to continue. In discussing unfunded retirement programs, Cotterman puts it this way: “The benefits paid in an unfunded retirement program are a tax on current income. That tax must be accepted as fair and bearable; otherwise, the current partners shall declare the tax null and void. Unsecured promises to pay benefits will not survive the demise of the firm. Such demise can happen by design—partners vote to dissolve, or by default—key partners depart with their clients, leaving a weakened unsustainable firm behind. Generally a tax less than 5 percent of owner compensation is okay; under 3 percent even better. Over 7 percent is dangerous and over 10 percent probably unsustainable.” Even if the law firm is free of unfunded obligations, capital accounts of retiring partners will become due and, unless funded by new partner contributions, must come out of the law firm's general funds, reducing cash for operations and distribution to remaining partners.

Unknown: Partners often fail to clearly realize that capital protects their future income stream. If the firm goes under, that income stream is interrupted. Granted that as a legal professional, the former partner of a failed firm can go elsewhere and practice law, but personal wealth and income is going to take a nose dive for some time. Law firms with only “two weeks running time” are operating on a razor’s edge. Most investors would find such a risk unacceptable. Leaving something on the table every year is a prudent investment to protect the income and wealth of law firm partners.

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.

It Is Time to Turn Up the Heat on Billing Attorneys

Admin — Mon, 10 Sep 2007 17:20:29 GMT

Labor Day marks the end of summer, and with its passing managing partners begin thinking about end of year issues.

It is time to turn up the heat on billing attorneys. Ideally, the firm remained focused on billing and collection efficiency throughout the year. Unfortunately, I know from experience that law firms (especially non-AmLaw 200 firms) tend to let work-in-process and accounts receivable accumulate during the year. As year end nears and partner distributions become threatened, unbilled worked that has been wasting away in the firm’s inventory finally get billed. Likewise, partners start chasing delinquent bills with determined effort.

Don’t wait any longer. Take steps now that will encourage partners to clean up old work-in-process and collect past due bills. Circulate a weekly aging report by billing attorney of both unbilled items and uncollected billed items. The comparison by billing attorney puts peer pressure on your side. At month end, you will also want to compare the current amounts to the amounts as of the end of the prior year. The difference will help bring home to partners the extent of billing and collection work that needs to be done. It is also helpful to hammer home that the increase in WIP and AR over prior year-end amounts is money that will not be available for partner distributions unless billing attorneys get busy and reduce funds they have let sit idle—unbilled and/or uncollected.

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.

Attorney Billing and Collection Cycle

Admin — Sun, 06 May 2007 20:17:00 GMT

I spent a good bit of time in the Juris exhibit booth during last week’s ALA conference in Las Vegas. Just about every fourth attendee was an administrator from a law firm using Juris software. One of those attendees had read some of my posts dealing with realization and the benefits of faster billing and better collection efforts. They wanted to see something that could help them in their effort to encourage improved billing attorney performance in these areas. The Juris team member they were talking with used the company’s new Active Information application to create the report shown below.

The report not only gives the viewer a quick snapshot of unbilled and billed-but-uncollected fees, but it shows the average days that each billing attorney is taking to bill and then collect from their clients.

Now here is the important part: all the viewer has to do is highlight and click on a field in the report to see the details. Click on WIP over 90 days and view the clients, then matters, and then the transactions that represent those unbilled items. Likewise, click on A/R and view the bills that comprise the billed-but-uncollected balance.

It is one thing to get a snapshot report like the one above. But converting that into actionable information is a different story. A report can show you a problem, but you can’t do anything about it unless you can get at details to identify the reason for the problem. That is what makes Active Information so valuable. The information is actionable. You can spot a problem and then drill down to its source so you can do something about it.

Why should firm leaders have to waste billable time digging through traditional reports that just tell them what has already happened when they can start getting targeted actionable information in time to change the outcome? If you are not a Juris law firm, talk to your software vendor to find out if they have anything with similar capabilities. If not, you might check into Handshake Software. Handshake, a Juris Alliance Partner, has similar capabilities and works with both Juris and non-Juris software.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income contact Juris National Sales Center at 877/377-3740, e-mail info@juris.com or go to www.Juris.com.

