Make More Rain : planning, cash flow issues

Why the Year End Collection Push is Not a Best Practice

Admin — Tue, 09 Sep 2008 16:38:57 GMT

It is that time of year again, at least for the early starters, when the legal industry begins its preparations for the year end collection push. The push has become an industry standard and buzz word over time. Each year countless hours are put into collecting massive amounts of receivables every December in order to meet targeted numbers. Although it is a foregone conclusion that there will be a year end push for most law firms, is this really a best practice?

The “ideal” approach with respect to legal industry inventory management is to have a continual billing and collections push year round, so everyone can enjoy the holiday season without worrying about making a budgeted target for collections. Although ideal, given the history of the industry, this is unfortunately a practice that will take time to implement. Even if that happens, the remains of the year end push might still have legs. For most firms both lawyers and, more importantly, their clients are used to and expect a year end push. It is a behavioral pattern that is established and therefore not going away anytime soon. That said there are negative ramifications to such a practice and a few firms have recognized this and smoothed out their collection pattern.

Client Behavior

The first obvious detriment to a year end collection push is the impact on client behavior. If clients expect a year end collection push then they are less apt to pay within a consistent, timely manner. Some clients even have said to relationship attorneys who have tried to smooth out the process, “Why pay now if I know you are just going to look for more in December.” In fairness to the client I would probably hold on until December as well. For example, if my mortgage company let me pay all of my mortgage payments in December, I would do so - which brings me to my next detriment of the push, the Time Value of Money impact.

Time Value of Money

A dollar today is worth more than a dollar tomorrow, so everyday a firm does not collect on a receivable they are foregoing the opportunity of re-investment. In my previous mortgage company example, I would take all of the money I owe the mortgage company invest it in some sort of portfolio that would give me a return on that money which would go straight to my pocket instead of the mortgage company. That is the same thing that occurs with the year end collection push within the legal industry: Investment income is left on the table as receivables age.

Aging Inventory

The next 2 problems are more internally focused within each firm. Not only can the collections push can have a negative impact on client behavior, it can as well with attorneys . A colleague of mine wrote a blog back in June on “Valuing your Firm’s Inventory” which I encourage everyone to read as it outlines how, as receivables age, the likelihood of realizing the original amount of those receivables diminishes. Since attorneys also exhibit the behavior of letting work age before it is billed, and billings age before they are collected, the probability of billing or collecting the original work/bill amount goes down.

Other obvious detriments include the ability to know where you are to your budgeted numbers as the year goes along, and how to budget for next year given a lack of information on your collections; a final drawback of the year end collection push is the impact on the age of your inventory. In the graph below, you can see three years worth of inventory pushes. There is a significant drop in balance each December (as depicted in the bar graph), but you can also see a spike in the age of inventory. Why does this occur?

I ask many of the firms I work with and they almost always point to the answer: At year end, with pressure to make budgeted goals, most of the collection effort is on receivables that firms know they can collect and are more recent in nature. Therefore, the older inventory that has been aging over the years continues to get older and may get to a point where it is completely uncollectable. This is an unfortunate side effect of the collection push and one that should be accounted for in any inventory management strategy.

Although I have gone over many reasons why the year end collection push is not a best practice, I am not blind to the fact that it is not easy to make a quick switch to a continual inventory management process. So given that the “ideal” practice is not a readily accessible current option, are there things firms can do to prepare and approach the year end billing and collection push to try to maximize its result while working on the before mentioned strategy shift ? The first suggestion is start billing early –nothing earth shattering. With most firms you see an upward trend in periodic billings in October and November. That trend should start in the 3^rd quarter, and those firms that have a more gradual collection slope in the last few months also have an increased slope in billings from August until November. The easy explanation to this is that billing is a more controllable portion of the inventory cycle than its counterpart. In the example below, you can see such steep a slope in each of the prior 2 year end pushes where as in the last year that billing was much more gradual and steady as the end of the year approached.

The natural benefit is that by getting the built up WIP out the door in a timely manner will give you the ability to focus on collections for a longer period.

The firms that I have worked with who have had the most success with respect to WIP management are those that have some stipulation on billing in a timely manner when it comes to their partner compensation. Knowing that many firms cannot simply switch their compensation system on a dime, this type of action is not widespread, but it is a proven method. Each firm has seen an improvement in inventory management when a portion of partner compensation has been tied to that driver. “Compensation” in this regard can be defined as a direct input into the partner compensation equation or, alternately, can equate to monetary “fines” for late billing and/or collections.

It may be inevitable within current industry conditions that December will be the month with the most collections. Again, it is in the best interest of the firm to change the status quo and begin collecting earlier and in a timely manner. Not only will you be able to have a better idea of where you will stand to budget sooner, but it will set your firm up for budgeting the next year. Still, if focus can be put on opportunity balances (those that have aged past an expected pay time) early in the process it may help avoid the side effect of the ever aging inventory. Those older balances can have the focus early on and perhaps generate collections while in December the focus can shift to the more readily available receivables.

