Friday, August 24, 2007

‘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.

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