I Feel Lucky…. Hit Me!

Many would argue that I am very lucky; so far this year I have spent 3 weeks in Las Vegas, Nevada, one of the gaming capitals of the world. Oddly enough, two major world gaming centers lie between the 36th and 39th North Parallels; Las Vegas, Nevada and Atlantic City, New Jersey. Was that by chance or was it intended? I wondered the probability of these two cities separated by 2500 East-West miles and only 200 North-South miles. Odd isn’t it?

As I walked through the casinos I wondered, what is it about gaming that manages to fill these cities. As Maslow wrote about human needs, Barrett Miller, in his paper Support Groups that Work, wrote about Human Hungers. One such Human Hunger is Contact Hunger; the need for rituals and pastimes (games). As I watched people satisfy their Contact Hunger, I realized that gaming is such a part of our daily lives – our collections lives!

In experiencing the tables of Vegas I came to realize how people play these games is often similar to how we manage our accounts receivable and work-in-progress, for that matter. There are essentially two types of games, those requiring skill and those of chance. The games of skill encompass games like poker, where the player has to work with what they have and make decisions regarding the behavior of the other players. Whereas games like roulette and craps require luck.

Bringing this home, so many firms manage their AR and WIP like they play a game of luck. I will put 50 on red, black and evens and away I will go, essentially having a firm standard AR and WIP management process. That is synonymous with having a WIP/AR strategy of treating all the clients the same. Which, for anyone who has been to my seminars, knows that this is the first taboo in managing the most valuable asset of the firm? Today’s firm must begin to manage their client portfolio as a skill; weighing the odds, making educated decisions and thereby becoming most effective.

The first question that must come to mind now is, how is this done? For the last 12-18 months I have professed the need to move to a risk based model for managing WIP/AR; a strategic approach. This approach is a growing trend in the corporate world, according to a 2006 Dun & Bradstreet study, where 30% of commercial firms have adopted a risked based collections model, which will grow to 60-70% by 2008! Becoming strategic at managing the most valuable asset of the firm will: reduce bad debt, increase cash flow, build strong client relationships and almost obliterate time wasting activities!

Using a risk-based WIP/AR management process uses statistical-based credit scoring to determine the inherent risk of the client. This score, along with the firm’s affinity for risk becomes the primary driver for determining how WIP/AR strategies manifest themselves within the portfolio. This isn’t hocus-pocus, research has shown that the age of an account and the amount due are the wrong criteria to use to optimize collections efficiency, DSO and reduce write-offs.

Remember, your ability to get paid is based on the client’s risk model. From my presentation, Collections Above and Beyond Technology, clients bring two types of risk to the organization, and it is that risk that determines the probability of the timeliness of payment. To demonstrate this with a simplified example, given two clients that require attention; Client A and Client B. Client A owes the firm €100,000 and is 30 days past due and is a low risk account with a 1.1% expected bad risk rate. Client B, owes the firm €10,000 and is only 10 days past due, but is an extreme risk account with a 65% expected bad risk rate. Working through the joint probabilities of default, it becomes apparent that Client B poses the greatest risk of default.

The question now is… how do I stop playing roulette with my firm’s largest asset and change it from a game of luck, to one of skill. The answer resides in your time and billing system! The most valuable weapon you have to build the foundation of a risk based plan of WIP/AR management is the payment experience you have with your clients! It has proven to be, by far, the most predictive data that is available. Because it screams of the inherent risk the client brings to the firm. Keep in mind, the best predictor of future client payment performance is client history, and you already have it, and it is free!

With all of that, you must ask yourself – do I feel lucky? And the answer should be…hit me – I am skilled!

The Hairy go’round of Collections

Here we are, almost through 2007! Another year is slipping away. For those firms on a cash basis accounting system, the memory of ‘year-end’ must be distant at best. Well, before you know it, whamo! Throttles will be opened and you will be in the middle of it! I think before you get there, you have to think of Richard Simmons and his famous line “STOP THE INSANITY”.

I am just settling in from a trip to Las Vegas where I had the opportunity to participate in the 111^th Credit Conference. This venue pulled together upwards of 2,300 credit professionals from North America. The enthusiasm for credit management filled every session and every conversation. I was fortunate to meet many people who were exuberant in sharing their trials and tribulations in the field of credit and collections. I want to share one such story with you. I met the director of credit for a national concrete and aggregate supplier whose name, for sake of presentation, will be Mary.

