My Reality vs. Your Reality

Each week, I write my entry based on conversations I had during the week with colleagues. I am always amazed how some entries create a flurry of responses and others go completely unnoticed. Last week’s entry created a wealth of feedback. I received everything from; “You don’t know the reality of the situation.” to “You hit it right on the money.” It was for this reason I wasn’t too hasty in adding another entry; I was hoping to purge the remaining thoughts from those who had something to say.

I am really pleased there are people in cyberspace who take the time to read my entries and more so to comment. Although they don’t comment in the public forum, which could trigger a debate, they do comment. This week I thought I would explore the feedback from those who took the position that, “I don’t understand the reality of the situation.”

Reality is one of those words with a very illusive meaning. Webster, in trying to give us meanings for words, tends to become largely circular with the word reality. The first step in the definition takes us to the word real. From there, real is something pertaining to fact and fact is ostensibly apparent. Reality, for me, also has a definition that my colleagues forced out of me when I was working in public accounting. Which somewhat parallels that of Descartes. However, with all of that said; reality is what is apparent. Taking this back to our situation of those receivables that have gained antique status; the reality is: some receivables do. That is it!

However, that can’t be it! That must not be it! That shouldn’t be it! If you take that position, then you have hit the road of complacency. If that is the moniker you wish to attach to yourself. So be it! However, those who were willing to push the card just a bit further, to ask the question … why? And then, why not? Those are the people able to create a new reality! However for many of us, we continue to perpetuate our existing reality. I don’t believe this perpetuation of bad habits is a result of laziness; it is simply the act of not ‘pushing the card’ enough or not knowing the direction in which to push.

Today’s professional services practices manage accounts receivable the way they have always managed accounts receivable. I believe it stems from an early time where professional services were a noble profession and asking for money was considered to be taboo. As sole proprietors banded together to form partnerships the philosophy stayed. I have spoken with many professional service firms that still believe that the ‘client’s will pay’, and that asking for payment was taboo. I recall a partner from a CPA firm in New York, who said, delinquent receivables is fine. The client will need audit and tax work soon enough, and then they will pay the outstanding bill. To that I responded, what happens if they simply change firms, then what? The look on the man’s face was definitely something to be captured. The firm worked on the premise the client will come back, so there really isn’t a problem. Law firms are no different. They ‘push’ and then they become complacent, someone assuming the belief that if the client has some ‘space’ they will have some divine revelation and then pay.

The problem with today’s firm is they are suffering with internal turmoil; they want to change but they want to maintain the status quo. More often than not, status quo – wins! Allow me to share a story, which screams how status quo wins. One of my favorite firms, a national firm, grew fairly large through acquisition. What they are left with is many cultures loosely attached to the main office. The firm has a central collections group that handles about 50% of the receivables. The firm has a national managing partner and each office has a managing partner. The collections group, as best as I can see, runs hundreds of reports each month. However, to demonstrate the perpetuation of status quo, in 2007 the firm set high expectations for cash receipts and has fallen short each month for one reason or another. Now they are into their year-end push. Oh this time, the collections manager is going into retirement. Without a specific retirement day set, the firm began recruiting. After several months, they settled in on a candidate. A top collections candidate! This person brought 25+ years experience in areas of risk management and collections, a true professional. With the new candidate set to start September 17^th, the firm decided that the retiring collections manager should stay on until December 31^st, to help transition the person in. The reason, although the new manager is a top grade professional, “he doesn’t know how to deal with attorneys and legal collections”. Therein is the first step down the status quo road. As I see it, the new candidate would bring in a new perspective. However, the transition stage will indoctrinate them into ‘status quo’.

I recall a similar situation from the late 1990’s, where one such professional collector started in a Texas based law firm. She was ready to take on the world; she knew credit and collections and was ready to make a change! A few months after our meeting, we were talking and she shared that the firm wanted her to be more of a reporting machine than a collector. I told her that she had difficult choices to make, starting with where her career was going to go. Needless to say, passion shone through and she left the firm! In both of these situations, and I have many more examples, firms have the opportunity to redefine receivables management in the legal sphere. Instead, they choose –status quo.

It is time that firms really look to change, if they want it. Now that billing rates have hit $1,000 per hour, one must question why. Is it because the value of the service that has driven the rate, Keynesian economics? Or, is it simply the dilution of collections realization that has taken its toll? I would like to close with an excerpt of an email I received from a friend who is a true professional collector. We have since spoken about my blog and she has agreed to an interview. Hopefully her perspective will reshape professional service reality, if not seed thoughts of a new reality.

“Someday, I want to hear about the legal side of collections…from what I’m getting…it doesn’t sound like there is a SOP in place…just collection efforts… willy nilly. Am I understanding this correctly? In a manufacturing environment there are procedures…material ships/services rendered, invoice generates with payment terms noted, collection calls begin 10 days after due date (or as close to that time as possible). If our efforts do not result in success, we will hold future orders or do no further work until an agreement has been made for settlement. If this doesn’t work…personal visit …could be by sales rep and/or me. Still not working, demand letter detailing our legal intentions if payment is not received within a 10 day time period. This usually works…less than 1% (sales) written off to bad debt…legal environment does not seem to be as simple…but why couldn’t it be? Certain protocols & ethics in volved? Just curious…we could have this conversation later …just puzzles me”…

Enough Already!

It’s here! Those nine months of waiting for the year-end push has finally arrived. For those US based firms with a December 31 year-end, now is the time. Now is the time to pull out all the stops, revive all the connections to getting those accounts paid. Throughout this flurry of activity there are those accounts that don’t get touched, not even the slightest glance. You know them, those seriously delinquent ones, those bankruptcy ones, the ones where the clients can no longer be found.

Lately the idea of enough has plagued me, the idea of when is enough… really enough. For anyone who has studied marketing, buyer’s behavior is very complex. In regards to research, compiling information, making the purchase and ultimately faced with either more fact-finding or buyer’s remorse. However, on the collections side I have yet to see an article that deals with the psychology of collections. I can only surmise that there are complex emotional states of those associated with the process of AR collections.

In the perfect world, counsel would have undertaken due diligence in securing the client. In so much as documenting expectations of both the client and how the firm expects to get compensated. From there, work would be performed and ultimately the time billed. To this point, the foundations of collections have been established. The moment the bill goes out the door, the nature of the foundation is put to the test. If the foundation of the attorney-client relationship is solid, the firm will be paid in a timely manner. If not, the collections artillery is brought into action.

