Monday, January 28, 2008
The greatest absurdity placed on today’s law firm partners is the expectation that they have skill in all areas of organizational management. Although they may be well versed in reorganizations or stock issuances, they don’t have the unique skill in managing their own partnership. Then because there isn’t a single leader but rather a sea of partners, jugular issues are sacrificed for the sake of status quo. Regardless of the firm, today’s partners must maintain a threshold number of billable hours per year. They must manage billing and collections realization, manage junior professionals, build their client base, bill for services and collect on their billings all within a 168-hour week! Given time for sleep and commuting, all aspects of today’s partners’ time are sliced down to the 1/10th of an hour!
Following a few conversations with three partners of a prominent global firm, I would like to share some of the highlights of our discussions. The conversation on prospecting came about when I made notice of a significant achievement the firm had achieved in a new practice. My colleagues shared with me how difficult it was to get their practice where they needed it to be. They were pressed with the demands of keeping on top of the workload they had and prospecting for new clients. Although well versed in their area of specialty they had difficulty in getting hold of and conquering the prospecting function.
Prospecting is probably the most difficult job in an organization. The position is well suited to a person with a true hunter instinct. This individual must seek out organizations that could use their product or service, find the correct individual, get beyond the gatekeeper and make contact. Once contact is made, a relationship must be initiated, then nurtured either to the point of a sale or a parting of ways.
In the corporate world, businesses have specific people whose entire role is to be the hunter, to find the prospect and open the dialogue. Once the dialogue is opened then a product/service specialist is introduced. The specialist, through fact-finding, attempts to close the gap between the prospects needs and the firm’s offering. In a highly sophisticated organization, a closer is brought to move the process to the ultimate sale. However, in the professional services world, this entire process rests on the partner’s shoulders.
Sadly enough today’s partners don’t realize that prospecting is already at their doorstep. Some of the best prospecting leads are on the pages of their receivables listing! The beautiful thing about prospecting within the receivables listing is you already know the clients’ business, if they are good payers, and you already have a relationship. There are essentially two types of prospecting which can be done from a receivables listing, service expansion, and service extension.
Service expansion is a process of providing different services to the same client. By way of an example, suppose the firm has a client, a company in the business of automotive parts manufacturing. That client would definitely have a need for patents and trademark work because of their R&D technology. They may also require advise in employment law, possibly litigation, immigration and maybe estate planning for the principals. Today’s firms have to realize that their receivables listing is an untapped goldmine of new work just waiting to be mined! The first step in tapping this valuable resource is communication. It is the partner’s responsibility to maintain regular communication with his or her client and to find out their needs to see how the firm may be able to be of assistance. In addition, the partner should keep other departments and practice groups informed as to the type of client for whom they have just completed work. Essentially the firm must ensure that each client is aware of all of the services the firm offers. This type of behavior is slowly being realized when firms offer lunch-and-learn sessions on current topics. However, this “shotgun approach is better than nothing. Truly, what is needed is a highly refined strategic approach, such as a personal call to the client with information of a new law that could impact their business!
Service extension is much more involved and requires the partner to be more in tune with the client and what is going on within their organization. A good example of this was provided to me by a Director of Administration of a national firm. During our conversation on the topic of delinquent receivables, he brought up that one of the firm’s large national clients had requested better payment terms. When faced with this type of question, the firm must have a plan on how to react. Although my colleague’s firm did issue the extended terms, they got nothing in return when they should have!
In the December 2007 issue of Credit Today an article entitled: When Your Customer Asks for Extended Credit Terms, by Doris Solis, explains how this question opens the door to a myriad of opportunities for both the client and the organization. Solis expounded on the many reasons why clients seek extended payment terms and how a true credit professional must research the company before making a decision. This is a critical juncture in the relationship. The client wants something, extended terms and the firm wants something, payment of receivables. The key area of research for the credit professional is in the basis for the extended terms and the client’s ability to pay essentially the client’s credit score and their circumstances.