I certainly hope that as time goes along the year end collection push will lose its luster as a buzz word and be replaced with continual inventory management. At the end of the year the firms that take this to heart just may see increased realizations, additional investment income, and perhaps most importantly a little more piece of mind that you are on target and can enjoy the holiday season.

- Posted by Russ Haskin

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.

The Making of a Successful Law Firm Business

Admin — Fri, 15 Sep 2006 17:37:00 GMT

We know that measurement alone improves performance. But combine measurement with goals and plans to achieve those goals and the whole ball game changes. Planning, goal setting, measuring, and accountability go hand in hand with increased management and teamwork. The resulting culture in such law firms sets those firms and their performance completely apart from those firms who are not similarly engaged.

Yet only about one-fourth of midsized firms report that planning is a key component to their mode of operation. Why should you be one of those? Per-partner income for those firms is twice that of the next best performing 25 percent of firms and seven times that of the lowest performing 25 percent.

What do you need to do to become part of that top performing group?

Engage in the planning process
Set goals and objectives
Develop plans for achieving those goals
Measure progress and hold people accountable

Doing the above will require adequate management and foster a team culture.

The above per-partner income information comes from the recently published Juris Law Firm Economic Survey of midsized U.S. law firms. For more information or to purchase the publication, go to Juris Survey.

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.

Advice from Experienced Managing Partners

Admin — Thu, 14 Sep 2006 17:35:00 GMT

I took another look at Patrick J. McKenna’s online booklet, First 100 Days. The booklet is a guide for transitioning a new managing partner. This time, I focused on the quotations collected by McKenna from existing law firm managing partners. These are appended under the heading “Voices of Experience.”

While their advice and wording varied, I did find what I thought was a frequent refrain:

Learn and pay attention to the profit driver

Listen more and speak less

Delegate and support—not every problem needs your solution

Taken as a whole, this is pretty good advice.

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.

Obstacles to Law Firm Planning

Admin — Wed, 28 Jun 2006 17:21:32 GMT

Howard Mudrick lists the following obstacles that can stop the planning process in its tracks.

Partners may be spending too much time and energy focusing on internal matters. This tends to happen when partners have not reached consensus on basic philosophic issues. If the partners can't get beyond this problem, the firm usually falls behind its competitors.

Some partners may not fully understand the economics of their practices. They may have a tendency to set economic goals without regard to whether the firm's client base/capacity for growth can support those goals. They may focus on cutting overhead rather than on increasing gross revenues.

They may not understand how their practice management habits impact the firm's financial success. Even if they do, they may not be willing to change those habits, including:

Work selection.
Pricing, billing and collections, including write-downs of time and write-offs of accounts receivable.
Delegating to other partners and associates and properly supervising work that has been delegated.
Specialization.
Keeping time and turning it in.
Using systems.
Doing work on time.
Communicating with clients regularly.

Some partners may not understand the necessity of having a strong, well-managed organization to implement strategic goals. They assume that, regardless of internal issues that are not resolved, there should be no reason that the firm would not be successful in implementing a plan.

Some partners may not understand the importance of decisions that must be made regarding the practice itself. Even if they do, they may be unwilling to make decisions that cut or curtail a given practice, especially if they are involved in it.

If any of the above situations are present in your law firm, the first step toward taking control away from fate as the future determinate for a law firm is to eliminate the obstacle.

The above insightful points were extracted from a paper by Howard L. Mudrick, president HM Solutions. Mudrick is president of HM Solutions, Inc., a Dallas based management consultancy to the legal profession. Howard Mudrick, a CPA and a former partner at Hildebrandt, has more than 20 years experience consulting with law firms plus on-ground experience in financial management positions with midsized law firms. For a copy of Howard Mudrick’s paper, Will Fate Plan Your Future or Will You?, email HLMudrick@aol.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.

Shutting Down Failed Law Firm Strategies

Admin — Mon, 22 May 2006 17:09:45 GMT

Paul Brown’s article, in the May 13 issue of The New York Times reported on issues surrounding failed strategies, projects, and business activities. It clearly applies to the law firm itself, and his proposed solution is worth clipping for those situations where a client or friend asks you for advice.

According to Brown, there are four psychology traps that would cause a law firm to hang on to failures (new offices, new practice classes, new technology projects) even though they are hemorrhaging cash and turnaround efforts have failed:

Confirmation bias. Executives seek information to support their point of view and disqualify data that does not.
The sunk cost fallacy. Managers add up all the money they have already spent and conclude it would simply be too costly to walk away.
Escalation of commitment. Executives decide to throw even more resources at the problem, convinced that is the way to resolve it.
Anchoring and adjustment. Estimates of the potential worth of the project or business are revised upward to justify all the spending.

His simple solution is a wise one. ”One simple way around these biases is to have a senior executive who is not involved do a thorough assessment about whether it is worth continuing.”

