How to reduce write-offs
Another best practice discussed in our project management workshop at Warner Norcross & Judd was just as simple and even more likely to quickly impact the bottom line: "Hold difficult conversations before money is spent, not after."
Anyone who has been involved with law firm finances knows the importance of the realization rate, the percentage of billable time that is paid for by clients. The precise definition of which hours are included and excluded from the realization rate varies a bit from firm to firm. The calculation typically includes work that was completed but never billed (such as a junior associate running wild on a research assignment; the relationship partner might never bill the client for that work), and expenses that were billed but not paid. Unpaid bills may be classified as post-facto discounts, write offs, or bad debts. But whatever you call them, they reflect lost income, which could have gone directly to the bottom line.
There are many reasons write-offs occur, but poor communication is frequently the key. Consider this scenario from a senior partner of an 800-lawyer firm in our survey:
[The client asks] "What's it going to cost?" and [the lawyer] says "Oh, I can't tell you, we don't have enough facts. But normally a deal of this size would run $120K-$150K." The client hears, "You've promised me $120K." And then that's it. That's your fixed fee. And you don't know that, of course, because you thought what you did was say, "This is what it costs on average," and at the end the client would say, "Gee, this cost $200K, how is that possible?" And you think, "Well, you know, your CEO got fired in the middle of the deal. The deal dragged on for three years. It turned out you got sued. Yeah, it cost $200K."
In the same interview, the COO of the firm commented that:
You can't wait until the end to talk about all the change orders. You really have to not be afraid to address these issues. A lot of partners don't want to do that.
If the lawyer in this scenario had discussed the issues with the client early in the process, she might have gotten a larger payment, or perhaps she could have satisfied the client's true need with fewer billable hours.
Unsatisfactory realization rates have always been a problem for law firms, and they are getting worse. Hildebrandt Baker Robbins tracks data on billing realization and collection realization rates in their Peer Monitor survey of 40 AmLaw 100 firms, 35 AmLaw 101-200 firms, and 52 additional firms. As noted in their 2010 Client Advisory, in 2007 both rates were around 95%. By the end of 2009, billing had declined to about 93% and collections to about 90%. Project management tactics offer the potential to improve those rates, and they have a huge impact on the bottom line.
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