I shared the article with my colleague and explained how the firm took the wrong approach with the client. When faced with the question of extended credit terms, they should have undertaken a thorough analysis of the client and their ability to pay. What they would have found was that the client was a good credit risk and wanted better terms because they were undercapitalized while they were in a strong growth phase. Where the firm made their mistake was in not seeking something in return for the better credit terms! As it turned out, the client had legal work placed in nine other law firms. The firm should have opened a dialogue with: “we recognize that you are using ten firms to fulfill your legal needs. We could offer you extended payment terms and possibly better hourly rates if you agree to move, where possible, 50% of the work you place with other firms to our firm.” The end result, if taken, the firm would have new business from a good client without the hassles of prospecting for new clients!
Today’s firms have so much technology, that they simply fail to see the opportunities right before their eyes. The receivables’ listing clearly outlines the good, the bad, and the ugly clients. From there, firms could easily take the next step in expanding their business – learn more about the clients and communicate with them. Having a receivables listing in hand and knowledge of the client’s business, most of the prospecting hard work is done! Start using that collections intelligence wisely – prospect from your receivables!
Saturday, January 12, 2008
Now that the dust has settled or at least started to, I want to kick the year off with some reality. My last entry returned a flurry of responses, the nicest of which were, the modern day, “raspberries”. Some of the others made suggestions as to where I should dislodge my head from. Wherever the readers are in the spectrum of responses, one response prompted today’s entry. The note basically made it clear that I had no idea what was happening in their environment and that all I do is hurl inflamed statements regarding business management and don’t provide any direction for a resolution. Freedom of speech is a wonderful gift!
Dear writer, I do know what the professional services world is like. I have been here for almost two decades both on the front lines and working with clients. As an outsider, I see the reality of all of the firm’s actions without the emotional connection. The problem with today’s professional services organizations rests with those on the ground in the finance team. They are so disoriented and therefore cannot see the way out of the forest! They have fallen victim to ‘status quo’. They have decided that their fat paychecks carry more weight than making a change. They don’t want to go beyond doing what they should be doing which is to begin increasing the financial health of their employer. On a like for like comparison, people in the finance departments of law firms make more money than their corporate counterparts and do less work; less meaningful work! They are paid for complacency; a sort of ‘hush’ money.
Following my last entry, one of my colleagues, Charlotte, from corporate America, stepped forward with some suggestions on how to get legal collections into the 20th century. Once firms see the return on investment of modern day business management, then a movement into the 21st century is possible.
I met Charlotte at the 2007 National Association of Credit Managers (NACM) conference in Las Vegas, NV. The NACM is an organization of credit professionals from all industries who emphasize a better management of credit decisions through education and knowledge exchange. Over the past few months Charlotte and I have spoken to great lengths on credit laws and practices in today’s industry. Charlotte heads up credit and collections for a multi-billion dollar organization that has 40 plus offices in the United States. Her organization is currently in the acquisition mode and has assimilated several smaller entities in the last few months. Working with her staff of two, Charlotte has consistently over the past 10 years received accolades from executive management as her team has kept their DSO hovering around 37 days for net 30 credit terms. In listening to some of the trials of this large organization, I can appreciate that managing a multi-billion dollar AR portfolio requires strategy and skill and not MBC (management by crisis); more brains than brawn! Even through the several acquisitions, Charlotte’s team have managed to take torn and tattered AR portfolios and turned them into stunning gems.
Here is Charlotte’s roadmap for today’s legal firm.
1. I would recommend starting a process for new clients in 2008…it would be a bit overwhelming to get this going for all clients right off the bat. Established clients will not be receptive to the process of providing credit information; however, they should not be excluded from the collection process. Perhaps a modified collection process would be more in order for these accounts.
