Tuesday, May 06, 2008

Gauging our Relationship

For the past week I have been stuck on the topic of this week’s contribution, as I felt there was more to say. For this week, my first thought was to explore credit report analysis, which is a growing activity in commercial entities. However, the need to put closure to last week’s contribution on efficiency had been overwhelming. Over the past week I thought the analysis on collections efficiency was fair, but what about billing efficiency and how the two should relate to one another.

As a starting point, the article of last week Law Firm Business Model-Realization, defined billing realization as the ratio of time and cost recorded versus time and cost billed. The author defined this as ‘efficiency’ in billing; the realization. In legal practices today we can see this figure assume a value of less than 1 to greater than 1, depending on how the billing partner identified the value of the work undertaken.

Taking a step back and recognizing that the transaction to billing and ultimately to collections are not sterile, like the purchase of a gasoline or even a meal. These transactions are rooted in a ‘relationship’; the attorney client relationship. If you care to, go back and read some of my writings in 2007 about the nature of these relationships. Relationships are a very complex phenomenon, in that both parties must contribute something to the entity in order to both derive benefit. With that said, Ed Poll in his book, Collecting Your Fee, addresses a means by which the attorney can gauge the relationship. Ed’s statement is “…the client who genuinely respects you and the work you do will pay your bill in a timely manner”.

Poll’s point is synchronous with the cash collection realization concepts developed last week. In that the client who has a respect for the relationship will pay in a timely manner, the timely manner being the time sensitive cash realization. The question remains, how do we assess the attorney side of the relationship? Once we are able to quantify the attorney contribution to the relationship, we then have a yardstick by which to assess the relationship.

According to Poll, the attorney’s contribution to the relationship is based on quality work, in a reasonable time, and which meets the terms of the engagement letter. Conceptually, if the work produced is in alignment with the expectations embodied in the engagement letter, one could reasonably assume that the quality of work is ‘reasonable’. However, price reasonableness, although tied to the engagement letter, is the result of basic economics; supply and demand. Pulling these concepts together, the amount billed to the client should be a ‘reasonable’ reflection of the, engagement letter dictated, quality of work done. Therefore, during the billing process, if the attorney believes that the amount of WIP is a fair and reasonable assessment of the quality of work done, then she should bill it at 100%, if not it is either discounted or set to a premium. The concept of premium billing, to me, seems a bit odd. Basically the statement being made is “… the quality of work that I have done exceeds the value I have placed in WIP.” As this concept, I feel, is rooted more in psychology than economics, I will shelf I for the time being.

With that said, billing realization is a reflection of the attorney’s contribution to the relationship and cash collection realization is an indication of the client’s contribution to the relationship. Therefore the product of the billing realization and the cash collection realization should be a bell-weather to the attorney client relationship. By way of an example, let’s take a look at this.

Paul Partner accepts a case which is consultative in nature. During the course of the month he and his colleagues record $1,000 in fees and $525 in costs. In believing there was some redundant work, Paul produces a bill for $1,400 and sends it to the client. After 45 days the client is contacted and is disputing a charge on the bill, a courier charge of $30. Paul agrees to write the amount off and within 15 days the firm receives payment of $1,370. Ignoring the concept of timing, the relationship gauge becomes:

Billing Realization X Cash Collections Realization

1,400 ....X.... 1,370 = 89.84%
1,525 ............1,400
(note, periods are added to the formulae to maintain correct spacing in html)

Therefore the attorney client relationship, as a whole, is probably running at about 89% efficiency. You should be asking, why the calculation is based on a product and not the average of the two realizations. As this is all theoretical in nature, I feel that an average raises one party’s value while lowering that of the other party. However, in real life that isn’t the case. When two people are disenchanted with one another, at a distance they are fine they have their respective degrees of disenchantment, however when they are together the tension increases, as each acts against the other and there is a combined effect.

Now taking it a step further and realize that this entire scenario is not operating in a timeless vacuum, we need to add some reality to the calculation; the concept of time! In Paul’s firm the rule to billing is that 80% of all WIP must be billed within the first five days of the new month; following the month worked. We must assume, to keep the calculation controllable, that 80% does not entail any division of a particular file, but rather 80% of Paul’s entire portfolio on a per file basis. Let’s say that Paul produces the bill on the 45th day; 10 days after the billing cut-off. In addition, the firm’s policy is payment is due 30 days from date of invoice, if we add 5 days for processing, the firm should expect payment on or about the 35th day. However, payment came in on the 60th day.

Using the same logic, as last week’s contribution, on looking at the impact of time on efficiency, the calculation now becomes:

1,400 X [1/(45/35)] X 1,370 X [1/(60/35) = 45.37%
1,525 ..............................1,400

With the inclusion of time, the relationship gauge is almost half of it was without time. Is this realistic, of course! The reason is both sides in the relationship are governed by time to meet their respective obligation, and they both failed! The attorney failed by ensuring timeliness and correctness in the billing. The client responded by not paying the bill in a timely manner, thus the compounding effect of the relationship degradation.

In closing, attorneys and clients are in a relationship, by virtue of the engagement letter, each must fulfill certain obligations. When either side fails, the probability of non-payment of the bill increases; dramatically! Maybe now is the time to check the vitals in your relationship.

No comments: