From Accounting and Financial Planning for Law Firms November 2013
Almost 30 years ago when I began my career consulting to law firms, the then managing partner of Donovan Leisure Newton & Irving used that term to refer to the months of October through December. It was his way of pointing out to his fellow partners that the necessary activities of practice management that so many of them had avoided for the first nine or 10 months of the year now had to be addressed. Clients that had not been billed as frequently as firm policy required now had to be invoiced. Outstanding invoices, many issued in the cold days of early March and April, now had to be collected and current work would not only have to be billed but collected as well!
Donovan was one of those old New York “White Shoe” firms that regrettably did not survive into the new century, but one where I first encountered afternoon tea time (“iced, two sugars and a mall-o-mar please”) and where I learned the craft of consulting and therefore will always have a special place in my memory.
Donovan, like most of its contemporaries and far too many law firms today, had poor billing and collection hygiene. Accounts receivable often totaled more than 50% of a law firm’s annual revenue. Professional fees were billed 30 to 60 days after recording and collected four to seven months after that. As a result, the “docket to pocket” time for many firms was 150 to 270 or more days.
Evan today, with the influx of professional management, the emphasis on running law firms like a business and the too frequent examples of what happens when law firms are not well run, the problems persist.
I have seen many billing and collection efforts over the years and at this time of year was asked to recap some of the most successful I have seen as well as some of the least effective.
Successful Approaches Meaningful (and Clearly Articulated) Partner Expectations
The most successful firms I have encountered over the years are those firms that document and communicate what is expected of their partners. Some of the most important include origination, billing and collection goals. Too often, law firms treat basic partner hygiene activities (recording time, billing clients and collecting receivables) as unimportant activities not really worthy of a professional’s time.
I agree that being a prompt recorder/biller/collector does not a great lawyer make, but I also maintain that without those things great lawyers would find it very difficult to be great lawyers.
What law firms need are clearly defined expectations and the stated principle that being a partner in a firm is a privilege, and that with privilege comes responsibility. After all, where do those distributable profits come from if not collections?
One particularly effective way to communicate partner expectations in this area is through the firm’s management reporting system. Billing inventory reports that list total unbilled time by partner in descending order (with the most unbilled time at the top of the list) or uncollected A/R reports that list (again in descending order with the largest first) individual partner total outstanding A/R in aged buckets are very effective in communicating expectations.
Expectations should also be reinforced at year-end review time by the Compensation Committee. That committee should meet with the members of the Billing and Collections Committee to discuss individual partner performance, get beyond the gross numbers and analyze individual performance. A partner who collects $2M and writes-off another $1M in the process is not the same as a $2M partner who has premium billed $200,000 to reach her $2M total.
Empowered Billing and Collections Committees
The Billing and Collection Committee should function throughout the calendar year, not just in the last three to four months of the year. Monthly committee meetings through August with increased frequency thereafter are an effective use of the partners’ time and an efficient way to manage the firm’s AR and WIP.
Each member of the committee should follow up with their assigned partners at least monthly. The emphasis of these individual meetings should be billing all available WIP and, once billed, prompt collection. Monthly billing and prompt collections are not pie-in-the-sky ideas but today’s reality. Committee members should be on the lookout for problem receivables early and actively work to salvage or write-off doubtful accounts.
At year-end, I recommend that the members of the committee keep their own “story book” by partner to keep track of promised actions and expected timeframes within which the promised actions will be accomplished. At the close of the annual collection drive, the firm’s compensation committee should meet with the Billing and Collections committee as discussed above.
Effective In-House Collections Professionals and/or Outside Collectors
Try as they might, the Billing and Collections Committee and individual partners cannot do it all. Their work can be augmented by dedicated collection professionals working full time on the firm’s receivables. Often firms assign the smaller invoices to the collection staff and have the committee and partners concentrate on the larger matters. This is a particularly effective approach because busy partners often do not have the time to follow-up on smaller invoices and they remain overlooked for extended periods of time.
I have seen effective in-house and outside collection efforts and have no specific guidance on which is more effective. However, at the core of every successful collection effort is frequent contact with a firm’s clients, supplying them with requested documentation (invoices, expense detail, etc.) and providing re-enforcement that someone is following up and the invoice will not be forgotten. Successful collection professionals often establish relationships within client accounting functions and can move an invoice along for payment using those relationships.