2. Start simple with credit policy (standard practice)…more can be added once the basic info is established. Application should include full legal name of client, address, contact info, credit references and contact person for payment. It should include the terms of payment & consequences of non-payment; spelled out terms in layman's language. (Do attorneys have an internal network to see if their clients are spreading out work? If so, you may want to consider sharing credit info with those attorneys as well to learn if they are getting paid).
3. Qualify the client and their ability to pay. Options to qualify--credit reports, personal guaranty, bank LOC, retainers, etc. Establish a credit line based on credit info record. If charges are near or exceed the credit line and the account is past due, a collection call should be initiated. Charges for new work should be reviewed and approved before additional work accepted. Total credit exposures include the WIP & AR and calculate accordingly to know total risk.
4. Explain the client collection policy and keep it simple. Would not recommend late fees or finance charges starting off but may want to consider it as an option if account goes beyond a certain predetermined time.
5. Be sure the client understands the billing; invoice regularly and in this environment may want to provide some way client knows about WIP. Also be sure client knows who he or she may contact within the firm to discuss invoices & charges. This person must be qualified to explain charges so the call does not escalate to the attorney.
6. Hire a customer friendly, credit professional to manage all aspects of the above while keeping attorneys out of the picture. (Not sure how to say it best for this environment, but in my world…the sales rep is the good guy and I am the bad guy…it works well in my world). My favorite adage is: "You can attract more bears with honey than vinegar any day of the week". Never back the customer/client into the corner but always give respect and offer options for a win-win solution. Finally, smile as it comes across in the communication.
There you have it, the first step to getting off the mark. All I can say is…start now, as October 1, 2008 will be too late to avoid the usual year-end train wreck!
Wednesday, January 02, 2008
For those firms with a December 31st year-end, the stress and anxiety of the final day in 2007 is now history. For accrual-based firms, the mad dash was to get the work in progress converted to accounts receivable. While for cash-based firms, the goal was to get as much accounts receivable converted to cash as the budget dictated. Regardless of the type of goal, the deadline has past! At this point, there is nothing you can do to alter 2007. Now, depending on your organization, you will be faced with the year-end audit; the numbers are what they are!
A faint memory of my days in public accounting, I recall that auditors were those who came in after the war was lost and bayonet the wounded. For many, the war was considered lost when the actual outcome was significantly different from the budget. I would guess that today, many finance people are reflecting on their firm’s 2007 goals, their degree of success, while many are feeling quite wounded. Regardless of when you return to the office, the remnants of 2007 will be everywhere and the task of clean up and starting a new year will begin. I am reminded of those feelings; post the April tax deadline when in public accounting and post December 31 when I was at a law firm. The medical world had identified those feelings and labeled it as postpartum depression. Although medically it relates to something significantly different, I can identify with the symptoms. It is the day after the war, the point when all stress and anxiety has diminished and only a sense of emptiness remains.
Over the coming weeks those feelings of emptiness will wane and will eventually be replaced by the day to day excitement of the New Year. We will settle in on becoming aligned with our new budgets and our new goals for 2008. By mid-February we will vaguely remember the long hours, the stress and the adrenaline rush of the last 90 days of 2007. The most important thing we will bring forward from 2007 will be our old habits and 2008 will unfold as 2007 had. It is important to realize that there are many roads to success in order to meet expectations. However the path chosen is what's very important. In achieving the goal of a certain profit figure, one could increase the revenues, decrease the expenses or affect both the revenue and expenses at the same time. Regardless of how you get to the goal, some roads to success are less burdensome. Maybe 2008 is the year to try a new path.
Over the years, I have written a lot about the year-end crunch and how it is the time bomb of insanity. On those occasions I brushed on doing things new and in different ways. I would encourage you to kick 2008 off with a paradigm shift; a radical new way to look at your business and the management of inventory and cash. Isn’t now the perfect time, as we are forming the foundation to December 31, 2008? In my earlier writings I basically outlined that there are only 3 reasons why clients don’t pay bills: relationship, billing and economic. I have also professed that not all clients are the same, therefore a one size fits all credit and collections policy simply doesn’t work! Therefore to make a radical impact on cash receipts, firms should look at their policies and practices as they impact the key reasons why clients don’t pay.