Through the passage of time, the collections team undertakes increasingly more effort in the collections rendering, to get the account paid. However the point ultimately arrives, when a tremendous amount of cost has been expended on the account only to find the client isn’t budging. The client is not paying! This is the point in the relationship that fascinates me the most…the “now what” moment.

It seems that when the “now what” moment hits, firms have no idea what to do. I believe that this moment is filled with emotion and making a decision solidifies reality. What are the firm’s choices? There are a couple of key options. If the firm feels completely justified that they have done their due diligence at the onset and throughout the relationship, then they should litigate and collect what is rightfully theirs. Alternatively, the other option is simply write off the account and move on.

Interestingly enough, when faced with the reality of the seriously delinquent account, firms don’t act in a reasonable sense. They neither litigate nor write off the account. I believe their reason for which is deeply rooted in the psychology of the attorney-client relationship. To litigate would be to stand strong in the belief that the firm did everything right and is rightly due payment. However as we all know, that isn’t always the case. Doing things right is more the exception than the rule. Another reason for not litigating is the probability of a malpractice countersuit and the stigma of being the firm in the community that becomes known as the “litigious thugs”. So firms are very apprehensive to litigate.

The only other option is to concede that there was a failure in the relationship and the account should be written off. However, the simple act of writing the account off moves the emotions from an ‘unrealized’ failure state to a ‘realized’ failure state. It is much easier to live in hope that one day, one miraculous day, the client will have an epiphany and pay. What makes this all the more entertaining is that often these accounts are delinquent by years. Sometimes far exceeding the statute of limitations!

The failure to realize failure is simply poor business sense. It is in the recognition of failure that learning takes place. Admitting that one’s actions were the probable cause of a relationship going sour is an important learning exercise. The timeliness with which the situation is internalized and the course of action is taken, hastens the learning and ultimately mitigates the probability that similar mistakes aren’t made in the future.

A colleague of mine, a finance director for an oil exploration company, explained the degree of analysis with which their organization examines differing business opportunities. Using statistical analysis, ventures are examined on their ROI to the 1/1000^th of a penny. When the market price of petroleum shifts, even by as much as a penny that could be immediate motivation to simply cap an oil well.

I think it is high time that law firms, who truly want to be profit driven, cast off the shackles of the victim mentality. Stand tall in the belief that your client will tell you, by way of their check book, what they feel about you and the work you have done! Attorneys and the firm’s support infrastructure have to do the job right the first time, believe they have done the job right and be willing to stand by it. Then if things go wrong on the payment side, be strong enough to cast off the emotion and take action. Realize that the relationship has ended, maintain integrity and take action to protect your bottom line!

Hey…. Let’s get together sometime soon….

No matter whom you are or acting on behalf of, that phrase brings on some type of relationship. It is the basic human need to fill a void that drives people into a relationship; we are simply not whole on our own. Relationships are multi-faceted beyond the human mind’s comprehension. Relationships can be as simple as helping the neighbor move furniture or as deep as it brings about another life. Relationships also have their place in the business world. Depending on your location, they can be the life blood of who you are, as is the case of the Japanese Keiretsu, while some corporate relationships are simply meant to achieve a small task.

In today’s legal market place we are seeing a remake of the late 1980’s where firms are in ‘merger’ talks. Hardly a day goes by that I don’t read about firms are in ‘talks’. I often wonder if the mergers of today results in the boutiques we saw form and flourish of the 1990’s. The corporate world as flourished on M&A activity. I recall some of my readings a decade ago about the rampant failures associated with M&A activities. As it turns out, what seems great on paper fails because cultures simply cannot meld together.

In the last year the M&A activity with law firms has really picked up momentum. As the talks continue, some groups disband while some actually gel into a new practice. With all of this activity in the marketplace I don’t feel that the basis for these talks is reasonable. I believe that often these firms who are talking M&A are really setting themselves up for failure. The best situation is where each side recognizes they need the other to become better. However, from I have been made privy to, this often isn’t the case. My favorite basis for a merger came out when two firms were in ‘talk’ the basis for the merger, one firm’s profit per partner was $10,000 higher than the other firm. It was felt that together, they could have a larger market presence and thereby get their profit per partner up for the ailing firm.

Anyone sporting an MBA shingle will immediately attest to that fact that M&As have a very high probability of failure. Some immediate ones that come to mind, which were all over the news: Daimler Benz and BMW. In 1994, BMW bought the Rover Group on the basis of entering the SUV and off-road vehicle market. Then after 6 years and millions of dollars, MG Rover was spun off. BMW made the public state “we’re going it alone”. Then in 1998, Daimler Benz got the idea to enter the low end market through their purchase of Chrysler. Now less than 10 years later, Chrysler becomes the Benz Frisbee – spun off to a venture capital firm. I could spend a huge amount of time looking at all of these deals that become curve balls into space. But the result is clear, the basis for M&As often don’t take into account the most critical factor – the human element. Oh it is easy to merge any company, move some PCs, get a few new servers, hook up a new network and done. Profits should flow! However, what companies don’t realize, is that it isn’t the hardware that makes a company, it is the culture. It is the attempt to meld cultures that end with internal tensions and a disbanding of the venture.

I feel that today’s firm should take a serious look at themselves and determine how best to grow their practice. For the most part, M&As is not the route to go. I sometimes wonder why firms don’t opt for organic growth. Could it be that they simply don’t have the culture that lends itself to organic growth or there isn’t a zealot who can envision what ‘what ifs’? If we can’t grow organically, what is the next step…..M& A.? In last week’s edition of Legal Week, Helen Mooney discussed how US firms are ‘merger-minded’ with Western European firms. Sadly, some of these firms are bullish in that regard. Sad in the sense that they have not looked at the human side of mergers.

In my career, I have seen M&As come and go. Mergers are severe cultural shocks even when it happens with an organization in the same geographical region; it is millions of times worst when it happens over time zones and oceans. I have seen these firms form and suffer tremendous internal turmoil, so much so that the sum of the firms is less than they were separately. Then there are those occasions where, partner groups spin off into boutique practices or the firm becomes a train wreck.

Well given the fact that M&As have a high probability of failure and most firms hit the glass ceiling on attempting organic growth. What’s left? The thing that is left is a new mind set, an external motivation. The corporate world knows this all to well. The growth by way of capital markets; selling stock in your legal practice! The concept of legal practices going public has been bantered around internationally for as long as I can remember. This approach, I feel, has the greatest probability for success in a growth oriented law firm. However, to achieve this, the firm must undertake a radical shift in how they operate. Law firms need to begin to run like a real business!

