The Cash Flow Vacuum

In the last four weeks there has been an explosion of articles written on practice management issues in today’s law practice. Over this time, they have become increasingly bolder and more hostile. Although I believe it is time to make a change regarding the management of today’s legal practice, initiating change is better accepted when it is a product of educating rather than bayoneting the wounded.

All business entities whether commercial or professional services are interested in managing their cash flow. The management of cash flow, a scare resource, is the entire basis of economic modeling. Organizations, as a whole face both an inward and outward cash flow. No one would argue it is the sum of these cash flows that is of greatest interest to an organization. How organizations manage the incoming and outgoing cash flows determines their long term economic viability. Although the management of these processes is entombed with management culture and market dynamics, they can be refined.

The management of outgoing cash flow is easily for most law firms. For the most part, the organization’s vendors communicate how and when they want to get paid. For the law firm, this dynamic goes unquestioned. In all my years of working with and within law firms, 99% of the time vendor bills get paid on time. Whether it is the preservation of a sterling credit rating or the demonstration of financial worthiness, payments are made based on terms.

In today’s legal practice, however, incoming cash is not as well managed. Anyone working in today’s law firm on the collections side would easily attest that cash receipts are dictated by the client’s attitude; where the firm’s bill fits into the client’s priority structure. The important thing for today’s professional services organization is to make sure their bills are at the top of the client’s payment priority structure!

Today’s professional firms are simply operating in a vacuum in how they manage their profitability. In today’s Law.com article Should Small and Midsize Firms Create Strategic Plans? (http://www.law.com/jsp/law/sfb/lawArticleSFB.jsp?id=1202421933007), consultant John Remsen Jr. concludes “Firms often steer clear of crafting the plans because the process is "hard" work and often raises unpleasant issues”. To that I would add, for the most part attorney’s simply lack the acumen to look at the environment and the firm as an economic ecosystem.

Although most firms really don’t undertake planning, other than isolated rudimentary budgeting, there are those who do plan but very few undertake building a strategic vision. On the collections side, most firms that ‘plan’ how much money they will collect each year. However, what I have found to be the most amazing part of the ‘cash receipts plan’ is that it is made in isolation. It is built in complete isolation of the economy, the inherent risk of their client portfolio, the current inventories, and the culture of the firm. These firms rest their entire existence on, essentially a wish rather than a probable reality. This lack of planning is supported by Remsen with “… attorneys often are more focused on short-term issues rather than the longer-term outlook. They also tend to be autonomous in their thinking, and they don't like risks or change”.

Today’s firm have a multitude of interrelated issues, none of which can be resolved overnight. This is also true for commercial entites;as they too have issues. However, commercial entities tend to have more planning and strategic vision as part of their operations diet. One of the first places firms should start, I feel, is achieving a better management of incoming cash flows. Firm’s have to realize that delinquent client payment isn’t a product of a poor collections policy or staffing. It is almost entirely based on the management of risk and client intake. The management of risk must be covered in the firm’s credit policy. In my two decades of working within and around law firms, I have yet to encounter a firm that has true credit policy. Credit and collections policies are meant to work hand-in-hand to firmly ground the organizations relationship with the client; to establish shared expectations.

It is only from tightly coupling between the credit policy and collections policy that firms can establish the foundation on which to accomplish more than budgeting. Firms can begin to strategize about their future, enhance their competitive advantage to become the leader of their peer group.

Whether you (firms) like it, believe it or not – change is happening in the legal market space. Sadly a few firms are initiating change while the market is forcing change on most. Clients are becoming more disenchanted with the practices of today’s firm and the results are being manifested in depressed cash inflows. Jason Mendelson, a VC and lawyer, had this to say to Law.com in the article VC Slams Attorneys on Salaries, Overlawyering, (http://www.law.com/jsp/article.jsp?id=1202421919452) “I've been working on a thesis for quite some time that the entire business model of law firms is going to have to change, or it's going to get uglier."

The issue of having a solid credit and collections policy is, I feel, jugular to the overall financial management of the organization. In order to help firms to act, now, rather than react, later, the next several postings will focus on establishing credit and collections policies in today’s economy.

Practicing Business or Business Practice?

Over the last few weeks I have been fixated on the concept of change within today’s professional services. As an outsider to the law firm environment, yet with tremendous contact within firms, I sit in awe of the next call or email talking about the firm’s trials and tribulations. It is amazing how an outsider can see, in real-time, what is happening yet those in the very midst are simply unaware of the metamorphosis that is occurring within their firms.

In the past week I had the opportunity to have a round table discussion with corporate CFO’s on the concept of financial management and budgeting. I was amazed that so few corporations build budgets based on current economic trends and are revising their position each quarter. Often these organizations see the budget as the Holy Grail, and any negative divergence creates frustrations and animosity among the ranks. I also hear of this type of behavior in today’s legal practices. Firms create their budgets for the upcoming year in a vacuum, and then etch them in stone. When the firm doesn’t live up to expectations, frustrations and dissension permeate the ranks.

Since my last posting there has been a lot of news articles hitting the press about what is happening with law firms. For the most part, law firms are facing the same economic pressures every other organization is facing. With these pressures some organizations soar while others sink. The reason for which, each firm reacts differently to these economic stimuli. Their response all dependent on when the ‘realize’ the stimulus, their management, their culture and a plethora of other factors.

On May 28, The Wall Street Journal published an article about a Midwest US firm making the decision to trim their ranks by 124 people. (http://blogs.wsj.com/law/2008/05/28/sonnenschein-lays-off-37-lawyers-plus-87-others/). Since the release of the article several firms throughout the US had meetings to tell their staff that their firm isn’t immune to such cutbacks. Since the melt down of the US real estate market and the subsequent credit fiasco, US law firm trimmings are not uncommon. Each month, some firm steps up to the table and realize trimming ranks is their only solution. This behavior is a direct response to a stimulus in the environment. One could argue that astute leadership would have seen the stimulus coming. I would argue, whether you see it coming or not the reaction may have been the same.

However, one day later an article in legalWeek.com identified a firm whose revenue rose 24% from last year. http://www.legalweek.com/Articles/1130817/Bird++Bird+flies+high+with+24+revenue+rise.html How could that be, here are two firms facing the same economic environment and their response is very different. The answer is definitely not simple and would require a thorough understanding of their practices and their management. On a very simplistic note, change happens and firms have to react to change. How they react is a product of their management and their culture. How they react to stimuli will determine their place on the competitive continuum.

