Tuesday, February 19, 2008

Actions, Not Expectations, Determine Results

Whether we choose to believe it or not, everything in this world is driven by cause and effect. The effect is in essence the result of the cause, which in turn drives other causes. We cannot view the effect or the result as the termination of an event or series of events. The result is simply a snapshot in time. As effects lead to causes which precipitate other effects and the continuum continues ad infinitum. The concept of viewing results, as a snapshot in time was first documented by Erwin Schrödinger in 1935. Although Schrödinger’s experiments related to superposition of subatomic particles, his theory on a macro scale basically indicated that causes and effects are synonymous and it is only at the time of observation that we can assign result versus cause.

This cause effect continuum is in every aspect of the world. For the most part, nature has in itself scripted a series of events that culminates in a series of results or effects that in turn lead to new effects. Take for instance precipitation; the occurrence of precipitation is a continuum of precipitation, absorption, percolation, absorption, transpiration, evaporation and precipitation. At any point, a snapshot, the preceding events are termed the causes and the item under investigation is the effect.

Another example that is probably closer to home is the management of receivables. The management of receivables is the ‘result’ of prospecting, undertaking the engagement, billing and waiting. The ‘result’ of managing receivables brings possible outcomes: getting paid or writing off the balance or in the case of professional services, allowing it to steep like tea. The outcome, whatever it may be, is the cause for future events and causes. This continuum of cause and effect has continued and will continue ad infinitum.

The cause effect continuum of the universe, for the most part, cannot be altered. There are certain things for which we can manage toward a given result. We can create arable land through the redirection of rivers. The effect is arable land and the cause is introduction of water. Then the new cause is arable land and the new effect is climatic changes; and a new cycle begins.

This management, or redirection of a continuum, is also attempted in business. In many cases, the ‘result’ isn’t what was expected and therefore another ‘cause’ must be instituted. For one to have a desired ‘effect’ one must institute more than a single stimulus or cause. There must be several changes operating in unison to bring about an irrevocable change. Using our arable land example, one simply cannot remove the trees and hope the river will jump the lower banks. In similar fashion, one simply cannot cut an arm from the existing river that will lead to the land. It is a series of changes that must be made.

Probably one of the best articles I have read on the many changes that must be made as part of better receivables management is by Susan Rausch, Best Practices: Collections, in the January 2008 issue of Business Credit. In last week’s entry, I expounded on the importance of the pre-engagement side of receivables management. This week, we will look at Rausch’s second most important aspect “Training or Re-training Your Customers”.

The concept of training, according to Webster, is to bring about an event or effect through a series of consequences. As we already know, the event or effect is the seed to more consequences that will lead to more events or effects. In Rausch’s address of the training issue, she makes the most powerful statement in a single sentence. “By never calling your customers on a consistent basis we actually train our customer to pay consistently beyond terms”. I believe it goes much further than this in the professional services world. By having an annual collections budget and tying it to partner compensation, we ‘train’ our partners into a lackadaisical mindset about collections throughout the year and to create the year end pandemonium. Rauch goes on to set out how we, as collection professionals, must go about training our new clients and re-training our existing clients. This is a process that has to happen both at the client level and at the partner level, in my opinion For without significant change or retraining, the process is self-perpetuating; as in the year-end ‘push’.

The training and retraining process is to arrive at the desired effect, by altering all the proceeding events. Rausch professes calling customers early and frequent so as to stay on top of receivables. The consequences or causes are being altered to derive the given effect: better receivables management. This is, however, is contrary to what occur in most professional services firms. The event or effect is determined, a certain cash budget, while the causes or consequences leading up to the event don’t change. Without the training, how do firms reach the desired result? They don’t! Firms simply go from year to year expecting a different effect, even though they didn’t make any significant changes to the causes. Swaying away from Webster and drawing on the urban vernacular: Insanity is the result of doing the same thing but expecting different results!

Today’s firm must STOP and recognize that they are part of an economic continuum where every event seeds future events, where every engagement can lead to payment and referrals or to antique accounts receivable. Whatever the outcome, more events are seeded. The process continues to either be a wildly successful cash rich organization or a train wreck. As I see it, firms have really only two choices: alter the cause and effect continuum to a desired outcome through training and retraining the clients, associates and partners or bask in the delusional insanity of greater cash flows while not changing anything. Luckily, the choice is yours!