In addition to running like a real business on the financial management side, firms would need to have a vision of what they are trying to achieve and where they want to go. That means that all partners must see the vision and their role in achieving the vision. Often in a legal practice there aren’t any visionaries, as partners we are in it for ourselves. Sadly enough so many firms are run like a collection of small firms (partners) each running in their own direction; somewhat like herding cats. It completely baffles me how these organizations continue, when they could achieve so much more. Without the foundation of vision, these firms will be in their current holding pattern forever.

For firms who can articulate their vision and are willing to relinquish their ego driven control, the capital markets hold tremendous potential. With the capital injection, the firm vision can come to its fruition, without the disruption of cultures and the like. Hard to believe? No! Chris Mondics of Philly News wrote Buy Stock in a law Firm? As it turns out, the Australian firm of Slater & Gordon decided that going public was the only way it could grow with its vision while keeping its culture in tact. The firm went public in April 2007 and the stock is currently trading at 70% above its initial offering price! Here is a firm that had a vision, and recognized the pitfalls in different methods of its achievement.

History is filled with the spin-offs of M&A failures, why become a statistic. If it is your vision to grow, you cannot annihilate the people who grew the practice. There are more than one way to achieve your goals, but first you must have a vision, then an evangelist to emblazon the vision in the minds of everyone. After that, all that is needed is capital… and that is easy to find. Your firm’s destiny is only a vision away. Are you working towards it, or simply herding cats?

Work Less, Make More

What an amazing philosophy to adopt! Basically I will put in less effort and make more of what I want. I will bet to this point you thought more represented more money. Well it could it could also mean more free time. However you choose to fill in the blank it is up to you. At the end of the day, you can make more by working less. The secret is in how you choose to work. Anyone who works with me learns the secret very quickly. Throughout my dealings with my colleagues I may ask ‘working hard?’ They realize very quickly that the correct answer is not ‘yes’ the correct answer is ‘no’. With today’s level of technology, people should not work hard, people should work smart. We should learn to leverage the resources we have available to us to work less and make more.

The need to ‘make more’ has driven the corporations of the Western World to new heights in financial achievements. In these pursuits, many people have benefited, not only financially but also with new technologies that make life a bit easier. Making more is a good thing, as human kind directly or indirectly derives the benefit. It is when the ‘make more’ mantra becomes the all encompassing end. Following the Enron meltdown, it seemed everyone with a keyboard and internet access had something to say as to the reason why Enron failed. It was one author that I thought took a very fresh perspective; he said “Enron’s failure was the direct result of shareholders wanting too much”. In his well thought out argument, he made it clear that the shareholders pushed management into their wrongdoings.

Today’s legal practice is no different than any other business. There is a need to make more, whether it is for growth, expansion, modernization, or simply bonuses. The motivator to make more is there. Unlike commercial entities that are driven by profits and ROI, professional services establish their own yardstick of success and are probably the reason that they aren’t as profitable as they could be. (Law firm profitability and destiny is a topic I will address in the coming weeks) I believe that today’s professional service firm has so much pent up value that it is scary. These organizations need only change one thing and they will unlock hidden profits!

In an earlier writing I addressed the potential profitability hidden in outsourcing some functions. I know several firms who have exploited regional price differences to generate cost savings. I believe that each firm is currently sitting on at least 100 processes that, if examined and refined, will add value straight to the bottom line. One such cost saving caught my attention as I was reading the October 2007 issue of Litigation Support Today. The article in question was: The Off shoring of Litigation Support Functions.

Litigation support is a time consuming, labor intensive process which requires the greatest adherence to detail. Some of the processes include bibliographic coding, e-discovery, and document review. When these activities are undertaken in today’s firm, it requires people; probably the highest cost of any firm. However, what has become increasingly more popular – outsourcing the function. Not to a firm down the road, but to countries like India, and China where just the exchange rates brings the costs down to 1/30 of what it takes to do in North America.

The process of Litigation Process Outsourcing (LPO) isn’t new. It was actually pioneered by a Dallas firm in 1995. William Brewer III of Brickel & Brewer founded I&A International, a foreign company that undertook litigation support for US based firms. Today, there are close to 500 foreign litigation support service providers, all concentrated on the Asian continent. E-discovery alone is slated to become a 4.8 Billion dollar per year business by 2011 all of which will hit foreign markets! The author of the article, Sally Kane Esq., contends that firms could save between 30-90% by tapping into the vast, inexpensive and extremely experienced foreign markets. Recently I read an article where a firm, faced with a $450,000 estimated litigation support price tag, outsourced the process to India and added $410,000 to their bottom line.

Please keep in mind; I am not professing outsourcing as a solution to every firm. I think that each firm has to look at their multitudinous processes and recognize that there are hidden profits just waiting to be freed, with only a small change to current practices.

AR Management in a Small World

Even after a decade it still amazes me how the world of professional services still manage receivables in isolation; isolation from the world around them. In today’s professional service practice we see the invoice as the means to an end, and that is as far as we see. We never see the world from our client’s perspective. It is in this failure to see beyond the client that impedes our true potential in making a major impact in the collections of outstanding receivables.

In today’s professional services world we are far too introspective, as we only look at what happens within our firm and to our firm. We fail to see that our firm is part of a network, a local, regional, national and even global network. We don’t see or don’t appreciate that it is stimuli that happens in all of these networks that have varying degrees of impact on our firm. These stimuli affect our staffing, billing, taxation and most importantly our ability to collect our outstanding receivables.

Unless you have spent the last 8 weeks on some intergalactic space adventure you would have heard about, if not been directly affected, by the financial meltdown in the US economy resulting from sub-prime lending. The effects of this economic jolt, isolated in the US, affected tens if not hundreds of thousands of people; here and all around the world. This economic stimulus is not unlike the Asian Financial Crisis of a few years ago or the Russian Petroleum Crisis. The one thing that all of these events share, they originated in a single sector or a country or region, and their impact is felt around the globe.

There is a tremendous amount of research available that directly addresses the interconnectedness of peoples and economies around the world. But somehow we aren’t sensitized enough to bring it into our collections efforts. Today’s Current Asset Managers, those managing WIP and AR, must get out the dark ages and use all of the tools available to understand the economy and how it affects their clients. It is only through this understanding can they make educated strategic decisions on the collections of outstanding receivables.