I personally feel that those who change their position on the continuum rest in how they develop a response to a stimulus. A much stayed organization will seek to apply ‘old’ solutions to new problems. As such they will slowly get left behind. It is the progressive firm that steps outside of the status quo, challenging the norm that will leap ahead of others. In a recent webinar by Kevin O’Keefe, (www.lexblog.com), on attorney blogging, O’Keefe made a subtle point of how different firms assimilate attorney blogging. For some firms, it is the taboo because of the social pressures of the other attorneys and the Bar hasn’t made any statement on blogging. While for other firms reap huge benefits. Both firms faced with the opportunity; one stayed and the other innovative.

A great example of a firm not choosing the status quo response was published by LegalWeek.com on May 22. In not knowing the background, one can only speculate the firm had a decline in their litigation practice. When faced with this stimulus, they came up with a ‘cost-free’ litigation program for their clients; which they named CONTROL. http://www.legalweek.com/Articles/1128480/Article.html

Change happens all the time, what happens to your organization rests solely on how you respond to it. You can seek innovative ways or hammer in the ‘tried and true’, the choice is completely yours. Keep in mind, old solutions work for old problems. In difficult times, innovation is the fuel for your organization to gain the competitive advantage. Choosing old solutions is simply business practice. Today, law firms need to be practicing business– treating the practice of law – as a business.

Change Happens, Initiate it or React to it!

In 2007, I realized that after spending almost two decades in professional services it was time to speak what those in firms all around the world were thinking. Looking back on my original writings on this form and in publications, although the topics changed; the theme didn’t. The core theme which I have been professing has always been the same – it’s time for change. Break free of the bondage of your ancestry and lead the pack!

In the academic world there are volumes upon volumes of articles that address organizational change. Everything from being a change master to managing the process of change, some of the great business writers lately have been very bold in putting forth their ideas. With all of this going on, there is one thing for sure – change happens. Several years ago a great little book was written Who Moved my Cheese by Dr. Spencer Johnson M.D. The book took a light-hearted approach in explaining the human behavior of failure to change, as demonstrated through mice in a maze. This is definitely a must read for anyone who feels they are no longer growing or changing.

I have found through the years that society is built up of institutions that assume positions along the ‘habit/status quo’ continuum. There are those institutions that constantly push the status quo, with their developing of the latest and greatest. While there are others who are more stayed in their behavior. Those who push the status quo, evolve more, learn more, earn more, and do more for society. Conversely, those who are stayed they experience decreasing membership in their institutions, soon they wither and die. Several years ago a colleague shared with me his experience with a financial institution that found its roots in the 17th century. When he joined the organization their business processes probably dated back to their origins. During his tenure, the board of directors interviewed for a new president. Throughout the interview, the candidate responded to various questions with the same line, ‘I will change things’. Finally the interviewer asked what will you change? To whom he replied, things. The point to be made here, was that a change was needed, any change. The organization had become stagnant over its life and this visionary saw that a single change will be the precipitate to many changes. Today that organization has now in 120 countries around the globe and in many of those countries, has become the leader in the financial markets.

My contribution of last week precipitated several comments. The one that I feel is most relevant to share is from Ed Poll. I have known Ed for a few years and I have always been inspired by his writings. I feel he is the voice of change in the legal management community. Ed’s closing remarks on last week’s contribution was: “Nevertheless, there is much about the operation of law firms that needs to be examined more closely and then changed if the "institution," called a law firm is to survive and thrive.” Ed’s statement comes at a time, I feel, when today’s law firms are at the cusp of a business management change. No longer can firms continue along the antiquated behavior of doing the same things month after month, year after year, decade after decade and not only expecting the same results… but better results!

The cascading changes that law firms will face will probably come by way of one or two very progressive forward thinking organizations. They will be the fuel that fires the change of the legal landscape. In reviewing the literature of today, I feel this impetus to this type of overwhelming change will come from a smaller firm outside of North America. The seed to change will be from a firm not imbued in processes of their history; they will push the status quo and thereby make change. In the last two years, we have seen considerable change in law firms outside of North America. One such firm, an Australian law firm went public. Currently in the Asia Pacific regions, companies are no longer accepting the status quo for legal services and legal fees. Corporations are undertaking statistical and probability analyses to identify their return on investment in legal engagements. It is this type of analysis that will determine if they proceed or halt the engagement.

On May 7 LawFuel, a New Zealand publication, ran an article entitled Are Lawyers getting away with Blue Murder on fees? The author cites that there is a considerable increase in outside consultants who review the legal engagements and assist in getting the costs ‘seriously trimmed’. I feel these two incidents are very important to the future of law firm viability as we see it today. One firm, taking a proactive approach in adopting more business behavior through outsiders objectively examining their business management, while there is a growing malcontent in the market that will push law firms to change. One firm is taking a more proactive, non-status quo approach, while the others are being subjected to increasing pressure to change. Either way change is happening and the institution of the practice of law as we have come to know it; is ripe for change.

No matter what you choose to do, you will be affected by change. Metaphorically, you can lead the pack or get trampled by it. At this point, the choice is yours. However, when market change begins, and it will fast and pervasive, you will be in your defined spot and will have to suffer the consequences. Maybe it is time for firms to empower their business managers to critically examine the firm and make it part of the change and not let it fall victim to being a product of change.

A MAP got us in this mess, only a GPS will get us out!

Over the last couple of days I had an interesting opportunity; I was asked to comment on a friend’s homework who is working on their MBA. For many this would not be considered an exciting opportunity. However, I saw it as such. Other than my personal research into my own ‘pet projects’, this was an opportunity for me to be academically challenged. After working through the assignment and speaking with other students in the class I realized that a decade has passed since the completion of my MBA. However, what really struck me was the immensity and diversity of business thought currently being presented in the academic world.

As I pondered the experience a statement that I had heard from a Nobel Prize winner a few years ago came to mind. The statement goes something like ‘…there have been more advancements in science, technology and insight in the last century than in all preceding time’. As I thought on this, I could name many of the greats of the last century, but I would be hard pressed to go back much further. The deduction I came away with; knowledge seeds knowledge and to that end, we will continue to see increasingly more ideas presented in our world.

With all of these new ideas it shouldn’t be amazing how the world continues to change so rapidly. These changes are the result of people assimilating new ideas and changing their world one tiny bit and as a whole the effect is commutative; hence more pronounced change. However this isn’t the case with everyone and every organization! There are a plethora of reasons why people simply do not assimilate new ideas. These could be self-imposed or a product of their ‘perception’ of the world; either way the gradation leaders and laggard continues.

A few of my recent readings have challenged me to make sense of why some organizations tend to be leaders and some laggards. I feel this gradient of success is a result of self-imposed limitations or narcissistic traits. Interestingly enough, in my career, I have visited organizations that continue to hold their place along the continuum of success, given the wealth of business knowledge at their fingertips they continue to run as they did a century or more ago.