What to do When Clients Don't Pay?

Admin — Tue, 06 Feb 2007 19:14:03 GMT

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.

Law Firm Collections Efforts: Are Yours Too Little Too Late?

Admin — Mon, 15 Jan 2007 19:23:11 GMT

I was paging through an expensive resource guide for managing partners when I saw it. It was A Model Collection System, a semantic or procedural flow chart illustrating recommended collection efforts for a law firm. The chart included the following steps:

Send the client a bill
If there is no payment in 30 days, send a statement and letter and have the lawyer make a reminder call to the client
If there is no payment in 60 days, send a statement and letter
If there is no payment in 90 days, send a statement and letter
If there is no payment in 120 days get serious about collection:
1. Strong letter
2. Lawyer to call client
3. Refer to committee
4. Pursue collection or write-off

“It is too late to close the door after the horses are out of the barn.” Old sayings like the previous sentence are sound business advice for managing partners. Why in the world would collection efforts be directed at past due accounts? Why not close the barn door before the horses get loose and have to be rounded up?

The typical law firm, according to the Juris Economic Survey, has 76 days of unbilled time still in its work-in-process at the end of every month. It takes another 72 days on average to collect for amounts once they are billed. That is a 148-day cash flow cycle. That is getting close to half a year!

Improving collections is achieved through procedures to avoid collection problems rather than trying to solve them after the fact. How do you do that? You do it by directing your energies as follows:

Improve intake procedures
Bill faster—speed up your billing process
Move routine collections out of attorney’s hands
Work accounts before they become past due

For more on improving law firm collections, including a checklist for speeding up billing and collections, read the following previous posts:

Speeding Up Law Firm Billing and Collection

Attorneys Are the Wrong People to Collect Firm Accounts

Collection Tip – Honey vs. Vinegar

You might also reread or distribute the post on problem solving, A Problem Solving Policy for the Law Firm.

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.

Leasing Keeps Money in Law Firm Partner Pockets

Admin — Mon, 13 Nov 2006 19:09:12 GMT

Technology-related investments are on the rise in law firms. It not just for replacement purposes, although Y2K-related purchases are now solidly in the obsolete camp. A host of new technologies in hardware and software provide law firms with new ways to increase income and cash flow. They include both new products and services as well as remarkable new capabilities in the current generation of mainstay law firm systems. Microsoft’s Vista, wireless technology, .NET technology, PDAs like the BlackBerry™, dashboard technology, peer group benchmarking, workflow improvements, automated event and exception tracking, automatic client engagement rules compliance, revolutionary changes in how information is reported and used in law firms—these and other technologies are driving new IT investments in law firms.

They are investments that usually more than pay for themselves, but the payback takes time. My friend John Dondey, at Baytree Leasing, reminded me that there are better ways to use cash than tying it up in depreciating assets such as IT equipment and software. With leasing, law firms have an easy way to finance IT investments without it taking money out of partners’ pockets. With leasing, law firms can avoid upfront payments all together, and monthly leasing payments should be offset by the higher income-producing benefits of the new investments.

With outright purchase, the law firm has to choose between making investments that they know are needed or using their cash for partner distributions. Leasing lets the firm do both. The firm can keep pace with peers and competitors without reducing partner distributions. Leasing provides the law firm with fixed, scheduled payments to simplify expense budgets and provides a hedge against rising interest rates. Cash requirements, including partner compensation, can be forecast and managed with greater accuracy.

Leases will cover the full cost—hardware, software, training, implementation and other related services. Companies like Baytree offer lease facilities that not only cover initial cost but also accommodate subsequent upgrades, add-ons, and technology refreshment during the term of the lease. And the process is super easy. Baytree, for one, has reduced the process to an art form—fast credit approval and simple applications make the process quick and efficient.

There are a number of leasing companies targeting law firms, but when I think of law firm leasing, I think of John Dondey and his team at Baytree Leasing Company. If you are interested in pursuing leasing for your IT investments, you can e-mail John Dondey at jdondey@baytreeleasing.com or call 877-229-4888, extension 224. You can also visit their web site. You can find other quality leasing vendors listed on the Ancillary Products and Services page within the Alliance Section of www.juris.com.

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.