However, a firm chooses to implement its collection program, the fundamental responsibility for collecting invoices remains with the partner who represents the client, and they should be the one who directs how the collection effort proceeds.
Proactive Firm Leadership
The management committee, departmental chairpersons and office managing partners must all work to develop the culture of what is and what is not acceptable in the way of collecting receivables.
Every firm leader must emphasize the importance of prompt billing and collections. The consequences of failure to live up to the firm’s culture should be uniform and well known. Nothing undermines a firm’s culture more than the perception within the partner ranks that the rules only apply to some, and that if you are among the chosen that adherence to firm policy is optional.
Less Successful Approaches Misunderstood Partner Prerogatives
As discussed above, privilege carries responsibility. One of the most important responsibilities that a partner assumes is to help ensure the stability and growth of the firm.
Partners who do not conduct their individual practices in a professional and businesslike manner endanger the entire firm through their conduct. A firm must be able to pay its bills, pay the staff and reward the partners if it is to succeed.
There are, of course, instances where individual clients will not be invoiced or invoices will not be paid within firm policy guidelines and there are many legitimate reasons why this will occur. But they should be few, recognized by the firm management and a resolution to the exception should be in place.
Billing and Collections Committees Who Lunch
I used to think that one of the worst management decisions a law firm could make was not to have a committee overseeing the firm’s billing and collections processes. Now I think there is something far worse: a firm that has such a committee that does little or nothing.
These firms operate under the illusion that the committee members are hard at work overseeing the firms billing and collection activities, but in reality, all they are really doing is meeting for lunch once a month to review the top three pages of the firm’s receivables to determine if anybody paid. There is little effort to understand the why and wherefore of client payment patterns and a lack of interest in actionable information or action itself.
No In-House or Outside Collections Professionals
Law firms without dedicated professionals often say that no one other than a partner should be contacting the client seeking payment of the firm’s invoices. In some instances, partners operate under the false idea that by contacting their clients to discuss old invoices they will be perceived as unprofessional, or if the contact is undertaken by the firm’s collection staff the relationship will be endangered through unprofessional behavior.
These fears are largely unfounded. First, it is not unprofessional to expect payment for services provided. Indeed, if a firm does not follow up, the client may begin to think that either the attorney questions the value of the service provided or that payment is not important to the firm. Either conclusion is dangerous to the financial wellbeing of a law firm.
Collection professionals (no matter how experienced) should not be talking to the president or general counsel or whatever individual was the client contact. I agree. But, in most instances, what is really happening is that the collection professionals of the law firm are contacting the payables professionals of the client firm. Over time, law firm collectors (both internal and outside) develop relationships with their fellow accounting professionals and can get invoices paid when they call.
Professional collection staff can also serve as an “early warning” alarm if they call and find out that the invoice sent to the client two months ago still has not made its way to accounting. A call to the partner can alert her to the possibility that the invoice was never received (a minor problem) or that the client is unhappy with the invoice and/or service provided (a much more serious problem that requires immediate attention and a problem that should be addressed sooner rather than later). Client problems, unlike wine, do not improve with age.
Chicken Little Firm Leadership
Over the course of my consulting career, I have worked with some firms for which every day is a management challenge. The leadership of these firms is indecisive. No management decision is final and often the few decisions that are made take an excessive amount of time.
These firms lack a cohesive culture. Indecision and tolerance for disruptive behavior (failure to record, bill and collect in a timely manner) are mischaracterized as a collegial environment. A few disruptive partners can bring the firm’s decision-making process to a halt.
In the areas of administrative hygiene discussed in this article, firm management must be decisive, enforce policy and procedure promptly and fairly and reinforce the firm’s culture.
Those firms that do so will not only prosper financially, they will reinforce their culture and succeed in the future.
- Mark Santiago is a member of this newsletter’s Board of Editors and a certified management consultant. He is the managing partner of SB2 Consultants, headquartered in New York City. Santiago has consulted to the legal profession for more than 25 years in the areas of financial performance improvement, compensation systems, merger/acquisition due diligence and integration, and administrative support outsourcing. A frequent speaker and author, he was one of the three originators of LegalTech in 1981 and is a member of its Advisory Board.