In a recent article in The Lawyer, one of the London City firms had decided to increase rates by 11%, while other firms have upwardly adjusted their rates by 4%. While at the same time, more peripheral firms have refused to alter their rates while some have shed some associate staff, while on the other side of the globe, in Australia, a new industry is blossoming; that of legal advisory. Australian commercial clients are engaging advisors to determine a fair and reasonable cost for their legal work. The clients then present the findings to firms to see who will accept it for the specified rate. While several large US firms have trimmed staff and stabilized their rates. This radical divergence of behavior at a time of economic contraction is indicative of how people assimilate, the current thought and how others continue in their historical belief.

In my career and travels I have found that in the case of law firms, the non-US law firms are more amenable to change. Even though some continue in their pre-Cambrian ways, they still undertake change; often begrudgingly. In my 2007 contribution Taxation the best Collection Motivator, I addressed why countries who have a Value added Tax system and those governments who impose accrual accounting on professional services firms are much more focused on current asset (WIP and AR) management. In the US firms hide under the veil of cash basis accounting and a much more lenient taxation structure. It is the lack of external forces in the US firms that diminishes the urgency for betterment.

Throughout history professional services was the ‘class’ of the elitist. Those of professional designation could hang their shingle, acquire clients and get financing without any formal business constraints; other than those imposed by their professional association. It is within this self-perpetuating comfort zone that professional services continue, often oblivious to what is going on around them. They operate without a clear vision of where they are going or a clear mission of who they are. This is made clear through the diversity in reactions to an economic softening of the global economy.

Interestingly these are the same organizations that maintain a mantra of higher rates equates to higher profits per partner, when in fact profit is a multi-faceted entity comprised of billable fees, related costs, overhead costs and write offs. It never ceases to amaze me how these ‘head strong’ leaders simply overlook all of these components to profitability. During a conversation, earlier this week, with Ed Poll, author of many works on how to manage legal practices, I was reminded of statement Ed had made quite some time ago “…in many law firms collections is almost an afterthought with as much as 30-40 percent of their billings are collected in the last two months of the fiscal year”. It is surprising with all of the knowledge out there, so many firms continue in their historic practices; the fire fight mentality. While the rest of the world has assimilated the ideas that profit is the culmination of many components and requires a multi-pronged approach for its growth.

This position is the result of, what I perceive, a misaligned accountability process (MAP). Simply put, it is the failure of all of the firm’s partners to be held accountable for their contribution to the firm’s profitability. Since there is no external body like taxation, corporate organization or Sarbanes-Oxley to instill a methodology of accountability the historical practices continue. One would argue that the professional services regulatory body would set guidelines for behavior. However, in my experience this has proven to be ineffective. The article Learning the Hard Way, by Stephanie Ward from the May 2008 issue of the ABA Journal, gives insight as to why some firms continue to act as they have always acted. According to Litigator Michael Burke “Lawyers often think they are smarter than anyone else”, the article continues with many examples of how some lawyers’ self-empowering narcissism has pushed them to the top and caused them to crash and burn. I feel this makes a tremendously powerful statement when one fails to understand why firms resist change.

I feel it is high time that change enter the professional services market. The change that is required must begin at the partner level, first through the deflation of ego followed by the assimilation of ideas into the practice. Firms have to empower their highly educated support group to read market indicators and bring forward new and exciting ideas that will not only catapult the firm forward but begin to erase the negative stigma in the market place. Today’s professional service organizations need a good strategy for survival and growth that comes as a direct result of reading the market indicators, assimilating new ideas and acting in a concerted accountable approach that will yield success. This great practical strategy (GPS) must be the new insightful technology to lead the firm forward, as the MAP has really gotten the firm in a quagmire.

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.

Measuring Efficiency; Ineffectively

Borrowing from my entry of two weeks ago on receivables management and reporting, So What, Now What, it never ceases to amaze me that the more people I speak with the more it emphasizes that receivables management is a problem in ever industry in every country. At a recent roundtable discussion at a CFO conference for telecommunication manufacturers, the issues of receivables management came up. Here are companies that deal in the tens of millions of dollars per bill and they have receivables issues! My first thought when I heard abut their issue was, why they aren’t using secured letters of credit? For some, letters of credit was par for the course when dealing with offshore suppliers, however domestically the old mantra of credit checks, billing and waiting for payment was the fare for the day.

With more probing the issue gained considerable depth. No matter who I spoke with they have their own ‘bell weather’ for determining how well they are doing with their management of receivables. Surprisingly enough, there are more variants of core reports in circulation than one can imagine, both in the professional services and in the corporate world. To make it even more surprising, each user swears that their ‘unique’ report is the best indicator.

My first thought after this experience was, I may be missing something in the remedy purported by all of these ‘unique’ reports. With this feeling of void in not knowing what the ‘best’ report is, I undertook my own research to find out what firms are using and what ‘authorities’ are saying about financial reports. As it turns out, today’s professional services firms have an enormous amount of reporting tools. They have reports from their billing systems and reports from their other systems. They buy custom reporting packages, they buy business intelligence packages and they even have custom reports written, all of which they trust as the gold standard. In the market place today, there is no shortage of reporting tools. The first thing the user must remember, the data is fixed it is only the spectacle by which we view the data that changes; the reports.

With the plethora of reporting tools available the user must really know what they want to analyze and why. Although these tools dice and slice the data in a multitude of ways, one should really ask oneself, is what I am analyzing telling me what I need to know? Do I understand the calculation being made? What is the logic behind the calculation? Until you can answer these questions you are stuck in the “So What” mode.

In an internet article I recently read Law Firm Business Model - Realization, the author discussed ways of measuring the various attributes in the firm’s cash cycle. So as we are on the same page, the cash cycle, begins with the entry of time and costs, through prebilling, final billing and ultimately the receipt of cash. The author contends that the only reports the firm really needs to operate are billing and collection realization reports. The contention is that realization provides the user with the measure of ‘efficiency’ by which a process operates, ie billing and collections.

This concept of efficiency continues to intrigue me. In the world of energy and thermodynamics, efficiency is the ratio of output per unit of input. By way of an example, a home air conditioning unit is said to be 67% efficient. In that regard for every kilowatt of energy taken in, 67% of the energy goes toward producing cool air. As an aside note, automobiles are significantly less than 20% efficient.

Back to the article, the author contends that managing the firm with these realization reports and current asset aging reports is essentially the key to firm profitability. In the article the author cites recent LexisNexis research on the average days for law firms to collect. According to the 2007 Law Firm Economic Survey, conducted by LexisNexis, the average North American Law firm will take 169 days to collect on a bill. This is about 30% longer than the findings of the ABA Survey in 2003. So in four years, law firms have showed a 30% increase in time to collect on a bill! However, almost within the same paragraph, the author, by way of example, presented several firms from the survey that had over 95% collections realization.

