September 01, 2018

Finance

Peeling the Onion: The Missing 35 Percent

Peter Roberts

I want you to get paid. Thank you for the chorus of agreement! But paid what? Your fees, of course. But what exactly will your fee amount to? Let’s take a closer look at the “onion skin” of your fee, between actually performing the legal tasks and what amount you deposit into your operating account.

Capturing the Effort

The effort you undertake on behalf of your clients is monetized with a rate per hour. The ultimate amount is affected by the effort recorded and the rate charged. The important variable is the effort recorded. I have heard it said that lawyers fail to record about 15 percent of their effort when completing their tasks. If true, in effect this is a 15 percent discount, and this discount is invisible to the client.

We all can agree it’s difficult to both remember what tasks we did and how long it took to do the respective tasks, especially if a delay in recording the time intervenes. Add to this that we dislike doing timekeeping. And so the deck is stacked against us from the beginning for these reasons. And the client gets the benefit with no knowledge of the discount so you do not even get a pat on the back from the client saying what a great value your service was!

Mobile cloud-based timekeeping certainly helps us to capture more time in a timely manner. Yet I realize timekeeping is not only about rate times time. Timekeeping is also somewhat of an art form.

The Prebill Presents Itself

The prebill portrays all of the time recorded for the matter for the relevant time period. You now see the bigger picture of what was done and the results achieved. And you think, How will the client perceive the big picture? Is the client prepared for this bill? What have you been telling the client about what bills to expect? Has the client expressed any annoyance with your office? Is the client a reasonable person?

I ask these questions because you are evaluating in effect the “quality” of the bill, the art form part, and you have the power to adjust the prebill amount. Maybe there was some wheel spinning by an associate or paralegal, so it may be appropriate to shave some time off the relevant amounts. You may be sensing the client is not happy for some reason, so you are tempted to reduce your own time. But your time is charged at a much higher rate per hour than the other timekeepers for the matter. On the other hand, gone are the days when a premium might be added for intense interim effort or an extraordinary outcome.

What the Final Bill Looks Like

The bill the client receives is an attention-getting message from you and indeed is part of your service. The bill describes in adequate detail who did what and when. If the bill is in the four-figure range, you add a note describing both the why of the efforts and the result derived, or will derive, from the why. Perhaps your adjustments net to a 10 percent write-down. If so, the bill should show both numbers. Ideally, the bill should motivate the client to pay sooner rather than later because the value is easily perceived. Be aware that the client’s motivation to pay may suffer if the bill is for a time period in the semidistant past. “If you are in no hurry to bill me, why should I feel obligated to pay immediately?” Your time and billing software gives you a report categorized by days showing by matter and by billing partner how old the time is. Of course, I am not speaking about contingent fee or other matters with delayed billing.

You can use this report to set up a billing budget each month. Take one-third of the total as the amount to bill. Then take last month’s total, deduct one-third and add the actual new amount worked to reach the next total, of which you take one-third to bill the following month and so on throughout the year. Consider deviating from strict month-end billing by splitting the billing at midmonth and end of month. Also consider billing active matters twice a month.

Waiting for Godot, er, Payment

Accounts receivable are a fact of financial life for any business. I note the exception of the trades, such as a plumber or electrician, who usually expects payment upon completion of the work. But for law firms the immediate benefits of a fixed leak or restored power are absent. Your service is built with each successive month of effort, and the result may be unpredictable or ill-defined and not as visible as a fixed pipe or power being back on.

Watch carefully the report of accounts receivable. Amounts over 60 days old may be incipient no-pays. Does your fee agreement include language describing what an overdue bill will engender, such as ceasing work on the matter and/or interest charges? Develop a script for your bookkeeper to use when contacting clients about overdue payments. Have the script be professional and courteous, of course. The client may have a legitimate reason for delay and feel more inclined to tell the reason to the bookkeeper than to you. That contact by the bookkeeper is part of the overall experience the client has with your office. You may have heard the adage that clients may not remember much of what you said or did during the matter, but they will remember how you and your office made them feel.

Payment Is the End of the Pipe

But the client now asks for a 10 percent discount in return for immediate payment. Remember the client is unaware of, or conveniently forgot, the discounts already built into the bill. If you agree, you now have realized just 65 percent of the amount of the original effort for the matter, derived by adding 15 percent of missed effort, plus a 10 percent write-down, plus a 10 percent discount for prompt payment. Ask yourself, Does this net amount approximate the value of the services for the client? Alert readers will note the final total percentage discount is a bit less due to the successive declining totals, but you see my point!

The pipe I refer to is the continuum of time recorded, time billed and time collected. The term “realization” is used to describe the percentage of your original fee that ultimately is deposited into your operating account. That said, if the value of the services is measurably higher than the cost of the time and the scope of work is reasonably predictable, consider using a flat fee for future similar matters, one that includes an amount reflecting the added value.

Peter Roberts

Peter Roberts is a private practice management consultant for lawyers. He is the former practice management advisor in the Law Office Management Assistance Program of the Washington State Bar Association for 13 years. He is active in the ABA Law Practice Division as co-chair of the Law Firm Finance Committee. pete@practicelawadvisor.com

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