For a law firm, the partners can agree to give the task to a partner not involved in the project or the decision to pursue it. If no partner fits that bill, go to someone outside of the firm--preferably a business person or respected non-competitive (or retired) business-minded attorney. Another view can help those involved admit “… that sometimes things just do not work out and it is simply best to kill the project or shut the division to free up resources and improve their ability to embrace new market opportunities." For clearly failed efforts, I suspect that just the suggestion of independent review will bring the shutdown decision to finality.

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.

Rebates As Alternative to Discounted Legal Fees

Admin — Wed, 10 May 2006 17:23:00 GMT

Occasionally, circumstances arise that warrant providing a client with a special negotiated deal. One firm we work with had done so with a particularly large client. Part of the negotiated engagement terms was that the discount applied to each particular bill only if it was paid promptly. The discount, however, appeared on the bill showing the net as the amount due.

As you might have guessed, over time the client’s payment pattern slowed down. Eventually, the law firm discovered the client was taking in excess of 60 days to remit payment for services billed. Yet, they always took the discount.

The Juris Client Services team working with the law firm recommended changing from a discount to a rebate arrangement. Under the rebate arrangement, the firm would bill the client at gross (the undiscounted amount). Periodically, the law firm would issue a rebate to the client for the bills that were paid within the negotiated terms.

The rebate approach, which is common in commercial circles, makes a lot of sense as an alternative to the discounted fee approach. It puts the law firm in control to assure that the client is delivering on their part of the negotiated bargain.

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 Managing Partner Compensation

Admin — Tue, 09 May 2006 17:16:18 GMT

A law firm that fills its managing partner position as a right of passage or as a place to park a mediocre partner does a disservice to all partners.

It takes effective management for long-term success. Without effective management, a law firm can only be accidentally successful for some period of time. When something goes wrong (and eventually it always does), the consequences for the poorly managed firms are likely to be fatal. Given the fact that every partner’s income and personal wealth is at risk, managing partners should be selected for their executive skills, and their compensation should reflect the value of the job.

Richard Gray addresses the issue of managing partner compensation in the March/April issue of Law Firm Inc. Gray states that, “It goes without saying that the managing partner's compensation should bear a reasonable relationship to the individual's historic compensation level--and, in all likelihood, should be somewhat higher. No one should take a pay cut to become a managing partner.”

Gray emphasizes that while the managing partner should be among the highest paid partners, he/she should not be the highest. “In accounting, investment banking, and even professional sports, the chief executive is paid well, but the highest pay is reserved for the ‘producers’. Law firms should follow this model, too.”

Personally, I would modify Gray’s statement that “…the highest pay is reserved for the producers” to read, “…the highest pay is reserved for the firm’s star producers.”

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.

Client Expense Drain on Law Firms

Admin — Mon, 24 Apr 2006 17:51:00 GMT

I had a conversation last week with a member of the Juris Client Services team who is working with several Intellectual property firms. Remarking on the recent post “Stop the Client Expense Cash Drain,”she reminded me that Intellectual property firms have a higher than average investment in client cost expense. On average, the benchmark client advance number for intellectual property firms is just over $40,000 per attorney per year. On average, a 20-attorney firm incurs $800,000 a year in expenses on behalf of its clients. Averages can understate the problem for a firm. For example, one firm she is working with has financed $6,000,000 in client expenses over the last 2 ½ years. Remember, it takes the firm on average 137 days (almost 4 ½ months) to convert worked or incurred time into revenue. Funds tied up in uncollected client expenses come out of the partners’ pockets or purse.

Our standard recommendations in this area have involved faster billing or retainers, but now there are a variety of innovative services that eliminate the need for partners to tie up their funds in uncollected client expenses altogether.

Patent and Trademark Fee Management’s innovative Cash Right Now™ system is one of those systems. With Cash Right Now™, your firm obtains “instant retainers” for payment of out-of-pocket expenses, and you get to keep your cash where it belongs—in the bank. The Cash Right Now™ system collects out-of-pocket fees from your clients the same day these payments are made by electronic collection from either a client credit card or checking account. PTFM pays your firm the full cost of the out-of-pocket fee. Your clients pay only when the fees are actually due.

For more partner income, check out the innovative services from PTFM.

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 Firms Can Stop the Client Expense Cash Drain

Admin — Mon, 10 Apr 2006 17:11:29 GMT

Under the heading BIG IDEAS, the March/April 2006 issue of Legal Management reports on an innovative approach for managing client expenses advanced by the firm. Why bother? AmLaw 100 firms alone advance more than $4.5 billion in interest-fee loans when prepaying their clients’ hard disbursement cost. Any law firm funds tied up in uncollected funds comes out of the pockets of partners.

The new approach involves the firm’s use of a Dedicated Hard Disbursement Line of Credit (DLOC). Checks for client expenses are paid from the DLOC. The hard disbursement amounts and interest and audit fees are automatically added to the client’s next invoices by software that integrates with the firm’s accounting system. The firm simply passes on the carrying cost to their clients without added markups. Legal Management reports that the DLOC complies with the ABA’s Ethics Standards.

For more about DLOC, check out Disbursement Management Associates and their sister organization PTFM.

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.

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.