How could this be? These firms realized 95% of the cash billed, but the average time to collect their bills increased by 30%. The problem here, I feel, is that the true measure of ‘efficiency’ isn’t being taken into consideration. The missing component is – time. If we recall from Finance 101, money has differing values over time. Simply put, a $1 today is worth more than a $1 a month from now. Therefore the calculation of ‘efficiency’ really does need a time component, which in all of the reporting tools I know of – don’t!

Let’s examine the calculation so you can see where we are going. So by way of an example:

Patty Partner produces a bill for $525 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. Patty agrees to write the amount off and within 15 days the firm receives payment of $495.

According to the standard calculation for cash realization, the formula is the ratio of inputs to outputs. Where $525 was the original amount of the bill and $495 was the amount paid. With that said, the realization is given by:

495 x 100% = 94.29%
525

That is pretty impressive! However it took 60 days to collect! The firm’s policy is payment is due 30 days from date of bill. Let’s alter the calculation to reflect efficiency based on time, which is really the true efficiency!

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.

Given:
If payment were to arrive on the 35th day, the process would be 100% efficient barring the deduction for the dispute. If payment arrived before the 35th day, the process would be more than 100% efficient, because the client paid early. While beyond the 35th day the process becomes less efficient.

The calculation of time therefore takes on the representation of:

Output 60 days
Input 35 days

However because the output increases, which operates contrary to energy models, we need the following correction.

1/ (output/input) 1/ (60/35)

Apply this to our example of Patty Partner, the calculation becomes:

495 X 1/ (60/35) X 100%= 55%
525

Therefore Patty’s collection realization for this bill is 55%. The reason for the radical difference from the cash realization report is it took at least 70% longer to collect on the bill than the firm policy dictated and there was a write down! This paints an entirely new picture of Patty Partner.

With this simple example, I hope you can see the need to understand what the calculation means and how it can or should be used to measure activity is vital. This is but a single example of a single calculation. With the number of reports being used, there is no doubt that each day millions of people rely on reports to make decisions, without really understanding what the calculation entails.

As for the article, we have just shown how cash realization can be 95% yet time to collect has increased 30% over the past four years. Realize that each bill for which you are awaiting payment has a time corrected realization that gets worse by the day and so many reports simply aren’t bringing it to your attention! Remember what you think you are measuring may not be in fact what is being measured! Understand the big picture before ‘picking’ a report!

Are you making Rain or making Mud?

I recently spent a week in Chicago meeting with financial executives of accounting and law firms. I wasn’t surprised how the two very different professions had the same types of problems in firm and financial management. It was almost as if these organizations were having internal battles as how to move forward and most importantly in what direction. Whether you are managing a huge global firm, a local firm or even a team within the firm you are constantly being plagued with direction and momentum.

Lately there has been an explosion of articles on how firms are changing to (re)establish direction and momentum. In The Lawyer, Julie Berris reported how one global firm radically downsized their management structure by 50%, as a means of focusing skills. Their expectation was to reestablish direction and momentum. While Martha Neil writing for the ABA Journal, discussed how a New York firm had undertaken to build a roadmap to partnership and rainmaker retention, by undertaking a ‘strength’ assessment of the professionals. Even the Partner’s Report published by IOMA went so far as to outline a seven step process necessary to establish focus and direction for professional services organizations. It seems these organizations realize they need to do something to maintain their competitive advantage in the market place, however their actions seems to be focused on downsizing and skills assessments.

Interestingly enough the writings of some of the business greats really don’t fit the professional services industry, simply because of the overall dynamic and structure of these organizations. The March 2008 issue of Partner’s Report spends a considerable amount of time expounding on the unique dynamic of professional services firms. However, as I view the entire situation as an outsider I can see that structure leads to form. The lack of a concerted direction of the organization has lead and will continue to lead the professional services organization into a state of confusion. The problem, I feel, is the management of today’s organization is not synergistic.

Even within these organizations, a lack of clear direction and management causes these organizations to become more attuned to fire fighting than overall management. I feel what organizations need now is a paradigm shift, a new way of looking at their business. Organizations must start to realize that all of their issues must be resolved from within. Chawla et al, in their recent publication: Learning organizations: Developing cultures for tomorrow's workplace, states “The human factor in business is more important than ever. Organizations must be responsive to their workers.” Although I believe that organizations must be responsive to their workers, they must understand the synergy created among staff. It is this synergy that makes the difference between greatness and mediocrity.

The idea of synergy between and among staff literally drives an organization in the designated direction. One conversation I had while meeting with financial executives reinforced this concept beyond realization. This firm, a global service provider, had recently had a change in their finance team. Before the change, the team was the most revered group in the organization. They were the rainmakers! However, since the departure of a key individual, they have slipped into mediocrity, had staff turnover and the staff remaining were disgruntled. With a single change, the greatness of the department was decimated and the dynamic was seriously altered.

What really happened, was the person who left a rainmaker? Or was the new hire so dysfunctional that the entire dynamics of the department was upset. The answer, I feel, rests in the huge amount of research done in the mid-1990’s regarding the success of ‘rainmakers’. At that time, it was the fascination of many business gurus that rainmakers who left their firm became average at their new firm, how could this be? What the research revealed was there was no single rainmaker – it was the team that ‘made rain’. As we extrapolate this from our departments, to practice groups and to the organizational level it becomes self-evident that it is more in how people work together that achieves greatness than a single individual. With this, I am reminded of a story from a North-East firm who had a corporate ‘rainmaker’. This partner would bring in some of the largest clients in the world and bill in the tens of millions of dollars per year. Through an internal issue, the partner left. Once announced, everyone in the firm began to ‘run scared’. Now two decades later, the firm continues to thrive and grow. The reason, the environment allowed for the creation of a rainmaking team.

Bob Bunting, partner with Moss Adams LLP, in his article Increasing Margins, makes a powerful statement regarding people and the success of the organization. According to Bunting “…recognizing that people are probably more important now than clients – but only if your firm has the best people.” Moss-Kanter, author of Change Masters:Change Masters: Innovation and Entrepreneurship in the American Corporation, professes that we are at a time of most change. She contends that the most important thing leaders can do for their organizations is to recognize the value of their people and the synergy they create and avoid top down management. The role of management then becomes one of transmitting values and priorities.

With that said, for those of us who manage teams we must recognize the value of the people in the team. Work to enhance the synergy of the team, as they are the rainmakers. It is the role of management to nurture the rainmaking team, as people leave managers not jobs; the team can soon fast become mud-makers.

