Make More Rain : compensation, subscriber content

Calculating the "Time Value" of Law Firm Accounts Receivable

Admin — Fri, 28 Dec 2007 14:00:00 GMT

Lawyers are keen to know what their peers are doing. Surveys, benchmarking applications, and business intelligence tools are all geared to give the firm a competitive edge relative to what others are doing. They tell you the "what". However, these tools don't tell you the entire story. They don't tell you the "how".

Take rate, for instance. What if you were charging the highest rate of those in your demographic yet still were not the most profitable? How do you know if the rate you are charging to one client is ultimately worth as much as a lower rate billed to another client? The difference lies in the time value of your accounts receivable.

In addition to considering what the market may bear, efficient billing practices, reduced write downs, and other pre-invoice processes, you should consider the time it takes your clients to pay for your services after the invoice is billed.

For example, if two firms bill their client in the same month $5,000 for services rendered, one pays at 45 days and the other pays at 120 days, the first firm retains a higher rate and is thus more profitable. How?

Based on data from the Department of Commerce, the value of a dollar decreases by 10% at 60 days and 20% by the time the debt is 120 days old. Studies also show that there is a 90% chance to collect a debt under 60 days, but that you only have a 20% chance of collecting the debt after 120 days. Finance companies use formulas based on percentages more restrictive than the above when providing loans secured by a firm's receivables.

Taking the above into consideration, the value of services for the firm which was paid at 45 days comes to $4,500 and the services for the firm which was paid at 120 days was only $4,000. The amount paid is still $5,000, but there is a $500 difference in the "time value" of the cash received for the first firm and a $1,000 difference for the second.

Now consider what this does to rate. Suppose the $5,000 represented 20 hours of work at $250 per hour. For the firm which was paid in full at 45 days, the collected rate would be $225, a full $25 less per hour. For the firm which was paid in 120 days, the rate is reduced to $200, or a $50 credit to the client per hour.

The above looks at the value of the debt owed. It does not take into consideration the chance to collect on the debt (not to mention pre-bill adjustments). If you want to forecast earnings, projections of revenue need to include the probability that the invoices will be paid. These percentages may differ from company to company. In the below graph (click on graph to download spreadsheet), I use a 95% chance to collect on AR up to 60 days. It decreases to 85% between 61 and 90, 60% from 91 to 120, and 20% after 120.

Calculating the aged receivables and multiplying the value by the percentage representing the chance to collect, your AR doesn't look nearly as nice as it does if you only consider the billed value. This combined with the decreased value of the service dollar makes for a dire forecast for those who don't take collections seriously.

The above takes a firm-wide look at receivables. You can replace the aging values with a specific client and determine whether your client is providing better or worse value for the rate charged. In this way you can determine the time value of existing client receivables.

Some may think that if you eventually receive the money, then you ultimately receive 100% of the money and the analysis above merely complicates a simple process. This line of thinking neglects to consider the time value of money. Financial institutions, insurance companies, and law firms consider the time value of money when calculating probabilities. In fact, when determining rate, firms often start with increasing their billable rates by the average percentage of inflation that may or may not be reflective of the cost of doing business in their region. It is a probability factored into the rate. Why would you not also take into consideration the negative impact of inflation on aged receivables, which is what the chart above (at least in part) represents?

Firms who don’t consider the time it takes to collect their receivables leave an important variable on the table when negotiating rates. Further, they decrease the value of their services since the debt that is collected after 120 days is likely induced by a discount if it is ever paid at all. Why spend time worrying what your billed rate is relative to others if you are ultimately going to devalue it by not seeing that the value for the work performed is retained?

Firms need to focus more attention on collections. In fact, a commitment to collecting debt within 60 days should be considered crucial to maintaining the value of the services you provide. With a monitored collections strategy, you will end up spending less in resources for future collections which will give you an effective rate increase without the client paying a penny more per hour.

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 .

New Associate Salaries in Midrange Law Firms

Admin — Tue, 14 Aug 2007 17:27:37 GMT

National media, include that targeting the legal community, is fixed on the AmLaw category of law firms—Big Law.

Fortunately, state and local Bar publications provide some sense of the real world in which midrange law firms operate. Likewise NALP, The Association for Legal Career Professionals, keeps a “real world” eye on compensation for legal professionals. NALP reports that only 14 percent of graduates were in that $135,000+ starting salary category. About half of those starting with law firms make less than $75,000. In fact, 42 percent start at $55,000 or less.

Similar problems exist with information when midrange law firms attempt to compare their financial results with others. Most surveys are heavily weighted to the AmLaw group of firms. That is something Juris is addressing by targeting its surveys and the on-line benchmarking service, Juris Insight, to midrange size law firms.

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.

The Lever to Pull to Increase Existing Law Firm Profits

Admin — Fri, 25 May 2007 17:22:48 GMT

As I was driving home from the office today, I listened to a recorded presentation by Brian Glauser of Redwood Analytics.

