Well-run law firms centralise control of inventory and receivables

In last month’s column, I suggested that firms still struggling with the aftershock of the recession need to get back to the basics by embracing goals and controls. Management should set goals for each lawyer and then monitor and enforce those goals; that process requires effort and diligence by the firm and hard work by the lawyers. On the other hand, controls may require a frontal assault on the heart of the law firm: its culture. The reward makes the effort worthwhile: goals result in greater productivity and a resulting higher inventory of billable time, while controls help to convert that inventory into dollars.

By definition, any well-run law firm controls its inventory and receivables. Firms struggle, however, to balance the holy grail of culture with a new-world need for profitability. Many lawyers still believe that client management and controls should fall solely to individual lawyers. That includes setting rates, billing time and collecting receivables. Following that course makes financial success virtually impossible. Lawyers do a great job of generating business and an even better job of logging hours. Unfortunately, they don’t do as well at billing or negotiating with clients over rates or unpaid bills.

Inventory and receivables

As a very young lawyer, one of my senior partners told me that being a lawyer would be the greatest job in the world if he didn’t have to bill. Many lawyers still feel that way. Having those lawyers negotiate a fee arrangement or the payment of a fee often puts the firm on the outside looking in, while the lawyer gives away inventory or forgives receivables. Lawyers believe that their clients represent their only real asset; asking them to negotiate with their clients over a bill, or its payment, is unfair to the firm and its lawyers.

A lawyer’s aversion to negotiating
with a client doesn’t make him disloyal
to the firm. On the contrary, he believes that keeping the client happy enhances the client relationship and puts the firm in a better place. Write-offs and write-downs will always be part of the legal business. But, a firm can minimise its exposure to unwarranted gifts of its inventory and accounts receivable by taking those decisions away from billing attorneys.

Lawyers value autonomy second only to their clients. Any plan that encroaches on that autonomy creates immediate pushback from the lawyer and faces
likely failure. In their hearts, lawyers
know that no business can prosper
with the sales force setting a price for
the product and then creating the payment terms; management has to
be involved. The same rules should
apply to law firms.

To begin, educate your lawyers about the problem. Show the impact of write-offs on the profitability of the firm and its partners. Then, create a plan
that doesn’t intrude on the lawyer’s dealings with the client. Any control that the firm can exercise quickly becomes found money that goes straight to the bottom line.

Begin by characterising controls as a ‘second set of eyes’. The process is internal, not external. The firm won’t contact the client, but it will require consultation with and consent of management before a lawyer agrees to rates lower than the standard hourly rate. Likewise, billing write-downs or fee agreements requires input and consent from someone else. In short, a second pair of eyes looks at all deals. These changes may seem small, but creating some form of control by the firm of its inventory and receivables is a huge
step forward.

Depending upon the size and the structure of the firm, the approval can be from the practice group chair, the billing committee or the managing partner. It really doesn’t matter who approves of the write-off or write-down, as long as someone does. The approval process gives institutional control over inventory and receivables. That’s a good thing.

Requiring a second set of eyes and the following approval changes the behavioural pattern of most lawyers. Lawyers hate to ask for approval; they perceive it as a sign of weakness. As a result, write-downs and write-offs will decrease dramatically. Even if the firm usually grants all requests, the process will quickly impact on the bottom line.

Long term, it will start the firm along the path to better management. Ultimately, firms should aspire for approval of fees, write-downs and write-offs that exceed
a threshold amount (which should be
very low). These controls lead to firms actually pursuing their receivables.
Ceding ownership of receivables
from the individual lawyer to the firm usually means enhanced profitability
and a better-run firm.

Productive bills

In summary, getting back to the basics involves increasing productivity and turning that extra productivity into dollars. Setting, monitoring, and enforcing goals increases productivity. Requiring a second set of eyes to look at all fee agreements, write-offs and write-downs makes for a better managed and, ultimately, more profitable firm.

Julious P. Smith Jr is chair emeritus
at US law firm Williams Mullen
(www.williamsmullen.com)