So What… Now What?

My last few posts have conjured up a few questions from my readers, mostly along the lines of; ok Don, now tell us how to fix it. How, about identify the various cultures in organizations and giving us solutions to resolve the issues in each. As much as I would like to produce an “If-Then” matrix for the marketplace it would be essentially useless. The reason for which, is that organizational cultures are the product of their leaders, and as human beings are very complex beings which cannot be explained in simple terms, the task becomes almost impossible; somewhat like quantifying what ‘normal’ is.

In the last couple of weeks I had the opportunity of meeting with several CFOs and Credit Managers from a few very large firms. My area of interest in these talks was, although collections, it more focused around reporting requirements. I found it truly amazing that, for the most part, firms run pretty much the same. They predominately manage their work in progress, they have a billing process, they create bills and they collect on them. Yet, they have a mind-boggling number of very diverse reporting requirements. How can that be? The have essentially the same quantities they are interested in, yet they report on them differently.

As it turns out, financial reporting is as much a quagmire as the differing collections methodologies seen in the professional services sphere. In reality, what is being exhibited in reporting is the same thing that is seen in the treasury and financial management infrastructure; it is all culturally driven. How can one firm honestly contend that their reporting infrastructure is vastly superior to others in the market place? The entities are the same, just viewed/reported on differently.

For many years my contention was that organizations got into the mode of ‘analysis-paralysis’. Through the intense gyrations of twisting, turning and bending the data somehow the user would be awaken by a hidden secret or some mystery would reveal itself. When in reality, that never happened. The secret contortion didn’t reveal the secret to the firm’s competitive advantage. This gets back to some of my earlier writings, regarding the continuance of identical repetitive tasks all the while expecting different results is a sign of insanity.

Today’s professional services firm has a plethora of reports that deal only with client investment. There are many levels of AR, WIP, and cash receipt reports that analyze the same data from hundreds of perspectives. Basically looking at the same apple from different angles! I will bet as you read this you may conclude, yes we have a few reports which look at the exact same data – differently. The most extreme organization I have ever met would produce a partner report book that was 480+ pages in length, EACH MONTH! Amazing when you consider the cost of its production for the firm’s several hundred partners!

How does one stop this treadmill of reporting frenzy? I believe the answer lies in an accounting concept that only auditors really hold dear. The concept is called materiality. In the accounting/finance world it is the materiality principle. The materiality principle can be summarized as: An item is material if there is a reasonable expectation that knowledge of it would influence the decisions of prudent users of the financial information.

Implementing the materiality principle in an organization becomes the gateway to relinquishing the bondage of excessive reporting. The firm, in its cultural wisdom, must define what deviation from expectation that would cause a user to take action in light of the variance. Once a firm can get to this point, the number of reports will rapidly dwindle to a few key indicators that will readily provide pulse of the operation. From there, management decisions can quickly be enacted to institute corrective change.

The first question you are now probably thinking, how can this be done in my organization? The answer follows from where we began – with culture. I do know several organizations that have been successful in implementing a truly strategic reporting model, yet they are few and it came with resistance. One firm, I know, took the bottom up approach. Where they simply dropped one report per month until management realized the report went missing. As it turns out, they went from 22 reports per month to three. Yes, there were only three critical reports that drove the organization!

A dear friend of mine shared her experiences of analysis-paralysis, from her junior days in a global accounting firm, through partnership and now in a global law firm. Her simple statement is “When looking at the numbers on a report, you are either driven to saying either - so what … or now what?” If your reports tend to invoke a lot of ‘so what’, do you really need all of them saying the same thing?

The Best Kept Collections Secret

I have spent a huge portion of the last two decades, meeting with, working with and helping professional service firms achieve increases in the collections of their accounts receivables. I have also lectured on AR management, WIP management and the treasury function in professional services firms. During this time I have probably met with and been questioned by close to 400 professional services firms. Of the 100+ of my favorite questions, the following are from the top ten: “Should we centralize our collections function?” “How do you motivate billing and collections?” “How do we begin to clean up this mess?” “What should be our next step if the client continues to withhold payment?”

For the most part these firms ask the ‘How to’ type questions. These questions are direction seeking type questions, such as ‘show me the way’, and I will do it. Just give the secret. However, the problem and ultimately its resolution is much more complex than simply pulling out a text book, flipping to page 76 and in the second paragraph the answer is blazingly clear. To arrive at the solution, one must completely understand the problem. To find your way from being lost, you must remember the road you have traveled.

There was an interesting article in today’s edition of The Times paper entitled Slaughter and May v Clifford Chance: who is pursuing the best route? The article basically outlines UK law firm business strategy along a continuum. Author Dominic Carman outlines how firms like Clifford Chance has spent the past decade opening offices all over the globe, while Slaughter and May operated at the other end of the spectrum, in closing offices and focusing on the elite type clients. Carman goes on to explain how Freshfields has adopted the middle of the road approach somewhat more of a hybrid of expansion and contraction. The article is filled with quotations from each of the ‘magic circle’ firms’ managing partners how their approach is the best and the others are wrong. One interesting point emerges from the article, “Slaughter and May emerged as clear winners in profitability: its highest earning partners comfortably passed the £2 million-a-year mark”.

Upon a cursory reading of the article, the reader may be left with the notion that the Slaughter and May approach is probably correct because the profit per partner is higher than the others and as is the profit per top partner is highest. Others may argue that is only a current phase and with increased globalization those figures will flip and the firm that is truly global will be the leader in profitability. This article should raise many questions in the minds of the reader, what is the right approach? Is it sustainable? What will be the impact of increased globalization? Maybe with a crystal ball, the answer would be very clear. One question I ask you to ponder would be: Would one expect the same results of Slaughter and May if a firm like Clifford Chance were to adopt the contraction and focus model?

Based on my reading, I think the answer is very simple. Insight to the answer was determined about 10 years ago in business school research and publications. The focus of study was how rainmaking stock brokers lose their thunder when they move to another firm. The answer – culture. It is through a firm’s unique culture that they all achieve profitability in their own business approach. It is the culture of the organization that provides the environment for the rainmaking stock broker to be great at one firm and be average at another. It is the behavior and belief characteristics of an organization that define its outermost capability.

The best kept collections secret, begins in understanding your firm’s culture. That will define how you view your clients and what value is placed on billings and collections. This is not to say you cannot enhance your returns because of cultural limitations. Instead, once you understand your culture, you can then implement policies and procedures that are in alignment with your culture and thereby tap that enormous pool of aging AR and covert it into cash. This is exactly the Slaughter and May approach, know thy self and focus on thy abilities. You already know The Secret and it begins with introspection.

