General Practice, Solo & Small Firm Division

American Bar Association
General Practice, Solo, and Small Firm Division
The Compleat Lawyer
Fall 1997
copyright American Bar Association. All rights reserved.

Show Me the Money! No Collection, No Compensation

BY EDWARD POLL

Edward Poll is a certified management consultant in Los Angeles. He is the author of The Profitable Law Office Handbook: Attorney's Guide to Successful Business Planning and Attorney & Law Firm Guide to The Business of Law (ABA General Practice Section, 1994), and the developer of The Tool Kit for Buying or Selling a Law Practice. He can be reached by e-mail at edpoll@lawbiz.com.

The business basics of a law practice are really very simple. First, you get the client; then you get the work; next, you bill for your work; and then you expect to receive a check by return mail. Communication and Fee Disputes

Many jurisdictions have rules of professional conduct that compel arbitration of fee disputes. These proceedings often are binding on the lawyer and not binding for the client. If the client is not satisfied with the arbitration results, the client has the right to file a de novo proceeding.

Those who arbitrate fee disputes between lawyers and clients have identified two things that the lawyers involved could have done to avoid the dispute in most of the cases: (1) provide a written fee agreement, and (2) improve communication with the client.

A written fee agreement, properly discussed with and explained to the client at the very first meeting, is a marvelous tool to sell a lawyer s skills and to explain the business nature of the prospective relationship. This is the time to tell the client that the process is a two-way street: The lawyer will do the work as promised, and the client will pay for the services as promised. Failure of either party to keep their part of the bargain will cause the attorney-client relationship to deteriorate.

Another way to improve the communication process is for the lawyer to keep the client informed of everything that is happening in the matter and what is expected to happen in the future. One good tool for such communication is the development of a budget. A budget should contain an explanation of the events that are expected to occur (with assumptions clearly set forth) and the costs anticipated to accompany each such event. Getting the client to "buy-in" to these future expectations can prove very effective in assuring prompt payment of the billings as the work proceeds according to the budget. - E.P.

If you receive the check from your client, you can pay the expenses of running your office...and you can pay yourself. But if you fail to collect for the work already performed, you won't have the funds necessary to maintain your practice.

This reality was very recently brought home to me by two clients. The first, a medium-sized law firm in a major metropolitan area, called me in to review its financial affairs. The firm was having difficulty paying its bills and could not understand why. Because of this, the lawyers in the firm found themselves having to reduce their "drawings" by a substantial amount.

The firm members didn't understand the economic conditions of their existing clients, nor were the intake procedures adequate to tell them whether new clients could afford their legal services. They also continued to work for clients long after it became obvious that the clients were not going to pay for the old billings, let alone future ones. And because the law firm did not have good controls over its accounts receivable, the lawyers erroneously assumed that billings were being paid.

Because the firm was collecting only 65 percent of its billings, its hourly rate was effectively reduced to 65 percent of what the lawyers thought it was. If you bill $100 and receive only $65, it is this latter sum that controls your ability to pay bills and to pay yourself.

Another lawyer, against my advice, continued to work for a client whom she believed would pay the bills. Close to the time of trial and with the client owing $130,000 in unpaid fees, the lawyer faced having to complete a trial without receiving payment on the amount already due her. Additional fees, also likely not to be paid, would accrue while conducting the trial. She found herself on the horns of a dilemma: Not wanting to work because the client hasn t paid the bill, but being forced to work at her highest potential in order to avoid claims of negligence if the case is lost, yet with only a slim hope of being paid by the client.

While these horror stories abound in small firms and sole practitioners offices, even large firms experience these problems unless they are careful. At the end of each fiscal year, you may see management committee members bustling around the firm to encourage all partners to contact the clients for whom they are doing work in order to collect on the outstanding receivables and get commitments for payment. Large firms know that until they "see the money," they cannot distribute it to their partners.

Prepaid Legal Services

BY GERALD HECHT

Gerald Hecht is a general practitioner in Danbury, Connecticut. He recently celebrated his twentieth year in practice. He can be reached at 203/792-3203.

What would you say about a system that costs your practice nothing, provides you with fee-paying clients, makes your telephone ring, and sends you sizable checks every month? Great! Wow! Huh? It sounds too good to be true.

The prepaid legal services industry prides itself on connecting clients with lawyers in an expeditious and efficient manner so that the client and the lawyer benefit. It is made up of basically three kinds of prepaid systems.

Discard all notions of prepaid legal services as either referral services or legal aid. It is definitely not either. Prepaid legal service plans are commonly large, for-profit enterprises of national breadth and influence. They have been operating for decades, not just recent years. Finally, plans have become an integral part of many successful law firms that receive clientele from the plans and yet remain independent and entrepreneurial.