Mary has been the director of credit of ABC Ltd for some 10 years. The world of construction credit, as Mary revealed, is a fraught with thin margins and is competitively cut-throat. As she explained her role, it became very apparent to me, that AR collections in a law firm isn’t really collections it is more of a service to the attorneys; a mish-mash of busy work, for the most part. In ABC Ltd, Mary’s department is notified immediately of a prospect. Her team diligently goes to work using all sorts of public data to establish a credit risk for the prospect, and ultimately a credit limit. Once the limit is established, the information is communicated to sales and to accounting, where limits are set in the various systems. Folks this is done in hours, not days, not weeks, HOURS! Then the game begins! The order is placed, delivered, signed for and billed. The turn around time, according to Mary, for all of this could be days and at most a couple of weeks.

The moment the bill leaves the building it belongs to Mary and her team of credit professionals. With thin margins they must get that bill paid as soon as they can, otherwise their company could not fuel the raw material engine. The moment the bill begins to approach the very close due date, the team watch. Should delinquency hit, they are on it, sending out reminders and making calls to get that bill paid. As Mary shares her story, a sense of pride illuminates her as her DSO is 42 days and her annual bad debt is 0.02% where the industry average is just a hair higher at 0.0206% of sales.

Now let’s contrast that with the law firm collections. For many firms, the act of law firm collections is to provide information to the partners who do their own collections. For those firms where they have collectors, they are told who they can and cannot contact. Well for most, this is par for the course.

At some magic point in time, all sense of reasonableness goes out the window. The point where the cash receipts budget becomes king and the entire firm is transformed into a collections machine, the behemoth has awaken. This is the infamous “year end”. During this time, lawyers spend their time speaking to clients about their past due accounts and the collections team run reports, ad nauseam. Oh and let’s not forget, those hourly calls to the bank about wires and the mass distribution voice/emails about daily cash receipts. Then as the days tick down to the year end and the feeding frenzy goes full force, we pull out our famed weapon….discounting!!! I often sit and wonder if at the American Express office if this type of feeding frenzy is going on as they await the payment of my bill. Although my narcissistic side would like to believe it; I surely doubt it!

For many firms, this is the way it is and the way it will be until one day… one magical day when someone says “STOP THE INSANITY”. With this behavior it is no wonder why the average U.S. law firm takes 122 days to collect a bill when their terms are N30, while a Fortune 500 company will take 42 days; with the same terms. Do our firms realize how much money they are wasting? Do they realize the cost to carry receivables and unbilled time, daily? Do they realize the true value of credit professionals? My answer is NO!

Today’s law practice, for the most part, is heterogeneous slurry of professionals who truly believe that their capital contribution buys them the right to run their own practice. However, their own practice is often in direct polarity to, possibly, their neighbor! With no one making the rules and everyone playing by their own rules can today’s firm expect to be profitable. Oh but they are, they are profitable – only because their margins are so large! Large margins is the savior, simply ask Mary! If we were to transform our firm into a finely tuned machine where there is a single leader and everyone follows in lockstep, the profits would be phenomenal! Imagine for a moment, Mary and her team, with their rules and their tight margins operating in a law firm, an organized law firm. We would see unbilled and AR turnover so fast it would be scary, and the profits would soar.

Oh, on the note of profits soaring. Do you realize in today’s world there is no limit what one can earn? However in today’s firm, it is the historical profits that perpetuate current practices. Because firms have the ability to control their profits by virtue of their accounting practices, they continue to use those practices that have served them. However, there is no such thing as the perpetual motion machine. These old practices will stop working, and I feel the time is fast approaching!

Recently, I had the opportunity to participate in a round table discussion of several major firms in a major metropolitan center. As the finance and collections people shared their trials and tribulations, it became very apparent that these firms are at the breaking point. One such firm CFO announced that the firm is expecting a 15% growth in cash receipts for the year, but has not added new lawyers, taken on any new major clients or had any landmark case. They had to grow the cash pot by 15% over 2006 levels, without changing a single thing… not even recognizing write-offs of AR of bankrupt clients. One has to ask the question, how is this possible? It isn’t! How is the collection group going to squeeze funds out of static AR? They can’t … at this firm, they are about to hit the wall!