Bet You Don’t Get IT !

Last week’s submission addressed why organizations fail to reap the true benefits of implemented technology. After thousands, if not millions of dollars of investment they are marginally better off than they were before the implementation of technology. Essentially what they have done is put technology over bad business processes, the resultant – speeding up bad business… faster and faster.

The mindset of these organizations, sadly enough, dates back to the 18^th and 19^th century. You guessed it, the Industrial Revolution! The Industrial Revolution was kicked off in agriculture, manufacturing and transportation, through the introduction of steam power. No longer was human effort so critically needed, now machines did the lion’s share of the work. Tirelessly the machines outstripped people in its production capabilities. It was soon realized that making the machines go faster yielded greater production. Then better faster machines were built that further increased the process. Dr. Stephen Covey refers to these productivity gains as “output was a product of how much you can lubricate the process”.

In case you haven’t noticed, the world has moved on, very much since those days of steam power. Although, we are in the age of Intellectual Capital, the era of process reexamination, sadly enough, much of the world have Industrial Revolution mindsets. Many years ago I visited an organization that had recently purchased an ERP system. Through the implementation on their big beefy hardware, the users found the system deathly slow. At the time the vendor said, it’s your equipment. After many iterations of increasingly larger and more powerful hardware, without a sign of increased output, the CIO opted to bring in the hardware vendor. After days of analysis by the hardware vendor it was determined that the “software was poorly written”.

Somehow we are sold on the notion that the next release or the ‘advanced’ product training will yield better results. Sadly that is not the case. It is simply the mantra of those with a 19^th century mentality! What is needed is a critical objective understanding of the business process to identify inefficiencies. In his book The Definitive Drucker, Peter Drucker makes the statement “If it ain’t broken, break it”. I feel the statement Drucker is making isn’t to simply go through organizations with a slash, burn and rebuild mentality. But rather to examine every business process, critically examine it in light of technology and new Insightful Thought, and then make changes. As an example, changing how your office orders coffee sugar will NOT have a great overall bottom line impact. However, changing how you do something like AR Management will.

After writing the last post, I stumbled on some research done by an independent body and published in Credit Today magazine. The article entitled “Formal Credit Department Training Programs Missing at Most Corporations”, made it blazingly clear that organizations spend a ton of money on hardware, software and go lean on product training and process training. The author made the following statement:

“Training is more critical than ever. Not only are technology and automation changing the way receivables are managed, but the regulatory and legal environments have witnessed significant changes since the turn of the millennium. On top of all this, we are at a point in the business cycle where cash flow and risk management are under an enormous amount of scrutiny”.

“Despite these factors, 77 percent of the respondents to Credit Today's recent Credit and Collection Training Survey indicated their firms did not have a formal training program for credit and collections.”

The survey presented that 89% of the sample organizations spent less than $1,500 per year on business process training, how credit and collections is changing and the tools needed in the 21^st century to be successful. Organizations today expect sterling receivable agings and tremendous cash flow from a staff that have little or no credit collections training. This makes no sense! To put this into perspective, just because I have a saw and know how to use it – doesn’t make me a cabinet maker! Would you go to a dentist who has all the equipment, and training on the equipment, but no formal training and testing in dentistry? I bet not!

I feel that time has come to stop buying all the new ‘widgets’, all the new snake oil remedies and get back to basics. The basic question is “Are my staff properly trained in Credit and Collections?”, “Are my staff aware of and using all the latest techniques, in light of the current laws and economic situation?”

Face it, the newest widget isn’t going to do it for you, nor will all the training on how to use it. Where you will reap huge benefits will be in your core understanding of the process and what you need to achieve given the limitations. So go and get the training you need, the core training to be the Credit and Collections professional, and then be the Drucker in your organization, and break then rebuild those Industrial Revolution style processes.

Accounts Receivable Collections; Get with IT!

Lately I have been pondering why AR collections in the professional services have been lagging behind their commercial entities. Over the past few weeks I have given insight into some of the major reasons. It wasn’t until reading the article, “Watch These Fast Growing Technology Trends”, in the March 2008, Credit Today magazine that I began giving more thought on the finer details of the causes for delinquent receivables.

The last 50 years have brought more technology to the market place than all preceding history. Each day more companies are bringing better and faster tools to the market than currently available. With the onset of electronic commerce, technology built on the other side of the planet becomes easily accessible by organizations in small towns. With all of this influx of technology, why aren’t organizations reaping the benefits? For the most part they are, however not to their full potential! The gap in productivity between potential gains and actual gains plagued me during my early years as an accountant. I saw the rise of technology and I myself assimilated it into my professional life as fast as it was available. I adopted technology quickly, but it seemed that the rest of the world did not realize the same gains. As I moved from public practice into a law firm, I realized that the problem was even worse than I had experienced previously. It wasn’t until my first few years in the technology field, that the problem became blazingly more pervasive.

My fascination with this ever growing gap between potential gains and actual gains due to the introduction of technology began to become the focus on my thoughts. I often wondered if I was the only person who saw this problem so clearly. In the late 1990’s, I speculated that the gap was the result of organizations simply failing to put in the 3rd and 4th most important element in the assimilation of technology. I reasoned that organizations spend a fortune on hardware, software, and then go lean on training and almost nothing on business process reexamination. Here were organizations that were spending a fortune on the latest tools, but they reaped only marginal productivity gains. The result, a faster way to undertake the old processes!

Interestingly enough, through my quest to understand this phenomenon, my research, and ultimately my thesis, lead me to the Productivity Paradox. Although first identified in the mid-1960s, it didn’t become a concept of intense study until the mid-1970s. The concept in research literature is defined: As new technology is introduced into business, worker productivity decreases. Turban et al (2008) redefined the stance as the “discrepancy between measures of investment in information technology and measures of output at the national level.” Suffice it to say that this topic is vigilantly debated by economists all the time.

Whether the underlying reality of the paradox is solved or not, should not impact our here and now! We need to understand the role of technology in our environment, and realize that it is always changing. What we need to be very cognisant about is to not only understand the new tools, but most importantly take the time to reexamine our business processes so that we do more than simply speed up our old processes.

On that note, I will leave with you one of my favorite quotes. In speaking to Ed Poll on the same topic, Ed said “technology is only a tool for collections, never to replace the human element”. A substantive quote was made in his book, Collecting Your Fee. Tools without knowledge of their use and more so the lack of insight into new ideas, simply aligns new tools with the functionality of old tools.

In receivables management, Getting with IT, should have you focused on getting with Information Technology – all the new tools available to you. In addition, getting with IT should be getting the Intellectual Training to understand the value of the tools, but more importantly the Insightful Thought on better ways of undertaking current practices.

