- What are the six key elements of an effective collection policy?
The three fundamentals of the law firm business model are: marketing (secure and maintain clients), production (do legal work efficiently and effectively), and collection (get clients to pay). All affect the bottom line, but of the three, collections—and particularly low collection realization rates—remain the biggest financial problem for most lawyers. A low realization rate means that, even as the firm pays expenses at 100 cents on the dollar, it is earning less. This lost cash flow may lead to disaster if it continues.
Collection problems typically arise from failing to establish, explain, and enforce effective collection policies. Lack of a firm-wide written collection policy is the number-one hurdle to establishing effective realization rates. Such a collection policy should cover everything from the beginning of the relationship with the client, to ongoing expectations of the client and the firm, to the payment of the final bill, to alternatives for handling a fee dispute. An effective policy should have six key elements, each of them equally important.
1. Detail Engagement Expectations. Getting fees and payment terms in writing should be at the heart of the engagement agreement. That means getting the client’s written agreement regarding the fee to be charged and how it will be calculated, when the fee is to be paid, and the consequences of nonpayment. If the client understands what to expect, collections increase significantly. At minimum, the lawyer and client should agree on:
- Who the lawyer is representing
- Who should receive the lawyer’s bill
- The scope of the representation—what the lawyer will and will not do
- The fee to be charged and how it will be calculated
- When the fee is to be paid
- The client’s responsibility to pay and the consequences of nonpayment
- Dispute resolution procedures if there is a dispute over fees.
Stipulating payment rates and terms up front is the best way to get paid. This is particularly true when accompanied by the client’s acceptance of a budget that addresses events, time, and anticipated fees. The engagement agreement should state explicitly that the lawyer will continually update the client about time needed and expenses incurred versus the budget. Once the client formally approves the final budget, all subsequent communication about it must be a collaborative effort. Because the lawyer and client will each have unique information at any given time, both must communicate constantly about developments to keep the budget on track. Review the budget document with the client periodically, explain how much they have spent (and why), and seek approval of any necessary changes.
2. Detail Payment Terms. The engagement agreement is the foundation for all future fee and collection considerations. Never hesitate to be as detailed as possible in the terms, including a written fee agreement. Typically a written fee agreement is required for contingency work but not for hourly or transactional work, though states are moving in the direction of requiring written agreements for all but de minimis matters. Many attorneys miss an opportunity by not having a written fee agreement. Defining and managing client expectations, how these expectations will be met, and removing uncertainty about fees carries marketing benefits as well as collection benefits.
Eliminate uncertainty about the collection cycle. Set specific dates of the month when clients will be billed. For example (particularly if most of your billing is done by mail), state in the agreement that invoices will be sent on or about the twenty-fifth of the month so that clients receive statements on or before the first day of the following month. Since many businesses close their payable cycle on the first to the fifth of the month, and pay their bills on or about the tenth to the fifteenth of the month, this can speed payment.
3. Bill Regularly. With the terms established, bill in a regular and timely way, using statements that contain a full narrative of the work done and the goal accomplished by that work. The more information that the invoice provides about what was done, the more likely the client will be to perceive the bill as fair and to pay it promptly. Too many lawyers make the mistake of brevity when billing—for example, “work on motion for summary judgment, 20 hours.” Break any such charge into its basic elements, with the amount of time needed for each: review key documents and deposition testimony, draft statement of uncontested facts as required by court procedure, research precedents in four similar cases, and so on. Such itemization does not try clients’ patience—it helps them understand just how much was done on their behalf. Use action verbs to describe services and clearly indicate the specifics of what was accomplished. This helps clients appreciate the effort required for success.
4. Enforce Policies Consistently. A collections policy becomes a dead letter if lawyers discount their fees—particularly if the client has earlier agreed to pay the full amount in the engagement agreement. Clients who argue about over-billing often just want a discounted bill. Such tactics are quite popular with clients in December. They agree to pay part of their large bills in order to wrangle discounts because the remuneration system for partners is based on collections by the end of the year. Any bills collected in January do not count for another 11 months. Even worse is when law firms propose the discount. Often a firm in its year-end push to collect fees will offer some type of discount, especially for repeat clients with significant billings. Even clients with a signed fee agreement soon decide not to pay without a discount. They wait until the end of the year and know they will receive a discount then. With a clear collections policy, firms should refuse to offer the discount in December, tell clients that a fee agreement is in place and will be enforced under Rule 1.16 of the Rules of Professional Conduct.
5. Follow Up Frequently. Follow up on overdue accounts. Make sure the bill is received and, if it has been, if the client is dissatisfied. Large and small firms alike often continue to work for the nonpaying client in the misguided hope that continuing the relationship means getting paid and receiving referrals in the future. However, clients respect firmness and a businesslike approach, and generally do not go out of their way for lawyers they disrespect.
To maintain respect and avoid taking a clerk’s role, the lawyer should not seek collections. If the lawyer calls about nonpayment, clients may become confused about whether they are requesting information, seeking new business, or requesting payment. Soon, clients will refuse to return all calls. They know they owe you money and think that’s the only reason that you’re calling. The best practice is for the firm’s receivables staff to request payment.
6. Pursue Legal Remedies. Rule of Professional Conduct 1.16 (“Declining or Terminating Representation”) allows lawyers to withdraw from a representation if “the client fails substantially to fulfill an obligation to the lawyer regarding the lawyer’s services and has been given reasonable warning that the lawyer will withdraw unless the obligation is fulfilled.” An attempt to withdraw without adequate notice, for example right before a trial date, and without careful records of the client's billing and payment performance may bring a state bar disciplinary action.
But if a lawyer continues the client representation, and has reviewed the client file to make sure that there has been no negligence in that representation, using a collection agency or initiating fee arbitration on current clients who are not paying is perfectly justified if an engagement agreement is in place. Otherwise, the representation becomes a pro bono assignment, and if pro bono service is not stipulated in the engagement agreement, it is not necessary.
Ultimately, suing the client may be an unpalatable but necessary final step. This should not be done lightly, and not without adequate communication on and careful records of the client's billing and payment performance. However, it can be effective as a last resort—some statistics show that the lawyer-creditor is successful in more than 95 percent of litigation against a client-debtor. This extreme action should never be necessary if a collections policy has been established and enforced, step by step.
This article was previously published as “Effective Collection Requires a Collections Policy” by Edward Poll in the October 2012 issue of Law Practice Today, published by the ABA Law Practice Management Section. Copyright 2013 © by the American Bar Association. Reprinted with permission. This information or any or portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.