Plans are divided into different categories based upon clientele, grouping, and open or closed status. Some of the largest plans are union-based. Negotiated in massive collective bargaining contracts, prepaid legal services become an employee benefit like medical insurance or eyeglasses. The money deducted from each paycheck is put into a fund that finances the establishment of union employee law firms or independent firms that service plan members nationwide. Examples are the United Auto Workers and the New York State Teachers.

Some private plans work in a similar fashion. A company signs up the plan for its employees, deducts a small sum every month from a paycheck, which, in turn, pays local counsel to service the plan members. Naturally, not every employee has a legal need every month but the ones who do make a claim for benefits pursuant to the plan. For example, Hyatt Legal Services of Cleveland, Ohio, participates with Pepsi, John Deere, and Pitney Bowes. Midwest Legal Services of Des Moines, Iowa, services Kraft General Foods. Other plans mass market. The Signature Group of Schaumburg, Illinois, solicits through credit card bills. Members pay the plan through a small credit card charge every month. Other plans market through credit unions, hospitals, universities, or other large employers, public or private.

What's in It for the Lawyer
Most plans require the lawyer to charge a discounted hourly rate for the plan members $70 to $100 per hour is typical. Not great, but for the routine legal services covered by the plan, such as wills, real estate closings, simple divorces, or criminal matters, an efficient firm can still prove profitable.

Some plans pay the law firms directly. After performing services, the lawyer bills the plan at the agreed-upon rates. There is no collectability problem.

Prepaid legal services plans make the phone ring. Many plan members need simple telephone only advice. As such, prepaids are not for every firm in that a significant amount of time is spent in non-fee-producing matters. But the benefits can far outweigh the disadvantages. Better the Odds of Payment
Compensation is inexorably tied to collections. Here are some specific ways that lawyers can increase the effectiveness of their collection efforts:

1. Know the reasons for failure to pay. Clients may not pay for a variety of reasons, and these reasons run the gamut from anger concerning the quality or price of the legal services rendered to the client s inability to pay not only the legal bill but also other bills as a result of economic reverses. The reason for the client's failure to pay is important; this information should assist the lawyer in determining the approach to be taken for future collection efforts.

2. Hire a cheerful, caring telephone operator (receptionist). When a prospective client picks up the telephone hand-set to call a lawyer for the first time, the prospective client is already in a great deal of stress. Most clients go to lawyers only when there is a problem that is stressful. The lawyer whose office staff facilitates the reduction of that stress will experience an easier time collecting fees.

3. During the first meeting between the lawyer and the client, the issue of fees must be discussed. Clients appreciate not having to raise the issue. It is better for the lawyer to acknowledge that the issue must be dealt with and to obtain an agreement that both parties can accept.

4. Prepare a written fee agreement, to be signed by both the lawyer and the client. The written agreement should explain all charges to be made and the need for timely payment by the client of each bill.

5. Do not promise work product sooner than realistically possible after considering the complexity of the matter and the workload of the lawyer's office. If, for any reason, the work cannot be performed in the manner and in the time promised, the lawyer must communicate with the client. The client will accept change if told in advance of the due date.

6. Tell the client what to expect each step of the way. Do not "hype" the client. If possible, include a tentative or expected timetable of events. The client's perception of the legal problem frequently is different than the reality determined by the lawyer. Educate the client.

7. Tell the client what has happened immediately after it happens. If the client is told what to expect, what is happening as it is happening, and what actually occurred, the client will then understand the entire process of his or her case; will feel that he or she was a participant in the process, not a disinterested observer; and will fully understand and appreciate the diligent effort put into the process by the lawyer.

8. Age the accounts receivable weekly. Review this aging weekly. Determine who the "problem" clients are. Gather information about the nature of their problem. Determine an immediate strategy for dealing with the clients and their particular issues.

9. Send reminder statements if the bill is not paid within 30 days.

10. Delegate authority to someone to review each file, contact each client as necessary, and pursue collection of the accounts receivable. Successful businesses do not send their salespeople to their customers to collect; that is handled by a separate credit department. If the lawyer must contact the client for payment, the client normally will be too embarrassed to return to the lawyer. Now, not only has the bill not been paid, but the lawyer has lost a client who might, given an improvement in finances, pay the outstanding statement and make an additional contribution.

11. Stop work! If the client does not participate in the process - and keep the promise to pay as billed - do not continue to work for the client. Either notify the client or, in certain circumstances, make an appropriate motion before the court to be removed from the case.

12. Sue! Some statistics show that the lawyer-creditor is successful in more than 95 percent of the litigation against a client-debtor. Malprac-tice cross-complaints or counterclaims are not automatic responses. Of course, when litigation occurs between a lawyer and client, it is obvious that there will be no future relationship between the two, which is an automatic loss of future business.

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