‘Relationships’ for Rent'

Just reflecting on the ILTA’07 (International Legal Technology Association) conference of the past week and a few conversations, with attendees, continue to fill my thoughts. The conference, an amazing educational forum, drew in over 1300 attendees from some of the most prominent legal practices in the world. Each year these attendees bring back knowledge to their organization with the hopes of creating value. I often wonder what type of value is created…

After a decade of working with law firms I am still amazed how certain practices continue to fill the halls of these law practices. No matter how much educational media these attendees have at their disposal, their firms continue to operate with a turn of the century mentality. Granted, from the beginning, law practices have been built and sustained on relationships. It is the attorney-client relationship that holds clients to the firm. However, it is also these relationships that cost the firms hundreds of thousands of dollars monthly, if not weekly.

In speaking with probably hundreds of firms’ representatives I was pleased to hear that only a small portion of which do not have a means of managing their largest and most valuable liquid assets; work-in-progress and accounts receivable. I refer to this asset as client investment – the investment the firm has made into the client relationship. Although most firms have some type of technology to manage this valuable current asset and they do so with varying degrees of success. There remains those few who simply have the attorneys ‘handle’ it. It is these firms that I feel compelled to address.

There are countless reasons why firms should not allow attorneys to manage their own client investment and this wouldn’t be the forum to list all of those. However, suffice it to say, attorney management of such a vital asset is like having the wolf guarding the henhouse – it just doesn’t work; on many levels. Very simply, it reminds me of a quote I saw on a service organization’s website. “Every hour you (partner) spend in collections, is an hour you could have spent billing”. That is true in the simplest of sense, although people like to believe they are multi-tasking – they aren’t. Therefore, in a 100+ attorney firm where the attorneys handle their own collections – countless hours are blown away as they chase client payments. Ed Poll in his book, Collecting Your Fee, is far more forthright in saying that ‘attorneys create their own collections problems’.

Through the many conversations of the week, the one I find most appealing to demonstrate this, was an email dialogue I had with a mid-sized firm regarding their client. This firm, 200+ timekeepers, is a full service firm that has grown through acquisition. Their culture is one of a mosaic of all the cultures they have acquired. Generally speaking they have a collections department, but for the most part the attorneys handle their own client investment portfolios. The collections department is essentially ‘report jockeys’ and not true collectors. They create a huge amount of reports on a monthly basis, set goals and then wait. This is the firm’s first faux pas – either have a collections department that undertakes collections or have the attorneys do it, not both!

Well, it seems that a client of a senior partner had managed to rack-up an outstanding receivable of $2M which was over 180-days delinquent. The collections group had kept the attorney apprised of the account since its inception with regular monthly reports. As the firm watched the account get older and older, all the while continuing to work for the client. It wasn’t until the managing partner got involved, did something happen; the partner made contact with the client. An abridged version of the dialogue follows.

Partner Paul sends an email to client Clint trying to make Clint aware of the balance of the receivable. For which Clint replies, “I have asked our accounting to send you a check, on a few occasions”. “I will follow up”. Paul graciously replies indicating that the managing partner has asked him to make a dent in such a large receivable. In a later email, Clint explains that company has a new billing system and they have been unable to get payments out. The statement that amazed me was, “there are many other vendors ahead of you waiting for payment”. With that Paul replies, “what ever you can do is appreciated, keep in mind the current work”. With that the dialogue ends. Within about 2 weeks of that ‘collections’ dialogue, Clint’s firm makes a statement of its financial distress. Now I wonder how much of that $2M AR and whatever amount in WIP will ever grace the firm’s coffers. My gut says, pennies on the dollar!

With this ‘relationship’ the firm has basically hemorrhaged good money, for the sake of status quo. Some of the key issues:

1. Why have a collections team if the attorney is going to do collections?

2. Why was something not done sooner? Some type of payment arrangement could have mitigated the risk.

3. The firm was the client’s bank for 180-days, the opportunity cost of that receivable at 6.75% cost the firm over $60k.

4. The ‘soft-shoe’ collections effort of Paul, didn’t get any mileage with the client.

Paul never fostered a fair equal relationship. Basically, the firm bought and paid for a bad relationship! So what can we take away from this, probably a lot of things? However, the statement that I want to leave you with is from Ed Poll, Collecting Your Fee. “Law firms are not the victims of their delinquent clients." "You and the firm itself cause your collections problems by not telling clients from the beginning what you expect from them”. These firms have no one to blame for their cash flow issues but themselves! I say, get the wolf out of henhouse management! Progressive firms need to put partners into the practice of law and the finance people into the management of the firm. Until then, situations like Paul’s continue to happen – daily.

