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
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