He indicated that of all the profit levers, the one that law firm leaders could pull to improve existing performance the most was realization. However, he wasn’t talking about collection realization that most law firms measure. He was taking about pricing and billing realization—the lost revenue and profit because clients aren’t being billed for the work performed at the firm’s intended or targeted price. The price in place for the client is either:

1. Discounted: The responsible attorney has agreed to accept the matter or engagement at an agreed-upon price below the firm’s standard rate schedule.

2. Out of Date: The responsible attorney has avoided making periodic price adjustments that would have kept the client’s deal in synch with the general movement in the firm’s pricing structure.

3. Adjusted: The responsible attorney is making unilateral adjustments before the bill is even mailed to the client.

Understand that there are particular situations where one or more of the above three exceptions are justified. But that doesn’t mean that all of the situations or all of the variances from target are justified. Measurement improves performance, especially when accompanied by goals for which people are held accountable. In this case, doing those things can make dramatic improvements in per-partner income.

To pull this profit lever, you need a report that shows hours worked priced at the firm’s targeted (standard) prices compared to what was billed in connection with those hours. The report should show the current month, year-to-date and inception-to-date amounts for client/matters. For midrange firms, it is useful to look at this information by responsible attorney and then drill down to clients and then to matters. It is also useful to be able to arrange the information by both the largest variance and by client/matter name.

Just as a reminder, this measurement excludes collection realization. Little would be gained if we increased pricing and billing realization only to write it off at collection time. So the two measures must go hand-in-hand. Likewise, keep an eye on unbilled fees (work in process or WIP). Keep in mind that no related variance will show up if the client hasn’t been billed for hours left in WIP.

In addition to the more detailed information described earlier, it is a good idea to implement a summary running gage along the lines of the table and chart shown below. I have attached an Excel® spreadsheet template that you can use to implement this summary in your firm. For Juris users, reports comparing billed amounts to their value at standard and negotiated values are standard. Juris® Active Information technology will automatically deliver on-screen views with drill-down capability directly to the appropriate individuals in the firm.

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

Law Firm Partner Compensation; The Case for Limited Origination Credit

Admin — Fri, 06 Apr 2007 17:26:00 GMT

People who sell are usually at the top of the food chain in every organization. Why? Because nothing happens until you have a customer or client. They are the force. They are the only source of revenue. They are the only thing that gives an organization the opportunity to succeed. Everything else is cost!

If it all begins with sales, it makes sense that origination credit, the equivalent of sales commissions in the business world, would be an important component in the compensation system of law firms. Having said that, there are good compensation plans and there are bad ones. Bad origination credit arrangements impede business development and get in the way of cross-selling, and team selling.

Think of the law firm as a triangular vessel that accumulates revenue-producing clients and matters.

The problem in most midrange law firms is that work doesn’t get delegated. Partners tend to hoard work. As their capacity is used up doing the work, new business development diminishes. It is a process that limits the firm’s performance and growth. What is the fix? The reward for “bringing in business” needs to be temporary. The politics need to be driven out of the system. You should get credit for making the sale if you make it, regardless of who will supervise or do the work. You should not get credit for the sale if you didn’t make the sale. Thus, new business occurring naturally from established relationships, referrals, and branded sales should not result in origination credit. The most important change needed to continually drive new business is that origination credit should expire with the case or matter, or for a continuing portfolio sale, it should expire after 12 or 24 months. Origination credit should be viewed more as a “bonus” than a way to build a compensation annuity. The emphasis should be on “what have you done lately?" Providing a handsome bonus for bringing in new business, say 20 percent off the top, requires that not all revenue be burdened with an origination cost.

Law firm partners are revenue producers, but if their individual production is all they contribute, the firm’s capacity is fixed and limited. One can break through that capacity barrier only if partners recruit, mentor, delegate and supervise. The role of a midrange law firm partner is to bring in business and get as much of the work done by others as practical. Thus, a sound compensation plan will not only have a “commission” component designed to reward for current “sales” (rainmaking) success, it should also compensate for supervision of the cases and matters regardless of who does the actual work. In midrange firms, this is typically the billing attorney role.

When it comes to individual production, the plan should not reward partners for neglecting rainmaking and delegation. One way to do that is to provide the partner with a billable target for personal production, one that leaves room for business development and the duties associated with delegation and supervision duties. Those hours are job requirements, and for that target the partner would receive a base compensation. The variability in compensation should come from three sources:

1. Collections for matters and cases under the partner’s supervision regardless of who did the work. That will include collections related to the attorney’s personal production as well as that attributed to others.

2. Origination credit earned only on new business where the partner actually closed the business. The credit is limited to the case, or for new portfolio business, it is limited to the revenue produced only for a temporary period such as 12 to 24 months.

3. A subjective element based on performance that considers assigned individual goals, teamwork, and support of firm strategies and policies.