E-billing, Friend or Foe?

For one very far removed from the billing process, I envisioned that e-billing would be the nearest and dearest thing to all those in finance, especially those on the billing team. You can only imagine my amazement to find otherwise. This revelation didn’t come over a casual dinner, but rather in the midst of a large open forum with over 80 attendees! Since that June day I have wondered why firms not only dislike e-billing, some hate it with a passion.

To set the stage, e-billing has been around for at least 2 decades. It made its splash in the marketplace about the time of JIT manufacturing. For those who didn’t evolve from the manufacturing world; JIT is an acronym for Just-In-Time. This concept came from across the Pacific Ocean; Asian manufacturing companies. The premise of which, if you know what you are building and when you are building it, you can save yourself a tremendous amount of money by receiving your raw materials Just-In-Time, for production. This saves warehousing space and all the expense of moving inventory around in warehouses. It was this model that allowed Japanese automobile manufacturers to achieve unprecedented profitability, which they then plowed back into the company to further increase their position in the market.

With JIT operating, these manufacturing companies needed a mechanism to streamline how they managed orders, packing slips, receiving documents, and invoicing. As you can appreciate, shipments of windshields and tires several times per week would create mountains of paper and decimate all forms of vegetation from the rainforests. Hence the concept of inventory and billing management evolved. In the manufacturing world, the buyer’s and sellers computers communicate to relay information as to requirements of products, expected date of need and place orders electronically to ensure delivery when the material is needed. Upon shipment, all related documents are forwarded between the systems. Upon arrival of product at the buyer’s location, the warehouse personnel scan the incoming product, which triggers more computer communication and finally the seller has all the pieces to invoice (agreement, order, picking list, packing list, receipt confirmation). The invoice is then sent electronically, e-billed, to the buyer where the buyer’s computer compares, contract, order, pricing, receiving list and then authorizes payment. Magically with minimal human intervention, the purchase order, packing list, receiving list and the invoice are all matched, and the item is in accounts payable already allocated to the correct G/L account. At the trigger point, the bill is released for payment and the funds are wired. What a great system!

For 95%+ manufacturing companies, or commodity based businesses, the e-billing process works like a charm! However, should something go wrong, getting paid can be an uphill battle! This is because the entire system is built on meeting expectations. The company ordered 6 widgets, 6 were picked, 6 were packed, 6 was shipped, 6 were received, and 6 were billed; at the agreed price.

Now take this model into a law firm and it becomes blazingly clear why it is destined to failure. I know for a fact, that someone didn’t wake up one morning and say “hey let’s provide our clients with an e-billing option’. E-billing was a requirement placed on firms who want to deal with large to mega organizations who have already spent decades proving that e-billing works!

To set the stage, e-billing technology underwent Darwinian Evolution. Basically there was no controlling body to set a standard, therefore no standards were set and standards grew from the swamp. So essentially, today companies can use any of a couple hundred e-billing formats/standards. For automakers, this isn’t a problem, they simply tell their suppliers – these are the 3 we use. However to the law firm, this is the first hurdle; which client is using which standard! Keep in mind that e-billing grew out of dealing with easily quantifiable entities, tires, engines, windshields, widgets. So what became of these quantifiable entities that were imposed on law firms? Very simply, what was able to be measured and negotiated: associate hours no more than X% at $Y and no more than Z hours of senior partner time, and photocopying at this rate. This becomes the new standard by which billing is managed, in a legal practice!

Let’s fast forward. The partner meets the prospect, gets the deal! The engagement letter is signed off and all of the acceptance criteria are agreed. The work begins and it is time for billing. We assume that the billing system has managed to ensure all is in alignment with the engagement letter; the contrary is most often the case. The prebill gets created; billing is done and sent through one of the many e-billing portals. Depending on the e-billing portal, the firm will find out within 5 minutes to 24 hours if the bill is accepted. Acceptance is the firm’s first hurdle, does it meet the ‘agreed’ criteria? If it isn’t accepted, the bill has to be “reworked” and then resubmitted.