It never fazes me how we continue to expect better results from doing things the same way! We know this inherently, yet our firm’s lawyers want the credit team to do the impossible. These legal minds can advise on the intricacies of the tax law or the proper steps to IPO for a Biotechnology Company, yet they cannot see that their requests don’t make sense, nor do they see that they need to take their own advice. I sense that the time is rapidly approaching, if it hasn’t already arrived, that today’s legal practices must begin running like a real business. They must break free of the shackles of historical behavior, appoint a leader and follow in lockstep with the goals of the organization and beheld accountable, accountable to their leader and their peers for their deviations! This and only this will be the firm’s armor in the combative world of globalization.

I realize that my words are stern, as I am only an outside observer. I don’t work within a law firm; I have, but not anymore. Today’s practices won’t take firms into tomorrow. Today’s firms need change and those willing to undertake immediate change will be the first movers, who will have the luxury of defining the legal landscape. With that, I want to leave you with a quote that, hopefully, will cut to the quick.

"If it ain't broke, don't fix it" is the slogan of the complacent, the arrogant or the scared. It's an excuse for inaction, a call to non-arms. It's a mindset that assumes (or hopes) that today's realities will continue tomorrow in a tidy, linear and predictable fashion. Pure fantasy. In this sort of culture, you won't find people who proactively take steps to solve problems as they emerge. Here's a little tip: Don't invest in these companies.”

Chairman General Colin Powell

Why Johnny Can’t Sell

Last week I was in Denver at a technology conference attended by many of the market movers and shakers. It was during one of the sessions that I met the author of “Why Johnny can’t sell”. The book looked at the changing needs of sales people over the last 50 years. In the history of modern day sales there are 3 main eras, each with its own characteristics: Era I (1940-1975), Era II (1975-1995), and Era III (1995 to present). You are probably wondering what this has to do with a blog on AR management; believe it or not, it is very relevant.

To gain a true grasp of the relevancy of the book one must look at what our legal counsel does, aside from the practice of law; they undertake business development. For all intents and purposes our firms' attorneys are salespeople! They get new clients and new work into the firm. They sell the legal prowess of the firm. However, it is this sales process that leads to WIP and specifically AR related issues.

Without belaboring the discussion on selling, era II was the age of ‘qualities’. Basically, I as the salesperson spend time presenting to you, my prospect, all of my qualities. I, as the prospect, purchase based on the distinguishing characteristics between the vendors, in my example - the law firms. This was all well and good before the explosion of technology and rapid global dissemination of knowledge through the internet and other electronic means. It is the increasing momentum of more knowledge being disseminated more rapidly that takes us to Era III; the age of consultative selling and the value proposition.

Success in the selling process in Era III requires the salesperson, our attorneys, to demonstrate the added value to the client, not simply by expounding on theirs or the firm’s “qualities”. The attorney must clearly demonstrate their unique value and how the engagement will provide the client with tremendous value. Now, consider how many lawyers are out trying to get the same clients. What we see is a sea of “qualities’ and very few distinguishing characteristics. The one characteristic identified most often; price. Clients rationalize all of the qualities of the lawyer/firm, and the only one that tends to stick out – is price!

Today’s legal salesperson, our lawyer, using the skills of ERA II (qualities based) in an ERA III world, has created a dilution of the value of legal work and has caused many of the problems we see associated with today’s law firm collections. They have essentially reduced the value of their services to a commodity. This commoditizing of legal services pits firms against each other bidding for services – bidding wars. Sometimes these bidding wars results in firms taking on work below their ROI thresholds or even worse, below break-even points.

Now with the client on board, commoditizing of the legal services goes a step further. In the effort to differentiate the firm from others, clients are offered special terms; such as N60. Since the billing for services is considerably protracted from the collections effort, the client’s motivation for payment is gone. This concept has been clearly documented by Edward Poll in his book “Collecting Your Fee”, in the protracted amount of time taken to collect the bills and worst – fee discounting, all the result of commoditizing legal services. Almost all of the problems associated with delinquent legal bills can be traced back to the inception of the relationship! It was Stan Godbehere, chief credit officer of Robert Half International who said “It is the 1% that is not done right at the onset of the relationship that can cause 99% of the collections problems”. In today’s market, that one thing is not clearly demonstrating the unique value the lawyer brings to the engagement.

To be successful in today’s highly competitive market, firms must educate their lawyers on becoming legal advisors, demonstrating their unique value to the client, and not commoditizing legal services. Today’s lawyers must see themselves as the one of a kind service provider, without whom there can be no value. Then and only then will they achieve true competitive advantage, in an increasingly more competitive market