Today’s Current Asset Managers should understand the impact the sub-prime crisis will have on their firm. Just in the last 4 weeks, several sub-prime lenders declared bankruptcy, and the remainder of which undertook mass layoffs. Simply looking at the most prominent, Countrywide, they issued a statement that they will lay-off 20,000 employees nationwide. However, that wasn’t enough ‘to get air flowing’; they needed a cash injection from Bank of America of 2 Billion dollars. Bring that home now, what does that mean to my law firm that has Countrywide as a client, or add a degree of separation. What does that mean to my client who has their commercial real estate financed through Countrywide and who is already debt laden?

A few years ago I gave a presentation on becoming more strategic in AR management to mid-sized law firms in the mid western United States. This was at a time of pre-recession in the US economy, a time when the Canadian economy was starting to gain momentum. Of the firms present, a few had clients in the consumer products realm. The question I asked of those firms, a bulk of your clients use raw materials in the production of consumer products, much of those raw materials originated from outside of the USA. “Since the NAFTA Free Trade agreement was premised on the partner countries having a certain exchange rate with the USA, how do you think it will affect your client’s ability to manage their business now that those country exchange rates were increasing?” All that was heard was the buzz of the fluorescent lights, the blank stares were overwhelming. Here was a group of Current Asset Managers who simply never thought about how their clients would be affected. It was only from the following dialogue that they became aware of; how their client’s business did determine how the firm got paid.

It think it is high time that asset managers stop the analysis paralysis, stop the mountains of reports, stop the highly reactionary year-end fiascos, stop behaving like we are in the dark ages! Today must be the day to shed the ‘ball and chains’ of your past! Recognize that you and your firm can add tremendous change to your bottom line by simply understanding your clients in light of what is going on in the world today. Whether it is toy recalls, sub-prime crisis or OTR cartage from Mexico, it is your duty to understand your clients and act in the best interest of your firm!

Whether you choose to believe it or not, it is a small world. The Milgram experiments of the late 1960’s demonstrated to a non-internet world that there are only 6 degrees of separation between any 2 people on the planet. That was over 40 years ago! It is a small world, listen to it and learn. Most of all bring that knowledge back to your firm and act on it, it’s your duty!

Global Competition, the Thief in the Night!

…“later than same day, they arrived at cheese station C. They had not been paying attention to the small changes that had been taking place each day, so they took it for granted that their cheese would be there. They were unprepared for what they found; no cheese!....”*

Isn’t it amazing how we take so much in life for granted? For the early part of our adult lives we are in a learning mode, and then we settle into a career and begin to take things for granted. We get into the mode of ‘it has always been done this way, therefore…’ The number of stories that touch on the concept of complacency, if stacked, would be miles high.

Innovation not complacency is the key to survival in the 21^st century. With the rapid expansion of the internet and multi-media tools the communication gap locally, nationally and globally is shrinking by the day. No longer must we concern ourselves only with local competition we are now faced with competitors all over the globe. Organizations all over the globe are vying for our business. These companies are slowly providing our clients with better service at a better price. The key to success, beyond survival, is to see clients in a long term light.

In a recent article entitled “The Secrets to Toyota’s Success”, the author discusses Toyota’s current and planned success. “Toyota’s set an ambitious sales target (planning to trump GM’s 1978 record of 9.55 million vehicles sold) but according to analysts, the goal is attainable.” “What’s the secret to Toyota’s success?” “Some people say long-termism.”

I am saddened when I see so many professional services organizations managing their client relationships they way they did 10-15 years ago. What many of these firms fail to realize is that the clients are smarter today? They have more knowledge and more tools at their disposal than they did 10 years ago. Therefore the methods of managing the relationship must change. Clients need more information in a more expeditious manner. Unlucky is the firm who simply can’t meet the requirement.

Those firms who have not broken free of the bondage of old practices, allow clients to control their banks. These firms have become their client’s bankers, by extending credit terms with their slow paying antics. With all of this technology, how does this happen? The management of the client portfolio represents the tie to the past; it is the missing link that has separated the ‘profession’ from any other type of work! With everything good, there must be bad to balance the equilibrium. In my career I have witnessed almost 50 firms die a painful death; some of these firms were small. Others were huge global firms. In many cases, they were unable to free themselves from managing their client portfolio.

In this day of rapid technological advancement and unprecedented globalization, a firm’s competitive advantage must be gained on the back of technology, as nothing is moving and advancing as fast. Bill Gates, in his book ­Business at the Speed of Thought¸ captured the essence of what organizations have to do today and will have to do into the future for their survival. For survival will be based on how organizations can leverage technology to create their own competitive advantage.

Finding your organization’s competitive advantage is the key to survival. Leveraging on technology to accentuate that competitive advantage will mean the difference between success and failure in tomorrow’s global economy.

Will you wake up one day and wonder who moved my cheese (clients) or wow, look at all the cheese (clients)? The answer is in your grasp today, don’t let it slip away!

In the coming weeks, I will spend time looking at some of the market forces that are acting on the legal profession and some of the possible changes we will see in the coming decade.

*Johnson, Spencer, (1998), Who Moved my Cheese? G.P. Putnam’s sons publishing, New York, NY

‘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.

Law firm AR Management gets easier

For many US based law firms with a December 31 year-end, the summer months represent the “quiet before the storm”. Once Labor Day rolls around, those firms will be ratcheting up their collection efforts to meet year-end targets. However, this practice may be short lived. As I have said in the past, there are only three main reasons why clients don’t pay their legal bills: relationship issues, billing issue and economic issues. Well over the past two years something is changing in the profession that, I feel, will alleviate some of the ‘relationship’ issues.

The thing that is changing is how firms bill for work. Law firms like all professional firms sell knowledge or expertise. This is quantified by the sale of hour or part thereof. For the longest time, I questioned the hour as the unit of sale, reason being it doesn’t make counsel more efficient and it is prone to ‘padding’. The practice of law, depending on the area, either has engagements with a definitive outcome or a probabilistic outcome. Therefore, it is a progressive firm that can use this knowledge to their advantage. As an example, a firm is faced with a particular engagement. They have a very good idea of what is involved in completing the engagement. They know who will work on the file, the related costs and the probability of success. Therefore, they can approximate a fee for the entire engagement. This now provides the firm with two powerful benefits: a negotiating tool in a competitive environment, and timely collections.

How does fixed fee billing speed up collections should be the question that comes to mind. Fixed fee billing removes the variability from the client’s wallet. The client knows going in to the engagement what it will cost and the probability of their desired outcome. With fixed fee billing, the client buys a pound of sugar and gets a pound of sugar – no surprises. Unlike the hourly basis, they buy a pound of sugar and can end up with 6 grains of sugar!