Of course, it is always easier said than done. Fitting the pieces together is never easy. What is important is to understand that a compensation plan that is weighted heavily toward individual productivity limits partner income and firm capacity. Without rainmaking, delegation, and supervision, the triangle that represents the firm’s capacity is significantly smaller.

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 Dashboards Can Improve Performance.

Admin — Thu, 03 Nov 2005 18:41:42 GMT

On November 8, 2005, I will be speaking at the Wisconsin Law & Technology Conference. The subject is Legal Billing Systems as Practice Dashboards. Dashboard has become the buzzword for information that is presented graphically. There are dashboards and there are dashboards. Presenting information in a pretty pie chart may qualify as a dashboard but has no value in and of itself.

The key is to provide information that is immediate, meaning you have the information in time to do something about it. It needs to be actionable, meaning it compels action versus requiring interpretation. Finally, it needs to be instantly digestible, providing the viewer with “Situational Awareness”.

How do you get information that meets the test—information that provides situational awareness with instantly digestible information that compels action? The more powerful law firm business software (Juris®, for one) now has built-in features to deliver it, including tools for automatic e-alerts to responsible individuals for conditions requiring their action such as missing time, low trust balance and a past due account that requires the attorney's attention.

However, regardless of the software used, the firm can direct its accounting and administrative staff to provide important information in a form that achieves the dashboard objective. It is a state of mind. Reports are for the accounting and administrative team. Use them to provide information in the form needed by busy legal professionals concentrating on revenue production. Provide information that:

· Is immediate (current to the moment)

· Is instantly digestible

· Compels action

· Provides situational awareness over each individual’s area of responsibility

To view the slides I will be using at the Law & Technology Conference, click here.

Increase Realization on Law Firm Fees from Insurance Companies

Admin — Wed, 02 Nov 2005 18:55:25 GMT

Some great information came out of a presentation on successfully billing insurance companies for legal services provided. The panel discussion was a part of Juris® Users International conference in October 2005. Insurance companies have largely adopted e-billing. Unfortunately, the insurance client’s requirements often make the process a bumpy road for the law firm. As a result, bills get rejected and/or adjusted downward unilaterally by the client.

The Juris law firm representative presenting the session listed the following conditions that typically result in downward adjustments or rejected bills:

• Attorneys billing for clerical functions¾scheduling depositions, arranging for court reporters, preparation of form documents like deposition notices and cover letters, faxing documents

• Attorneys billing for paralegal functions - preparation of form documents such as subpoenas, notice of appearance, medical record summary, records requests, basic discovery such as form interrogatories

• Paralegals billing for clerical functions - scheduling depositions, arranging court reporters, organizing files, calendaring and conflict checking

• Prior approval for various tasks - such as attending depositions, retaining experts, performing research, certain types of motions

• Excessive time billed for tasks - receipt and review of court notice

• Block Billing - multiple tasks in a single entry

• Vague entries that do not completely define the task performed

• Unidentified parties - every name should also have a relationship to the case and visa versa even if you use the same name 100 times in a bill

• Duplication of effort - two timekeepers performing the same task

• Invalid billing increment - most insurance companies require .10 multiples

• Unapproved timekeeper or rate

• Invalid Task or Activity Code - wrong code set or type of code

• Repetitive and duplicated entries - proofreading or editing, multiple revisions to documents

• Interoffice communication - group meetings, memos to file, paralegal/attorney meetings to discuss task outlines

• Invalid rate for expenses - copies, postage, fax, long distance telephone, research

• Invalid expense - or expense over billable cost advance threshold

When it comes to wording entries, the speaker’s advice was:

• Always use the 5 W’s - Who, What, Why, and sometimes When and Where.

• MOST IMPORTANTLY - BE SPECIFIC - each entry must stand on its own and not depend on a prior entry.

Keeping time and expense entries compliant with insurance company requirements have exceeded the capacity to do so manually. Insurance companies are using technology to reduce its legal cost. The law firm has to use technology to avoid inappropriate adjustments. You have to get the words right. But more important you have to improve scheduling within the law firm so that the firm does not use the wrong person or more resources than the client authorizes you to use in performing requested services.

Using technology to audit time and expense entries against engagement standards before the billing process can eliminate rejected bills and reduce adjustments—that puts money in the partners’ pockets. Applying technology to the compliance issue materially increased realization at the speaker’s firm--from the high eighties to the high nineties. That is a 10 percentage point increase! That is "more partner income" worth going for.

Most law firms that are billing insurance companies try to adhere to the rules, but good intentions and manual testing haven't avoided the rejects and write downs. As far as I know, Juris, Inc.'s optional application, MyJuris®, is the only off-the-shelf product that includes an automatic compliance feature. The application's compliance feature automatically audits time and expense entries against the client's billing standards or rules before the billing process; thus, eliminating rejected bills and reducing adjustments. If you want to know more about ths alternative for increasing realization, go to www.Juris.com.