Sunday, February 10, 2008

All Roads lead to Rome

Success in business can be sifted down to two very simple activities: producing a product or service that makes sense, and selling it for more than it costs to produce. These two very simple activities form the very basis of every wildly successful company. Equally, look at the failure of any organization and it could be attributed to one of these being out of alignment.

I recently returned from Legal Tech New York, an annual technology show focused on the legal industry’s needs. This venue has been running for 27 years and each year it has attracted more and more technology companies that are trying to get a foothold into today’s law firm. Each of these vendors are purporting that their latest high-tech gadget will provide tremendous value to the operation of today’s firm. However, they often fail to demonstrate the business case on how their ‘snake oil’ is better than the competition. Although they fail to recognize it, they are attempting to reduce the costs of the operation of today’s legal practice, thereby making your firm an ongoing viable entity. In speaking with several of these vendors this year and many over the years, their focus is clear: they want the ‘deal’ and are willing to use their canned lines which they hurl at the attendees, in hopes to land them, hook, line and sinker.

With a sea of technology abound and more coming to the market each day, today’s firm must gain a full understanding of their business, where the revenues are being derived and where the costs are being generated. Only then can an astute decision maker objectively look at solutions and make an educated decision as to how to enhance the bottom line while enhancing the quality of service their organization brings to the market.

In all of these relationships, be it from the vendor side or the customer side, we all too often take the big picture for granted. We simply fail to see all the pieces of the puzzle. To the sales person, it is the ‘deal’. To the firm, it is the cost saving of the new widget. The underlying idea we all fail to either realize or simply not consider is that the underlying medium of all of this is cash. Without the ultimate exchange of cash, the entire model breaks down. The once great ‘deal’ is nothing more than a bad debt. The latest new widget, if it doesn’t live up to expectations can at best not have any effect on the firm’s bottom line. At worst, it can enhance the hemorrhage of funds.

The first step in effective cash collections, regardless of the business, is establishing the rules of the business transaction. In the commercial world, the starting point is the credit application and the purchase order. These are informational pieces that later becomes legal documentation following the sale. In the professional services world, it is the engagement letter.

In the January 2008 Business Credit article, Best Practices: Collections, author Susan Raush sets out that the best collections happens long before the account is past due. She stresses it happens at the credit application. This contention is strongly supported by Ed Poll in his book, Collecting Your Fee. I, too, have shared this belief for many years. It amazes me that with all of this knowledge in the market place so many firms have either no engagement letter or an ineffective one.

During my recent travels, I had the opportunity to meet with several large national firms. At some point in our meeting I got the opportunity to review their engagement letters. For the firms who had these documents, and they are few, they were essentially a form letter that every prospective client received. I found it amazing and sometimes humorous that somehow the firm thought that every client was the same and every case was the same. If the firm didn’t believe this, why would they send all of their clients the same engagement letter! My one suggestion on engagement letters is to tailor them to the uniqueness of the engagement and the client. I am not saying that these letters run rampant. What I am saying, is that within the limitations of the firm’s credit and collections policy, the engagement letter should be tailored to the uniqueness of the situation. Here are some ideas that, I hope, will seed some thought in engagement letter evolution:

This engagement falls under “Pro Bono” work as defined by our firm, XYZ LLP. Under such engagements only the legal fees are “Pro Bono”, all costs and disbursements are to be paid within 30 days of receipt of our invoice.

The outcome of this type of engagement cannot be determined with any degree of certainty. It is only by way or a court judgment that the true position of this case is known. Therefore, I, ABC Ltd (client) agree to remit payment for all billings within 30 days of receipt. In addition, should any funds be disbursed into escrow, XYZ LLP retains the right to apply those funds to outstanding billing and remit the remainder to ABC Ltd.

It is important to keep in mind, no matter if we are a vendor, a client or a professional services firm, that our ultimate goal is collecting for services rendered. Steven Covey professes “Begin with the end in mind…” essentially he is saying to recognize that every action and client interaction must bring you closer to – getting paid.

The Romans were masters at never losing sight of what was important. Following all of their battles, the Romans would build elaborate roadways. The roadways, would lead from the town to Rome. Never did they build roadways between adjacent towns. The reason, the towns could rally together and oust the Roman invasion. The key here, focus on the task at hand and bind it! In every engagement, solidify the relationship such that “the road to Rome” is payment for your billing.