This may seem like ‘pie-in-the-sky’ as most firms can’t even get themselves to the point of deciding if particular clients are profitable or not. In fact, fixed fee billing is fast approaching reality. About 18 months ago articles started appearing where small firms had given up the classical hourly billing in favor of fixed fee billing. Their initial motivation was to get away from the huge administrative task of billing. Over the past year the momentum has picked up and of late, medium and larger firms are embracing fixed fee billing. In a recent article on Law.com, a few large national firms have adopted fixed fee billing for specific practice groups.

Some of the feedback, in the literature, on fixed fee billing is astonishing! After operating in a fixed fee mode for twelve months or more, many firms report a huge drop in the amount of AR they have and WIP becomes more “manageable”. A few firms have said “…we have no accounts receivable!”.

I feel the time is right for firms to move to a fixed fee or probabilistic fee billing model. Firms will gain greater competitive advantage as they will work toward minimizing costs through increased staff efficiencies and in so doing achieve their desired profitability. These firms will take on work that provides them the required Return on Investment while doing good work for the right clients. Those who pay timely!

Successful Collections, a team sport?

In one of my earlier writings I made the point of paradigm shift; the need to make that quantum leap into a different way of thinking and doing business. This, I feel is, essential to cast off the bondage of old ways of doing things. I have noticed that all too often, most businesses continue in a lock-step of their past. Although they achieve success, the success isn’t near what they could possibly achieve. Over the past few weeks I have met many people who practice the concept of truly thinking out of the box. These people have developed such a skill they have become consultants to multi-national and global companies.

If you have experienced even one of my seminars on collections you will know that accounts receivable delinquency dates back to 1500 BC. One would think that over the last 3000 + years we would have rationalized AR collections to a science. However, that hasn’t been the case. It hasn’t, simply because AR collections is a people process, we must work through with other people to get what we want; our bills paid. With that said, I am sure we can draw knowledge and insight from other facets of industry.

The human phylogenic roots orignated about 6 million years ago. As one traces the evolution to modern day humans, it becomes very clear that human beings are communal animals. Our entire survival rest in our ability to be part of a group, tremendous research has been done on group behavior. It was found that the optimal group for humans to be part of is 75 individuals. It was found that groups of 75 individuals function the best, when the size of the group exceeds 100 individuals the group breaks apart in to smaller groups. It has been postulated that human survival requires being part of a group. What can we learn from that? One must ask the question, why? I have reasoned that groups of 75 provide both enough diversity in skill and the ‘right’ degree of formality. To play on the skill aspect, each person in the group brings a certain skill to the group, which enhances its probability of survival – team work!

Let’s apply this to the typical professional service practice, with its diversity of skill. The collector is a responsible member of the team bringing their unique skill set for the betterment of the overall team. Their role is to work with the client to get the bills paid. These are the same bills that the billing attorney instructed the billing specialist to create. The file was probably brought in by the responsible partner and the work was managed by the supervising attorney. Is the picture beginning to unfold? Each person in the firm injects their expertise to ensure the entire operation not only runs smoothly, but is successful.

Success is a relative term. What defines success for one person could be considered failure for another. However, if we contend that the law firm’s definition of success is to provide outstanding legal services and earn a profitable return on investment then we have succeeded. We can see that everyone on the team plays a vital role and is responsible for their part in the ‘successes of the firm. Taking this a step further, if profitability is tied to success then everyone should support the expertise of the collector in getting bills paid. That assistance provided to the collector must start at the very beginning of the attorney client relationship, at the initial meeting. It is the attorney’s responsibility to set the stage of how the relationship will progress, how services will be rendered and when payments are expected. All too often, I don’t feel this happens – sadly enough.

Over the last few weeks I witnessed true team work in action! Lately I attended many conferences and conventions and I watched how the wait staff took care of upwards of 2500 people. During one such conference a waiter talked about a recent conference of 8,000 people. Think of it, feeding 8,000 people. Every meal is perfect down to the temperature and the presentation. Now that is team work!

Recently I had the opportunity to dine at Maggiano's, an upscale Italian restaurant in Las Vegas. During my meal selection process I was approached by Michael Pawlowski, the Executive Sous Chef, who took tremendous time in ensuring that every question from the group was answered. Throughout the meal, Mike stopped by regularly to check on the group. Through discussion we found out that the restaurant serves upwards of 400 people per day and that doesn’t even consider their entire catering business. One would think that kind of pressure would be the seed for chaos. However, Mike spoke of how the entire process moves in lock-step to the challenges. In a rare act, Mike took our party for a tour of his kitchen and sure enough, his staff of 20 focused and synchronized to the fulfillment of their goal, their success; making sure each order was perfect!

I think it is time that the concept of teamwork becomes emblazoned in the hearts and minds of today’s professional practices. Each one of the players must not only understand, but feel, how the actions of others impact what must be done for the success of the team. If the goal of the firm is profitability, one must ask oneself, “How does what I do help the team achieve our goal AND what can I do to help my team members achieve their part of our overall goal!

TEAMWORK

Whipping Value into WIP

My recent posting, Taxation, the best Collections Motivator, brought plethora of responses. I heard everything from: uh....say what, to wow, interesting perspective. For all of those who took the time to share their feelings, thank you. I appreciate your feedback. One of the responses was the seed to this week’s entry. As countries enter the global marketplace they must adopt a more global perspective, once such adoption is maintaining their financial records in accordance to the precedents of the International Accounting Standards Board (IASB). Some of the hot topics now are the valuation of inventory and the recognition of revenue. A few weeks ago, I was fortunate enough to be part of a symposium on some of the IASB standards that will be hitting US companies in the next 3 years. It was the question of a reader asking about WIP valuation that catapulted me back to the symposium and got me thinking about WIP valuation in legal practices.

After considerable difficult research, as little information is published about professional services, I came to the conclusion that: Today’s law firms are valuing WIP wrong! One of the things I learned early in my finance career is some things can be classified as right or wrong, other things come down to presentation. The errors in our ways come from the simple act of recording work-in-progress at the selling price. If we look at the very basics in accounting.

Work-in-Progress in professional services is nothing more than inventory, inventory no different than at Ford Motor Company. The basis of inventory valuation is at cost. Now there is a whole discussion to be had about LIFO and FIFO. But regardless, valuation must be at cost. Taking this a step further, it must be the current cost of production, which in itself includes fix and variable costs. It is on this basis that commercial entities have the line item on their P&L of, cost of goods sold. At the same time, professional services should also have the line item, cost of services provided. But they don’t! The professional services P&L and balance sheet, for that matter, is essentially a mish-mash of incorrectly categorized items.