Good Luck!

Through the Looking Glass

You all must remember the novel; it is the sequel to Alice in Wonderland. Oddly enough, author Lewis Carroll denied the novel was a sequel but rather a work to stand on its own. Although characterized as literary nonsense, I realized this week that, from an economic perspective, the novel carries tremendous merit.

This week I spent a significant amount of time in conversation with some of the most astute business minds in banking. Here was a group of people who internalized and projected from not only national vital statistics but those of a global economy. At their level, money was quantified by billions and hundreds of billions rather than the units we carry around in our pockets. I was amazed and my thoughts were validated that the US economy is stepping into a recession and more specifically stagflation. However, for these people the results of measuring vital statics were numbers; objective, cold heartless numbers! The barrage of reports and analysis could fairly predict where the economy was going and how, in their capacity, their institution should react.

I have always professed that the economy screams at us, every day, hour and minute what it is doing and what are its intentions. However, like Alice in Through the Looking Glass we don’t see our reflection; we are more enthralled with what is on the other side of the mirror. We aren’t interested in the reality which is being screamed at us, we choose to create our own reality; our illusion of reality, the one on the other side of the mirror. Once we get into our illusion, separating it is based on our ability to deflate our ego and recognize the world around us.

Right about now you should be wondering, how does this relate to AR management in my organization? Surprisingly enough… it is a DIRECT REFLECTION. In our professional practice we often live in this delusional mindset that we, the principle, know all about the environment and the client. When in fact we are looking through Alice’s mirror and failing to see the true reflection of reality. As a principle or partner, I accept a case where I really don’t undertake any due diligence before I establish the client relationship. I believe the engagement is important for my career and that the client will pay the account in full. There is my illusion; for payment of an account is based on a series of compound probabilities. Without a due diligence investigation of that wonderful client, which could be a deadbeat in disguise, the reality of the client not paying, may have a negative impact on my career.

Now when my ego is blended with my illusion of reality, the simple problem gets worse. The work is done and the AR is sitting on the books steeping with each passing day, week and month. Not to mention the cost value of money as that account reaches antique status while sitting on my books. You know the situation all too well, that account is out there for everyone to see, and your sense of reality is faulted. You were looking through the mirror instead of into it. YOU didn’t see the signals. However, it gets worse; you are the partner a well learned person, an authority in your field. How can I be wrong, the client will pay – I guarantee it? What you are doing now is protecting your fragile ego; you must admit that you pushed the card and landed yourself into the fork in the road and now there is no going back! You are left with only two choices, admit your error and write the bill off or seek validation that the client will pay, by leaving the account on the books and maybe even taking on more work in hopes that the client’s cash flow will increase and all accounts will be cleared up. This is your second illusion!

When illusion mixes with ego, it is a recipe for a downward spiral – a train wreck. How can I go back to my partners and my committees and say I was WRONG. How do I resolve the problem, learn from my mistake and most of all spare the firm all of financial losses, and essentially turn back time. The resolution is a two step process, which doesn’t include going back; in the here and now, admit your fault, write the bill off and go on. This also means coming clean with all those who are involved.

The second and most important situational resolution is putting processes in place that prevent you from misreading reality again. Although the client’s ability to pay is important, deflating your ego is probably the most important prevention mechanism. Recognize that you DON’T know everything. You may be the best litigator or possess the best M&A mind, but you do not know everything about credit management. Marcus Buckingham in his book, Now Discover Your Strengths, professes that we should focus and train to increase those attributes for which we have an affinity, and pass onto those the things for which we have no affinity. In his recent speaking engagement at Arizona State University, he spoke how Tiger Woods’ trainers made him practice more at his shots from the tee and not his putt, as he has always been a poor putter. So to emphasis his winning ability is to get the ball closest to the cup.

To put this all into perspective, do what you do best and let others do the rest. Never fall into an illusion of reality. Looking into the mirror is the truth instead of looking through the mirror, and creating your own reality. Finally, as Alice awakens from her experiences of her dreams, she blames her black cat. Like Alice, we often blame others when we look through the mirror and create a train wreck. Maybe it is time to stop the vicious cycle, listen to the numbers, seek the knowledge from those in the know, do what you do best and most of all destroy your ego and admit when you have erred. The costs of illusions are high!

When is Enough, Enough?

Although it is a faint memory, the 4^th quarter of 2007 has left its skeletons. If you don’t think it has, sit back and peruse your aged receivables. You know those skeletons, they are sitting there, now better than 120 days old. They amount to a river of broken dreams. In the back of your mind, the words of that partner still ring clear, “I am almost reasonably positive the money will come in by December 31^st”. While they were being uttered you hung onto every syllable, for that meant the difference making the target or missing the target.

Now as you reflect on those hectic times, you can see where things started to brew into the train wreck 2007 had become. I have already written about the moderate growth that some firms experienced in 2007. Well if you are up-to-date on your reading, you would have caught the February 25^th ABA article, Large Firms Prepare for a Slower Year, by Debra Cassens Weiss. Face it, the global economy is heading for a recession and the world powers are denying it. They sort of won’t tell you about the “800 pound black bear” before you go into the woods. I have written about it and anyone with a television set and at least one channel would know.

Over the past few weeks I shared with you many of the mantra held by the corporate world when it comes to collections. Now more than ever it is time to take heed, otherwise the 2007 train wreck of year-end will pale in comparison to that you will experience in 2008! My recommendations now are get yourself a subscription to Business Credit and learn what your corporate counterparts have known for years.

With Business Credit tucked under your arm and a plethora of caustic blog entries, you may be well suited for the recessionary jungle of 2008. My secret for you is...I perceive that the global economy will begin to see a recessionary reprieve in 2010! However, with that said, and the plans in place – best of luck! Keep in mind that many are vying for your client’s less than stellar cash flow. Make sure your bills are at the top of their list.

Now that your processes are in place to have stellar collections in 2008, there are those legendary receivables. Those that have been around as most office furniture or the first service patch of Windows 2000. At some point, you need to come to the realization that unlike wine, receivables don’t mellow and get paid with age. Instead, the client becomes more calcified and less likely to make concessions. Although calcification is an interesting phenomenon, there is something even grander – the statute of limitations and the Fair Credit and Collections Act. All I can say is make the move to collect on something where the statue has run out and you should consider yourself lucky if you are able to walk away with just an earful of profanity. Instead, you should consider a “Don-ism”. For anyone who has worked with me enough you will know the phrase.

