A practical plan to improve cash flow and client relations
Some messages are worth repeating. This popular article appeared in the April 2006 edition of Proctor, but the message in this updated version is as relevant now as it was 10 years ago:
Many firms bemoan the difficulties with slow, combative, and non-payers. And so they should, when it typically takes around $150,000 of additional billing to replace one $50,000 write-off. However, the fact is that most payment problems are self-inflicted. Peter Lynch looks at causes of non-payment and the pathways to improvement. On balance, the news is positive – because the problem is largely controllable, if partners have both the will and discipline to do something about it.
In a former incarnation, I had a reasonably large business in the building and construction industry.
Like most industries, we had our share of truisms – but the one that stood out above all others was ‘a job that starts bad finishes bad’. There was the occasional exception, but not many.
My experience tells me that the situation isn’t much different in law firms. However, this fact isn’t appreciated as starkly as it ought to be. So what do I mean? Well, firms too often look at difficult payers in isolation instead of seeing payment for their work as simply one step at the very end of quite a long chain.
More often than not, payment problems are merely symptoms of poorly opened files and poorly managed retainers. In fact, my firm is now of the view that in the vast majority of cases, problem payers and retainer disputes are more likely to be caused by the legal firm than by the offending clients. How can this be? Well consider these situations:
- Client never had the money to start with (for example, poorly qualified or advised litigation clients).
- Escalation not managed within client’s capacity to pay.
- Retainer, scope of works, agreement, fees expectations not properly established up front.
- Clear terms of payment and consequences of non-payment not established.
- Clients not conditioned to pay regularly (money in trust).
- Over-reliance on documentation (which people don’t read) as a substitute for talking straight.
- Authors not trained in talking confidently about money.
- No clear file-opening policies and procedures.
- No system for monitoring compliance with file-opening policy.
- Clients not kept informed of progress (why should I pay?).
- Poor WIP recording leading to inaccurate billing (account disputes).
- Inaccurate billing damaging client trust.
- Lethargic billing practices reducing the client’s sense of obligation to pay.
- Disorganised, slow and indecisive collection habits.
- An unforeseen change in the client’s circumstances.
- Sheer client opportunism.
The two that you don’t have much control over are obviously 15 and 16. You can’t really do much about those… but you can try to minimise the fallout when they occasionally happen by attending to items 1 to 14 diligently.
So when you read through this list, it should become clearer that just putting more vigour into your debt collection processes isn’t going to solve your payment and cash flow problems. It should help – but it is really curative medicine as opposed to preventative medicine.
When we go through this list with law firm clients, a not uncommon reaction is “surely you’re overcomplicating it – I mean, how have we got the time to go into all of that stuff?” Our answer is simple – if you want drama-free client relationships and the profit and regular draws that you think you’re entitled to, you can’t afford not to.
For firms with poor existing habits, making the important changes doesn’t come easily. It requires both discipline and commitment to see things through… qualities that sometimes are in short supply.
Some of the more sophisticated firms are very good at managing this total process, and this doesn’t just mean tier 1 and 2 firms. Some firms are good at managing parts of the process, but weak at other parts – for example, they might have good documentation, but authors poorly trained in talking about money and weak compliance systems. Others are not very organised at all. It seems more a matter of good fortune than good management that some do not have really serious debtor and insurance claims problems.
So what can you do so that your firm reaches a high standard? In our experience, it is one of those areas where the whole is significantly greater than the sum of the parts – that is, you can’t afford to have any weak links. The five key areas you need to deal with are:
Step 1: Clear matter acceptance policies and standards, and a willingness to apply them seriously and consistently
Having clear policies is important. It saves time. Authors know what they can and can’t do. They know what needs to be referred and what doesn’t. Clients get consistent signals. Policies can be tailored to vary between areas of law where the commercial circumstances differ (for example, high-intensity commercial litigation versus conveyancing). Getting the right policies is as much an art as it is a science – too stringent and you lose business; too loose and you won’t be paid.
The critical thing is not to see the objective here as ‘production of a manual’ but to establish some foundations on which to change the way people do things.
Step 2: An electronic system that helps you manage compliance without being admin for its own sake
When we go into firms and ask about their file opening, they regularly say, “yes, we always have a client agreement and we always ask for money in trust, and we don’t start the work until those things are settled (and so on)”. Yet when we go through a selection of the files, we see evidence of intentions to do these things, but mixed evidence of them actually happening.
Client agreements are sent out, but not followed up. The agreed $$ retainer wasn’t asked for because “the client was a special case” (and subsequent files reveal myriads of special cases). The author simply started the work without the file opening matters being settled because “the client said it was urgent” (In which case, we would argue, you have the perfect opportunity to demand compliance).
So you need to build your file-opening procedures into your practice management system, preferably with workflow steps, and a regular reporting system that enables the practice manager or managing partner to track and manage who is playing the game and who isn’t (partners, staff and clients).
Building a system like this involves a once-only investment of some time and money, but without it, the task of monitoring compliance simply becomes to manually cumbersome and the firm will quickly lose interest in doing things correctly.
Step 3: Author training so they have the skills to talk confidently about money and the firm’s terms of doing business
We can’t overemphasise this. So many lawyers either haven’t been trained in this area, or assume they have the requisite skills but simply don’t. There is absolutely no substitute for positive straight-talking, face-to-face agreement on terms and payment conditions sealed with a handshake. There are ways to do it well, and ways to do it poorly. Done well, you can legitimise almost any follow-up action, including requests for trust money top-ups and chasing of unpaid accounts.
Your written agreement should be nothing more than a legal backstop for the agreement you have reached personally.
Step 4: Some special provisions that quarantine existing good clients from sudden changes in trading terms
The beauty of a full makeover of your client and matter acceptance procedures is that it gives you an opportunity to refocus on your special clients, your difficult ones and all those in between. Generally, it is unwise to simply slam brand new terms of business on important long-standing clients who may have a history of paying reliably and without fuss, but perhaps not with the new stringency that you are considering. Therefore, a quarantined client list makes sense. But make sure you have very stringent guidelines about getting on the list, or in no time at all, weak partners will simply claim that all their new and existing clients are special cases.
At the other end, you may choose to quite openly tell your more difficult clients about your new terms of trade and enforce them rigorously, so that they either become less difficult clients or leave the firm – either being a good outcome.
Step 5: Character and discipline from the partners so that they lead by example and don’t just ‘talk the talk’
As always, this is where the whole process starts and finishes. You can have the best policies, procedures, compliance systems and training in the world, but if the partners do not champion the system (or at least comply) themselves, then how is any of it believable to other people who are being asked to comply?
This is why quite early in these assignments, we deal with partner commitment up front, and if there is any significant doubt about that, we simply suggest that the firm spend its money on an alternative improvement project.
Readers will see that I have written a paper about getting paid without even talking about debt collection. This isn’t to say debt collection is unimportant – but merely that it is just one very late step in a long chain which is significantly influenced by the quality of the preceding steps.
By working through steps 1 to 5 in a structured way, you will be amazed at the improvement in your firm’s cash flow and your client relations… but don’t expect it to be a project that will be completed in a day. As always, there is an amount of pain before the gain.
Published: Queensland Law Society – Proctor, July 2016