On a very basic level, firms record the selling price of fees in work in progress, while, at the same time, they record disbursements at current cost. This, by its very nature makes WIP valuation a hash total of figures. Then to top it off, firms expense all of the overhead costs of providing the services. Whether or not you maintain WIP on the balance sheet, their whole concept of getting a true value of work-in-progress and accounts receivable is truly a hit-and-miss undertaking. The firm’s largest current asset and it can’t be accurately valued!

How do we pull order into this disarray? I am not professing order for the sake of order nor for alignment with current or future accounting standards. I believe that firms need to have a strong handle on the valuation of their largest current asset, then and only then can they truly manage it.

Example

To illustrate using a simple example, John is a sole practitioner who employs a secretary, Mary, who has paralegal skills. They have a very small practice outside of the big city where the rent is $500 per month; half of which is for administration. The firm out-sources all of their searches and IT, the costs for all is $700 per month; half of which is for administration. On the compensation side, Mary earns $24,000 per year and John has an annual draw of $60,000 per year. Their billable rates are: Mary $30 per hour and John $75 per hour. Furthermore, they have jointly agreed to work no more than 2,000 hours per year. Based on where they are located there are no additional payroll costs. On June 1, they secure a client which will take all of their time; they plan to bill June time on July 15th.

Under this model on June 30th, the value of work-in-progress is $7,420, comprised of $6,720 in fees (at cost) and $700 in fixed costs. Then at time of billing, July 15th, the value of the accounts receivable is $17,500, comprised of $16,800 in fees and $700 in flow through costs along with cost of services provided of $7,420 and a straight P&L hit of $700 for administration expenses. While in today’s firm on June 30th, we would see $16,800 in WIP fees, $1,200 in expenses and $4,800 in payroll costs. Then on July 15th we would see $16,800 in billings and AR with all costs hitting the P&L.

One could argue that the proposed scenario and current practice are essentially the same, in that we neither created nor lose cash. In reality, the difference comes down to timing and presentation. However, under the proposed model, at any point in time the firm has a very accurate valuation of their work-in-progress, there is better matching of revenue and expenses and not to mention increased accuracy in determining profitability. Because now, we have costs of services provided, which can be broken down by department, practice group, area of law and…. by partner! This practice would empower firms to be better able to quote work, knowing well in advance what their gross margin on such work should be in order to meet the goals of the firm.


Overall, the resulting balance sheet and P&L are in GAAP compliance!

Taxation, the best Collections Motivator

For the last several weeks I have focused on some of the nuances of collections and more specifically collections in law firms. Being on the road for the past several weeks has brought on the homesick bug and therefore, I thought this week’s contribution should be back to the basics; of accounting.

I can almost guarantee that if I were to ask a randomly selected group of people how much they embrace their tax system, their answer would be far from endearing, such words as detest and hate would fill the response. Why has taxation gotten such a bad rap? It was probably because of that famous slogan of the mid 1700’s; “no taxation without representation”. Whatever the reason, taxation is a good thing and it is good for many reasons. First, it means you have earned enough to not only survive but enough to repatriate, it keeps accountants employed and in Europe it stimulates collections! Why should anything that bears such benefit, be black listed? To gain a real appreciation for the importance of taxation on collections we need to have an appreciation of accounting, and then look at what European and other countries are doing.

The 1494 writings of Luca Pacioli had a greatest impact on the financial world. It was his writing, Particularis de Computis et Scripturis, a treatise on accounting that made Pacioli the Father of Modern Accounting. Pacioli established the basis of double entry bookkeeping and many of the structures of modern day financial record keeping. Today, accounting is one of the most vital organs in the commerce. Historians argue about what seeded the need for accounting, some argue that accounting was developed purely in response to the needs of the time brought about by changes in the environment and societal demands. Others claim that the development of the science of accounting has itself driven the evolution of commerce. It was only through the use of more precise accounting methods that modern business was able to grow, flourish and respond to the needs of its owners and the public. Either way, the history of accounting throws a light on economic and business history, and may help us better predict what is on the horizon as the pace of global business evolution escalates. Regardless of its origin, it is the basis of every tax system and it is here to stay!

For almost all US based law firms, cash-basis accounting is the mainstay. It is the way accounts have been managed since the first firm began, and the practice continues today. It is the very basis of maintaining the firm’s accounts on a cash-basis that creates the ‘year-end crunch’. This, however, isn’t the case in the rest of the world. In almost every country, professional services must run on the accrual basis. Accrual accounting redefines law firm revenue and profitability.

Cash accounting only recognizes revenue when cash is actually deposited, while accrual accounting recognizes revenue at the time of bill creation. What a motivator! Just that simple change of when to recognize revenue triggers a whole host of tax implications. Hence the motivation to collect! Who would want to pay tax on money they didn’t collect?

In December 1997, European Countries withdrew the practice of cash-basis accounting for computing taxable profits for professional services organizations in favor of a ‘true and fair’ approach’; accrual accounting basis. With the ‘go-live’ date in 1998, there was considerable upheaval in the legal community. Here were a group of professionals who had to radically change how they managed their organizations. They had to cast away the shackles of the mad year-end crunch for a more consistent approach of receivable management. Otherwise, they faced the penalty of the tax-man! Amongst the hostilities, there were many hidden benefits that today’s US law firms don’t see. European and other law firms around the world, have considerably lower average days to collect, better utilization of assets, better cash flow management and comparatively smaller operating lines of credit.

Let’s now fast forward and really make collections the forefront! On March 10, 2005, the Accounting Standards Board (UK) issued UITF Abstract 40. This circular plowed full force into uncharted territory in the professional services arena; revenue recognition and valuation of work in progress. Although a mainstay of manufacturing organizations, this was very new for professional services, and as such met with tremendous resistance. To the professional services firm… now revenue will be recognized when the work is done!

Once the accounting community worked out all the pieces; sure as anything the tax department jumped on the band wagon! With all the hoops and loops to be dealt with, the European tax authorities put in a plan for firms to take all of the work in progress into income; over time. Otherwise, firms with three months billings in WIP would recognize 125% uptake in revenue – straight to the bottom line! The end result of all of this… the inception of new accounting rules lead to progressive tax rules, which ultimately benefited the firm, bill faster and collect faster!

If it wasn’t for progressive accounting and taxation, would firms ever bill or collect?


Hooray for Taxation !!!

I Feel Lucky…. Hit Me!