“You derive no benefit in life by proving someone else wrong”

Remember, in collecting receivables you can only state your case so many times and in so many ways; if the client doesn’t move then you need to. Imagine the surprise when I saw that Susan Raush, a corporate credit manager who authored Best Practices: Collections, have the same mantra. Her statement goes as follows:

“When you have a legitimate dispute, you need to weigh the costs against the benefits of continuing the dispute. Sometimes it just isn’t worth it to be ‘right’ and you have to graciously give in to the customer’s demands in the name of goodwill and future profits.”

When the time comes, and you know it has for many of your receivables, you simply need to learn from the experience and walk away. Not walk away in the light of one day the payment will materialize. But rather, do three things: internalize why the receivable never got paid, put in safeguards to prevent it from happening again, and the hardest thing – write it off! When you write it off, it will be like a “therapeutic cleansing”; a rebirth of your purpose in managing receivables!

Managing receivables is probably the most difficult role in an organization. It is important to know when you have done all you can and when to simply walk away. I have learned everything has a beginning, middle and an end. It is important to know where on the continuum you are. Know when you have reached the end, clean up the skeletons and bow out gracefully. Always remember, as you exit the stage, all what you have learned. Most importantly, repeat successes not failures!

Actions, Not Expectations, Determine Results

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

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

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

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

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

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

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

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

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

All Roads lead to Rome

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

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

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

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

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

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

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

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

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

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

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

Prospecting with Receivables

A few times in the past year I wrote about the radical difference between organizational management in the corporate world and that of the professional services world. These differences permeate every facet of the entity, from vision to what type of coffee is available. It is for this reason that professional service organizations operate under a profit-limiting glass ceiling unlike their corporate counterparts. After years of research in this area, I have concluded that the managerial organization of professional service organizations is inherently flawed and this is the reason for the rampant inefficiencies that plagues all of these organizations.

The greatest absurdity placed on today’s law firm partners is the expectation that they have skill in all areas of organizational management. Although they may be well versed in reorganizations or stock issuances, they don’t have the unique skill in managing their own partnership. Then because there isn’t a single leader but rather a sea of partners, jugular issues are sacrificed for the sake of status quo. Regardless of the firm, today’s partners must maintain a threshold number of billable hours per year. They must manage billing and collections realization, manage junior professionals, build their client base, bill for services and collect on their billings all within a 168-hour week! Given time for sleep and commuting, all aspects of today’s partners’ time are sliced down to the 1/10th of an hour!

Following a few conversations with three partners of a prominent global firm, I would like to share some of the highlights of our discussions. The conversation on prospecting came about when I made notice of a significant achievement the firm had achieved in a new practice. My colleagues shared with me how difficult it was to get their practice where they needed it to be. They were pressed with the demands of keeping on top of the workload they had and prospecting for new clients. Although well versed in their area of specialty they had difficulty in getting hold of and conquering the prospecting function.

Prospecting is probably the most difficult job in an organization. The position is well suited to a person with a true hunter instinct. This individual must seek out organizations that could use their product or service, find the correct individual, get beyond the gatekeeper and make contact. Once contact is made, a relationship must be initiated, then nurtured either to the point of a sale or a parting of ways.

In the corporate world, businesses have specific people whose entire role is to be the hunter, to find the prospect and open the dialogue. Once the dialogue is opened then a product/service specialist is introduced. The specialist, through fact-finding, attempts to close the gap between the prospects needs and the firm’s offering. In a highly sophisticated organization, a closer is brought to move the process to the ultimate sale. However, in the professional services world, this entire process rests on the partner’s shoulders.

Sadly enough today’s partners don’t realize that prospecting is already at their doorstep. Some of the best prospecting leads are on the pages of their receivables listing! The beautiful thing about prospecting within the receivables listing is you already know the clients’ business, if they are good payers, and you already have a relationship. There are essentially two types of prospecting which can be done from a receivables listing, service expansion, and service extension.

Service expansion is a process of providing different services to the same client. By way of an example, suppose the firm has a client, a company in the business of automotive parts manufacturing. That client would definitely have a need for patents and trademark work because of their R&D technology. They may also require advise in employment law, possibly litigation, immigration and maybe estate planning for the principals. Today’s firms have to realize that their receivables listing is an untapped goldmine of new work just waiting to be mined! The first step in tapping this valuable resource is communication. It is the partner’s responsibility to maintain regular communication with his or her client and to find out their needs to see how the firm may be able to be of assistance. In addition, the partner should keep other departments and practice groups informed as to the type of client for whom they have just completed work. Essentially the firm must ensure that each client is aware of all of the services the firm offers. This type of behavior is slowly being realized when firms offer lunch-and-learn sessions on current topics. However, this “shotgun approach is better than nothing. Truly, what is needed is a highly refined strategic approach, such as a personal call to the client with information of a new law that could impact their business!

Service extension is much more involved and requires the partner to be more in tune with the client and what is going on within their organization. A good example of this was provided to me by a Director of Administration of a national firm. During our conversation on the topic of delinquent receivables, he brought up that one of the firm’s large national clients had requested better payment terms. When faced with this type of question, the firm must have a plan on how to react. Although my colleague’s firm did issue the extended terms, they got nothing in return when they should have!

In the December 2007 issue of Credit Today an article entitled: When Your Customer Asks for Extended Credit Terms, by Doris Solis, explains how this question opens the door to a myriad of opportunities for both the client and the organization. Solis expounded on the many reasons why clients seek extended payment terms and how a true credit professional must research the company before making a decision. This is a critical juncture in the relationship. The client wants something, extended terms and the firm wants something, payment of receivables. The key area of research for the credit professional is in the basis for the extended terms and the client’s ability to pay essentially the client’s credit score and their circumstances.

I shared the article with my colleague and explained how the firm took the wrong approach with the client. When faced with the question of extended credit terms, they should have undertaken a thorough analysis of the client and their ability to pay. What they would have found was that the client was a good credit risk and wanted better terms because they were undercapitalized while they were in a strong growth phase. Where the firm made their mistake was in not seeking something in return for the better credit terms! As it turned out, the client had legal work placed in nine other law firms. The firm should have opened a dialogue with: “we recognize that you are using ten firms to fulfill your legal needs. We could offer you extended payment terms and possibly better hourly rates if you agree to move, where possible, 50% of the work you place with other firms to our firm.” The end result, if taken, the firm would have new business from a good client without the hassles of prospecting for new clients!

Today’s firms have so much technology, that they simply fail to see the opportunities right before their eyes. The receivables’ listing clearly outlines the good, the bad, and the ugly clients. From there, firms could easily take the next step in expanding their business – learn more about the clients and communicate with them. Having a receivables listing in hand and knowledge of the client’s business, most of the prospecting hard work is done! Start using that collections intelligence wisely – prospect from your receivables!