There can be a startling difference between the revenues law firms budget for when bidding for business and what they actually get paid for work done if the cycle isn’t supported by good processes and some early warning measures.
The below diagram illustrates the effect of revenue leakage on what is finally collected from a typical invoice, and factors that contribute to that leakage. Some of the factors are simply the cost of doing business, or the effect of fee arrangements in place with the customer. But others are avoidable or can at least be anticipated and mitigated somewhat. Let’s take a closer look at each factor:
Discount to Win the Matter
Discounts to win the matter are often forced on the firm by fee arrangements or agreements set up with the customer. They may be offered in response to competitive pressures for what is otherwise standard commodity work, which could be handled by another firm. The ability to refer to the firm’s historical performance of matters of the same type offers another clue as to what is a fair estimation for the work requested. Being able to objectively review the firm’s historic abilities to complete the work, and accurately price the effort required, lessens the instinct to accept requests for discounts, and maintains the firm’s sustainability.
Write-downs during the matter (that is, work done by timekeepers that is later found to be unnecessary, or beyond scope, or took longer than expected) can be controlled a little more tightly with the help of alerts and task-collaboration tools. Steps like laying out the scope of the work to be done, what assumptions have been made in bidding and carrying out the work, and setting budget amounts for tasks within the plan, provide the boundaries for those working on the matter. Having these boundaries easily accessible, like in matter notes or available as part of the matter plan, provide that support and transparency. Another aid is the ability to monitor the trajectory of time worked against the task budget (i.e., “Is the budget being burned through unusually quickly?”), and compare it to what has actually been completed for the matter.
Late Invoicing (Reduction of Billing Realization)
Reductions in billings related to late invoice submission are heavily process-related. The premise is that the longer it takes to record and submit a timecard for billing, the more likely that time expended will have been missed, or underestimated, or simply forgotten. Customers can also insist, as part of their Outside Counsel Guidelines rules, that timecards be submitted and logged for review well before billing time, or follow strict formatting and itemisation requirements. Time recording that falls outside those guidelines is simply not paid. Without a process to immediately trap timecards which don’t comply, and iterate through to meeting what is required, the potential of not being able to bill for work which is otherwise due remains high.
Having presented an invoice is no guarantee the invoice itself will be paid in full. An excessively late, small amount, invoice from the firm will often not be considered seriously by the client, and be held over repeatedly. The client can also be rigorous in paying creditors as late as possible (for their own cashflow reasons) and not pay in the reporting period of the firm. Invoices which don’t meet the firm’s Outside Counsel Guidelines also result in delayed payment, and the painful process of reconstructing fees and expenses from many months ago to support what is being billed.
Finally, write-offs at collections time need to be factored in. These invoices, though duly issued, are simply not paid for many and obscure reasons. Perhaps there is a dispute or misunderstanding as to scope, or maybe fault for missteps are being settled. The effect is yet another reduction in collections and expected revenues.
All of this can happen before the costs of providing the legal work (that is, salaries, business services costs, overheads, pool shares) are covered!
So, while the sources of some revenue leakages and losses are not under the firm’s control, there are process and technology steps the firm can take to reduce the likelihood of losses and be alerted when such a tendency is indicated. These are tools to examine the firm’s past performance for like matters, monitoring of matter scope in relation to budgets, and early detection of compliance with client Outside Counsel Guidelines.
Stay tuned for the final part in this series: LPM to Win and Keep Work.
“While the sources of some revenue leakages and losses are not under the firm’s control, there are process and technology steps the firm can take to reduce the likelihood of losses and be alerted when such a tendency is indicated.”