Many would argue that I am very lucky; so far this year I have spent 3 weeks in Las Vegas, Nevada, one of the gaming capitals of the world. Oddly enough, two major world gaming centers lie between the 36th and 39th North Parallels; Las Vegas, Nevada and Atlantic City, New Jersey. Was that by chance or was it intended? I wondered the probability of these two cities separated by 2500 East-West miles and only 200 North-South miles. Odd isn’t it?

As I walked through the casinos I wondered, what is it about gaming that manages to fill these cities. As Maslow wrote about human needs, Barrett Miller, in his paper Support Groups that Work, wrote about Human Hungers. One such Human Hunger is Contact Hunger; the need for rituals and pastimes (games). As I watched people satisfy their Contact Hunger, I realized that gaming is such a part of our daily lives – our collections lives!

In experiencing the tables of Vegas I came to realize how people play these games is often similar to how we manage our accounts receivable and work-in-progress, for that matter. There are essentially two types of games, those requiring skill and those of chance. The games of skill encompass games like poker, where the player has to work with what they have and make decisions regarding the behavior of the other players. Whereas games like roulette and craps require luck.

Bringing this home, so many firms manage their AR and WIP like they play a game of luck. I will put 50 on red, black and evens and away I will go, essentially having a firm standard AR and WIP management process. That is synonymous with having a WIP/AR strategy of treating all the clients the same. Which, for anyone who has been to my seminars, knows that this is the first taboo in managing the most valuable asset of the firm? Today’s firm must begin to manage their client portfolio as a skill; weighing the odds, making educated decisions and thereby becoming most effective.

The first question that must come to mind now is, how is this done? For the last 12-18 months I have professed the need to move to a risk based model for managing WIP/AR; a strategic approach. This approach is a growing trend in the corporate world, according to a 2006 Dun & Bradstreet study, where 30% of commercial firms have adopted a risked based collections model, which will grow to 60-70% by 2008! Becoming strategic at managing the most valuable asset of the firm will: reduce bad debt, increase cash flow, build strong client relationships and almost obliterate time wasting activities!

Using a risk-based WIP/AR management process uses statistical-based credit scoring to determine the inherent risk of the client. This score, along with the firm’s affinity for risk becomes the primary driver for determining how WIP/AR strategies manifest themselves within the portfolio. This isn’t hocus-pocus, research has shown that the age of an account and the amount due are the wrong criteria to use to optimize collections efficiency, DSO and reduce write-offs.

Remember, your ability to get paid is based on the client’s risk model. From my presentation, Collections Above and Beyond Technology, clients bring two types of risk to the organization, and it is that risk that determines the probability of the timeliness of payment. To demonstrate this with a simplified example, given two clients that require attention; Client A and Client B. Client A owes the firm €100,000 and is 30 days past due and is a low risk account with a 1.1% expected bad risk rate. Client B, owes the firm €10,000 and is only 10 days past due, but is an extreme risk account with a 65% expected bad risk rate. Working through the joint probabilities of default, it becomes apparent that Client B poses the greatest risk of default.

The question now is… how do I stop playing roulette with my firm’s largest asset and change it from a game of luck, to one of skill. The answer resides in your time and billing system! The most valuable weapon you have to build the foundation of a risk based plan of WIP/AR management is the payment experience you have with your clients! It has proven to be, by far, the most predictive data that is available. Because it screams of the inherent risk the client brings to the firm. Keep in mind, the best predictor of future client payment performance is client history, and you already have it, and it is free!

With all of that, you must ask yourself – do I feel lucky? And the answer should be…hit me – I am skilled!

The Hairy go’round of Collections

Here we are, almost through 2007! Another year is slipping away. For those firms on a cash basis accounting system, the memory of ‘year-end’ must be distant at best. Well, before you know it, whamo! Throttles will be opened and you will be in the middle of it! I think before you get there, you have to think of Richard Simmons and his famous line “STOP THE INSANITY”.

I am just settling in from a trip to Las Vegas where I had the opportunity to participate in the 111^th Credit Conference. This venue pulled together upwards of 2,300 credit professionals from North America. The enthusiasm for credit management filled every session and every conversation. I was fortunate to meet many people who were exuberant in sharing their trials and tribulations in the field of credit and collections. I want to share one such story with you. I met the director of credit for a national concrete and aggregate supplier whose name, for sake of presentation, will be Mary.

Mary has been the director of credit of ABC Ltd for some 10 years. The world of construction credit, as Mary revealed, is a fraught with thin margins and is competitively cut-throat. As she explained her role, it became very apparent to me, that AR collections in a law firm isn’t really collections it is more of a service to the attorneys; a mish-mash of busy work, for the most part. In ABC Ltd, Mary’s department is notified immediately of a prospect. Her team diligently goes to work using all sorts of public data to establish a credit risk for the prospect, and ultimately a credit limit. Once the limit is established, the information is communicated to sales and to accounting, where limits are set in the various systems. Folks this is done in hours, not days, not weeks, HOURS! Then the game begins! The order is placed, delivered, signed for and billed. The turn around time, according to Mary, for all of this could be days and at most a couple of weeks.

The moment the bill leaves the building it belongs to Mary and her team of credit professionals. With thin margins they must get that bill paid as soon as they can, otherwise their company could not fuel the raw material engine. The moment the bill begins to approach the very close due date, the team watch. Should delinquency hit, they are on it, sending out reminders and making calls to get that bill paid. As Mary shares her story, a sense of pride illuminates her as her DSO is 42 days and her annual bad debt is 0.02% where the industry average is just a hair higher at 0.0206% of sales.

Now let’s contrast that with the law firm collections. For many firms, the act of law firm collections is to provide information to the partners who do their own collections. For those firms where they have collectors, they are told who they can and cannot contact. Well for most, this is par for the course.

At some magic point in time, all sense of reasonableness goes out the window. The point where the cash receipts budget becomes king and the entire firm is transformed into a collections machine, the behemoth has awaken. This is the infamous “year end”. During this time, lawyers spend their time speaking to clients about their past due accounts and the collections team run reports, ad nauseam. Oh and let’s not forget, those hourly calls to the bank about wires and the mass distribution voice/emails about daily cash receipts. Then as the days tick down to the year end and the feeding frenzy goes full force, we pull out our famed weapon….discounting!!! I often sit and wonder if at the American Express office if this type of feeding frenzy is going on as they await the payment of my bill. Although my narcissistic side would like to believe it; I surely doubt it!