The first step down this paradigm shifting experience; recognize that all clients are not the same! Recognize that the world is constantly changing. Your cash flow is directly related to the economics of where you operate, the clients and how the economy affects them. The foundation must begin with a credit policy, a policy that recognizes a dynamic economy affecting your firm and your client’s operation. Now is the time to set a credit policy, not a policy where any client can be extended any amount of work. But a policy that looks at how much risk, in each client, the firm is willing to absorb. The credit policy will form the basis of the collections policy, which will determine how the process goes from billing to ultimate cash receipts. From here, firms must establish benchmarks and milestones throughout the year to ensure they are on target.
According to Dr. Charles Gahala, CCE, Professor of Finance at Benedictine University, setting milestones and benchmarking performance are some of the best tools available to identify focal points for improving credit deparment operation. Dr. Gahala goes on to state, in his article Practical “Best Practices” to Integrate Benchmarking into the Credit Department, that the setting of milestones and firm management through benchmarking requires the buy-in of top management. Basically, the entire partnership must be in full agreement that the new process of establishing a reasonable credit and collections policy and its monitoring, is what is needed to achieve the desired results, without the anxieties of the past.
Terry Callahan, CCE in his article Benchmarking to Measure your Performance, makes a very strong statement in “Tell me how I am rewarded, and I will tell you what my focus is”. The partnership must recognize that the better way is at their disposal. However, it takes a leap of honesty to conclude the current methods are not working and a change is needed. With a solid credit policy and a process for collections, today’s firms can reap huge financial benefits without the stress and anxiety of the year-end push. Today’s law firm doesn’t have a problem in communicating, with the voluminous reports that are created each month. The problem with today’s firm is that no single leader exists that is willing to admit that the current methods are simply not working as they have. The old adage hold, if it isn’t broke, don’t fix it. While many brilliant minds of today say, if it isn’t broke, ‘break it” and rebuild it better.
To break away from the insanity of the past, the firm must establish realistic goals and also realize that as the economy changes the means for achieving the goals must change. In 2007, the US economy suffered a series of financial blows in the sub-prime mortgage sector. The economy changed, but many firms didn’t! Today, those firms are now sitting with millions of dollars invested in those sub-prime lenders with really no way to collect. Moreover, those same firms are now overstaffed in corporate groups with associates having no work. I have read about on east coast firm that bantered with the idea of downsizing their corporate group. But there had never been lay-offs in the associate ranks in the history of the firm. Obviously no one recognized the economy changing or they were too afraid to make a change. Too bad!
It is high time that the professional services world looks at the corporate world for direction on how to truly run a business, that is, if the firm wants to run like a business. If you have been a regular follower of my commentary you will recall my reference to Slater & Gordon, the world’s first publicly traded law firm. They took the quantum leap in May 2007 and today they continue to tout their unprecedented growth in profits and increasing market share. Success in today’s firms must now be marked with the words: credit policy, collections policy, profits, milestones and benchmarking. To get the ball rolling, here are some facts from corporate America that set out the road ahead.
1. The median cost of performing the credit function is 0.028% of billing.
2. The average corporate firm will experience AR turnover of 8.88 times per year. That is average days to pay, based on net 30 terms, is 41 days!
3. Most credit professionals manage a portfolio of 700 customers.
4. In corporate America, 52% of companies use an auto-cash application system that automatically applies payment to over 80% of the bills.
5. 52% of all companies assign a risk code to their clients.
Here we are at the fork in the road, we can make 2008 a mirror of 2007 or we can do something different, something better. Now is the time to act, as December will be too late!
“Two roads diverged in a wood, and I -- I took the one less traveled by, and that has made all the difference" - Robert Frost