How law firms should approach collections for financial success
By many accounts, law firms got through the financial challenges of 2020 by making deep cuts to expenses. And while that strategy seems to have worked, firms have likely reduced spending as much as they can and will have to focus on other aspects of the revenue cycle to propel their recovery. As a result, collections will probably become an obsession for law firm managing partners and CFOs throughout 2021. This will be a challenge, as many law firms already struggle to maintain a healthy collections cycle even in the best of times.
According to the 2018 Clio Legal Trends Report, the utilization rate (i.e., the number of hours billed divided by the number of hours worked) for lawyers is only 30%, which means nearly two-thirds of attorneys’ workdays are spent on nonbillable hours. Furthermore, the realization rate shows that only 81% of billable hours worked are invoiced, and the collection rate aver ages 85%.
That’s a lot of money that should be flowing into a firm that is not. Firms are also well-known for focusing on collections in the fourth quarter rather than the whole year, which really isn’t the best approach.
But ramping up collections when a firm’s processes—and culture—have not evolved with that in mind may backfire. This is particularly the case if a firm does not already have a solid billing relationship with its clients that begins well before a letter of engagement is even signed.
Viewing collections as a gas pedal that can be pushed to pull more revenue out of clients could end up driving them away, particularly as the economic impact of 2020 continues.
Know your clients
Even though firms might justifiably want to maximize revenues right now, doing so at the expense of client relationships is not a sustainable approach. What’s needed is flexibility and empathy with a client’s financial situation. There’s no use collecting a large invoice immediately if doing so helps push a client into insolvency. That is not how a client-focused firm is successful, and it also makes terrible long-term financial sense.
Instead, firms would be wise to use the events of 2020 as inspiration to solve the collections puzzle once and for all.
It also pays for firms to ask themselves some questions about each client, such as:
- What is this client relationship worth to the firm over the long term?
- Is this a client we can afford to lose?
- Do we want to be known as a firm that values money over client relationships?
- How can we partner with this client to help him or her ride out these financial difficulties and make us both stronger for the future?
- What alternate arrangements can we make for payment?
- What can we afford to do in this situation?
A healthy approach
The most important thing to realize is that a healthy collections process does not start after the client receives an invoice. Rather, law firms set the stage to maximize what they collect from the very start of a client relationship. There are some specific areas to focus on in order to get th is right.
Fee agreements. Having a clear fee agreement that specifically lays out how much a client will be billed, what they are receiving and payment windows goes a long way in setting the stage for healthy collections. It’s also important to customize fee agreements for eac h client.
Clear, unambiguous language that establishes deliverables and costs not only helps the overall client relationship but also minimizes confusion as to why a client owes the amount billed on an invoice.
Invoices. Just as important as fee agreements is providing clients with bills that are easily understood and thoroughly describe the work performed. Sending a bill with just an amount due and a vague one-sentence description of services provided is just asking for a client to query it. Likewise, billing for chunks of hours using nonspecific descriptions is only going to raise eyebrows and delay payment. A clear, concise and detailed invoice should solve that problem.
Timekeeping. As noted above, law firms repeatedly leave money on the table simply because it is not properly tracked and the n billed.
In addition, sloppy timekeeping leads to inaccurate invoices, annoyed questions from clients and delayed payments—not to mention the fact that this could also create an ethics headache that no firm wants. For good collections to happen, firms should foster an internal culture that emphasizes accurate daily timekeeping and use solid, user-friendly (and preferably cloud-based) software.
Client communication. For unpaid invoices, firms often leave following up with clients to someone in accounts receivable. While that is fine for the first or second inquiry, it is mostly a reminder. It’s not where things should be left if payment is not received quickly. Rather, firms should employ a staged communications approach where the main relationship attorney is looped in for follow-up after one or two attempts by accounting staff. The attorney can also maintain a more personal touch to communications and weigh alternative arrangements for the client. This is also a good way to maintain and even enhance the client relationship.
Software solutions. There are software products that can assist firms in making the collections process more efficient.
A list of “must-haves” includes:
- Built-in timers.
- Automatic prompts that remind users to enter time throughout the day.
- Help for users in accounting for all billed time, including how much of their time remains to be allocated.
- Flexibility that allows users to break time blocks into subcomponents.
- Capacity for multiple timekeepers to work on a matter and use robust, customizable rate tables for clients, practice areas, offices and roles.
- Electronic bill approval.
- Automatic write-down of charges that exceed a fixed fee while still tracking hours worked.
Firms that implement all of these strategies at key moments in their client relationships are far less likely to experience problems with collections, whether in good times or bad.
Above all, it’s about focusing on clients and what they need, both in terms of legal work and facilitating payment. It’s also not something a firm can just reach for when cash flow is threatened. Instead, collections should be a part of the fabric of a client’s experiences with the firm at every touch point.
This story was originally published in the August/September 2021 issue of the ABA Journal under the headline: “Bringing Home the Bacon: How law firms should approach collections for financial success.”
Scott Brennan is the former CEO of Lexicon, a provider of practice management software and legal support services. This column was written before he left the company.