For many firms, this is the way it is and the way it will be until one day… one magical day when someone says “STOP THE INSANITY”. With this behavior it is no wonder why the average U.S. law firm takes 122 days to collect a bill when their terms are N30, while a Fortune 500 company will take 42 days; with the same terms. Do our firms realize how much money they are wasting? Do they realize the cost to carry receivables and unbilled time, daily? Do they realize the true value of credit professionals? My answer is NO!

Today’s law practice, for the most part, is heterogeneous slurry of professionals who truly believe that their capital contribution buys them the right to run their own practice. However, their own practice is often in direct polarity to, possibly, their neighbor! With no one making the rules and everyone playing by their own rules can today’s firm expect to be profitable. Oh but they are, they are profitable – only because their margins are so large! Large margins is the savior, simply ask Mary! If we were to transform our firm into a finely tuned machine where there is a single leader and everyone follows in lockstep, the profits would be phenomenal! Imagine for a moment, Mary and her team, with their rules and their tight margins operating in a law firm, an organized law firm. We would see unbilled and AR turnover so fast it would be scary, and the profits would soar.

Oh, on the note of profits soaring. Do you realize in today’s world there is no limit what one can earn? However in today’s firm, it is the historical profits that perpetuate current practices. Because firms have the ability to control their profits by virtue of their accounting practices, they continue to use those practices that have served them. However, there is no such thing as the perpetual motion machine. These old practices will stop working, and I feel the time is fast approaching!

Recently, I had the opportunity to participate in a round table discussion of several major firms in a major metropolitan center. As the finance and collections people shared their trials and tribulations, it became very apparent that these firms are at the breaking point. One such firm CFO announced that the firm is expecting a 15% growth in cash receipts for the year, but has not added new lawyers, taken on any new major clients or had any landmark case. They had to grow the cash pot by 15% over 2006 levels, without changing a single thing… not even recognizing write-offs of AR of bankrupt clients. One has to ask the question, how is this possible? It isn’t! How is the collection group going to squeeze funds out of static AR? They can’t … at this firm, they are about to hit the wall!

It never fazes me how we continue to expect better results from doing things the same way! We know this inherently, yet our firm’s lawyers want the credit team to do the impossible. These legal minds can advise on the intricacies of the tax law or the proper steps to IPO for a Biotechnology Company, yet they cannot see that their requests don’t make sense, nor do they see that they need to take their own advice. I sense that the time is rapidly approaching, if it hasn’t already arrived, that today’s legal practices must begin running like a real business. They must break free of the shackles of historical behavior, appoint a leader and follow in lockstep with the goals of the organization and beheld accountable, accountable to their leader and their peers for their deviations! This and only this will be the firm’s armor in the combative world of globalization.

I realize that my words are stern, as I am only an outside observer. I don’t work within a law firm; I have, but not anymore. Today’s practices won’t take firms into tomorrow. Today’s firms need change and those willing to undertake immediate change will be the first movers, who will have the luxury of defining the legal landscape. With that, I want to leave you with a quote that, hopefully, will cut to the quick.

"If it ain't broke, don't fix it" is the slogan of the complacent, the arrogant or the scared. It's an excuse for inaction, a call to non-arms. It's a mindset that assumes (or hopes) that today's realities will continue tomorrow in a tidy, linear and predictable fashion. Pure fantasy. In this sort of culture, you won't find people who proactively take steps to solve problems as they emerge. Here's a little tip: Don't invest in these companies.”

Chairman General Colin Powell

Why Johnny Can’t Sell

Last week I was in Denver at a technology conference attended by many of the market movers and shakers. It was during one of the sessions that I met the author of “Why Johnny can’t sell”. The book looked at the changing needs of sales people over the last 50 years. In the history of modern day sales there are 3 main eras, each with its own characteristics: Era I (1940-1975), Era II (1975-1995), and Era III (1995 to present). You are probably wondering what this has to do with a blog on AR management; believe it or not, it is very relevant.

To gain a true grasp of the relevancy of the book one must look at what our legal counsel does, aside from the practice of law; they undertake business development. For all intents and purposes our firms' attorneys are salespeople! They get new clients and new work into the firm. They sell the legal prowess of the firm. However, it is this sales process that leads to WIP and specifically AR related issues.

Without belaboring the discussion on selling, era II was the age of ‘qualities’. Basically, I as the salesperson spend time presenting to you, my prospect, all of my qualities. I, as the prospect, purchase based on the distinguishing characteristics between the vendors, in my example - the law firms. This was all well and good before the explosion of technology and rapid global dissemination of knowledge through the internet and other electronic means. It is the increasing momentum of more knowledge being disseminated more rapidly that takes us to Era III; the age of consultative selling and the value proposition.

Success in the selling process in Era III requires the salesperson, our attorneys, to demonstrate the added value to the client, not simply by expounding on theirs or the firm’s “qualities”. The attorney must clearly demonstrate their unique value and how the engagement will provide the client with tremendous value. Now, consider how many lawyers are out trying to get the same clients. What we see is a sea of “qualities’ and very few distinguishing characteristics. The one characteristic identified most often; price. Clients rationalize all of the qualities of the lawyer/firm, and the only one that tends to stick out – is price!

Today’s legal salesperson, our lawyer, using the skills of ERA II (qualities based) in an ERA III world, has created a dilution of the value of legal work and has caused many of the problems we see associated with today’s law firm collections. They have essentially reduced the value of their services to a commodity. This commoditizing of legal services pits firms against each other bidding for services – bidding wars. Sometimes these bidding wars results in firms taking on work below their ROI thresholds or even worse, below break-even points.

Now with the client on board, commoditizing of the legal services goes a step further. In the effort to differentiate the firm from others, clients are offered special terms; such as N60. Since the billing for services is considerably protracted from the collections effort, the client’s motivation for payment is gone. This concept has been clearly documented by Edward Poll in his book “Collecting Your Fee”, in the protracted amount of time taken to collect the bills and worst – fee discounting, all the result of commoditizing legal services. Almost all of the problems associated with delinquent legal bills can be traced back to the inception of the relationship! It was Stan Godbehere, chief credit officer of Robert Half International who said “It is the 1% that is not done right at the onset of the relationship that can cause 99% of the collections problems”. In today’s market, that one thing is not clearly demonstrating the unique value the lawyer brings to the engagement.

To be successful in today’s highly competitive market, firms must educate their lawyers on becoming legal advisors, demonstrating their unique value to the client, and not commoditizing legal services. Today’s lawyers must see themselves as the one of a kind service provider, without whom there can be no value. Then and only then will they achieve true competitive advantage, in an increasingly more competitive market