Once the bill is accepted, all is great! NO! Unlike in the purchase of widgets, where quality is easily assessed, legal work is more subjective. So the e-bill has now passed, what I call, the “scrub” phase, that is where it met the criteria that was agreed to in the engagement letter. However, because of its subjective nature of legal work, it now must be moved to one if not many people in the organization for approval – all electronically! The problem of getting approvals is compounded if the bill requires few to several approvals that must happen in a ‘defined’ order. As with executives, time is of the essence and travel schedules puts people out of the office for days if not weeks. Therefore, internal approvals can take considerable time. Meanwhile, back at the firm, everyone is wondering where the payment has gone!

So what can today’s firms do to move e-billing faster to collections. The process is very simple. In reviewing what happens with e-billing one simply needs to build in ‘checks & balances’.

1. Have a clear understanding of the terms outlined in the engagement letter.
2. Implement a prebilling process that is in alignment with the engagement letter
3. Internally run through the ‘scrub’ phase before producing the bill
4. Submit the bill to the e-billing vendor
5. Identify and resolve and ‘kick-back’ errors immediately.
6. Institute a collections policy to notify the relevant parties when payment is not according to terms. The bills may be stuck in the approval chain.

E-billing is a phenomenal tool for organizations; it ensures receipt of the bill and timely payment. However, like everything, it has its limitations. Spend some time, learn where things can go wrong, build a safety mechanism and most of your e-billing problems will go away!

To Source or Outsource that is the question….

Although not as philosophical as Hamlet’s grappling in the garden with his whole sense of being, the issue of outsourcing is a difficult one for many organizations. In today’s competitive world, organizations have to increase revenues and cut costs, the goal – a lean mean profit machine. Today’s in-tune organization already realizes that the only way to grow the revenue is through a global presence, or increasing an already established global presence. These organizations are now turning to reducing their costs and the immediate thought is through ‘outsourcing’.

The concept of outsourcing is not new by any stretch of the imagination. In the academic world of accounting it took on a different moniker “build vs. buy”. Regardless, it is the same animal! Should I do it myself our have someone else do it for me? That becomes the question. Delving into the academics of classical economics, the answer becomes easy – outsource. That is all based on different people groups having a selective advantage of production or a certain product/service. However, in reality this isn’t the case. Academics only skims the surface of the complex nature of economics. Although countries have a certain selective advantage for certain production outputs, they also have a potential selective advantage for outputs; for which they may be trying to achieve. Therefore classical economics breaks down.

It doesn’t take much research to see that sometimes outsourcing makes both companies amazingly profitable and other times is simply a recipe for disaster. The question now begs, what is right for my organization? The answer depends so much on the culture of your organization. It is YOUR culture that will determine YOUR success in outsourcing. There is no doubt, outsourcing, when properly executed and managed, will reduce costs!

The first step in successful outsourcing is to determine your current cost of managing the proposed process. This requires taking a very objective look at the process and related processes. The second step, which carries much more difficulty, is to find a group that can take on your outsourced work. Sounds easy enough – NOT. This group must not only come in with a lower cost than you currently incur with in your organization. They must provide as good, and I say, better coverage than you are able to provide in-house. If they can, you must ask yourself – how do they do it? That is a valid question, because why aren’t you achieving that level of success, after all you currently control the entire process. Do they achieve better coverage and lower cost by economies of scale or is it simply a shell game? If you have achieved success, in your search, by this stage, then the next step is to put together an agreement that clearly outlines expectations of both sides and penalties for failure. Finally, probably the most important and most difficult – have a feedback mechanism to make sure the outsourced firm is doing what they have contracted to do to the level of quality agreed upon. This must be your own benchmarking tool and not theirs. It is easy for them to stand at the podium and say “we are doing a great job”.

Outsourcing can be a daunting task on many levels. However, for every success story there is a horror story. It is new territory for most organizations and requires a considerable amount of homework and management for it to be successful. However, if it becomes successful, it will be lucrative for both parties. The one thing firms have to keep in the forefront of their minds, the question really isn’t to source or outsource. But rather, how to increase efficiency and effectiveness while reducing costs? With this as the focal point, outsourcing is simply another option, just like changing to more efficient business processes or relocating the support infrastructure to a low cost location.

So don’t lock yourself into the question of source or outsource – set your sights on economy, efficiency and effectiveness and see where the analysis takes you. You may be able to reap a huge benefit, from a minor change in the current process.