Andrew McDermott

Realization efficiency is a major challenge for law firms of any size.

It’s simply impossible for firms to achieve a collection realization rate of 100 percent. It also seems like an unrealistic expectation to have.  Skeptics are quick to mention that this is the way it goes for everyone in the legal industry.

“Things are trending down,” they say.

It certainly looks that way on the surface. You really can’t control if or when clients pay you.

Or can you?

Your realization efficiency depends on communication

There are simple things you can do.

Obvious things.

These steps don’t require a significant investment of time, energy or resources. They just require your consistency and commitment. Let’s take a look at the techniques you can use to improve your firm’s realization efficiency.

Technique #1: Deal with discounting

Discounting at the timesheet level.

This happens for a variety of reasons. An inexperienced attorney decides to reduce the amount of time they recorded. They feel the task or matter they handled took too long.

They’re feeling fear and/or guilt.

Then there’s recording billable hours at the end of the day. Relying on manual timekeeping systems. This creates billable leakage as the time you’ve spent tracking your time is lost revenue for the firm.

This costs $20,000 to $40,000 per attorney, per year.

Then there’s aggressive billing. These firms complete work aggressively. They’re quick to champion their client’s cause but they’re not as mindful of their billing and invoicing practices as they should be.

Which creates surprises.

Clients aren’t fond of surprises. If there’s a significant variance in your client’s invoice let them know ahead of time. Better yet, set a pre-determined budget or range for each invoice. If you find yourself outside said budget be sure to let your clients know ahead of time.

Get their permission to proceed.

Ignoring this contributes to lower realization rates. It also means future invoices will be policed more aggressively which further reduces realization rates.

Technique #2: Minimizing write-downs and write-offs

Here’s a surprising truth.

According to Altman Weil, your realization suffers the most during billing.

How’s that possible?

Attorneys are afraid to bill for their services. Many attorneys are afraid their clients will dispute the amounts listed on their bill. They’ll engage in fault finding or they’ll question the value of the work that was done. Or they’ll refuse to pay their invoice in full.

Perception is the problem.

Will your clients recoil at an unexpected amount on their invoice?

Most likely.

Will clients recoil in horror if they’re prepped and communicated with ahead of time? Probably not. Share the whole story with your clients.

Give them the why.

Outline why their bill was higher than expected. Show them the cause of the problem. Then, offer your solution to the problem so they avoid any unexpected surprises in the future.

Communicate.

Make it a consistent habit to speak with clients before, during and after their matter has been handled. If you adjust the pre-bill, list those adjustments on their invoice.

Then go further.

Create policies that limit adjustments, without prior authorization, before billing. Then, enforce these policies. Make sure that your policies outline how write-downs, if necessary, should be recorded.

Do your best to maintain consistency.

Technique #3: Manage the price variance

Pricing is complex.

If your firm is similar to others, you have a set of alternate/actual rates for each timekeeper and each matter.

This is common.

Both the standard and actual rates are a reflection of the pricing decisions, matter management, and service efficiency of your firm. You can track/report the results of both figures.

What about variance?

Simply calculate the difference between your standard and actual realization rates to identify your price variance. If you’re dealing with a price variance problem you’ll want to:

• Ensure your pricing (and pricing model) is clearly communicated to clients
• Create a mechanism that allows you to adjust pricing (e.g. if the material facts of representation vary)
• Assess whether your firm’s pricing is competitive (up or down) with respect to competing firms
• Factor your client’s payment history into your pricing model (e.g. higher pricing for delinquents)

There’s a significant amount of detail that can be mined here.

The point is this.

(1.) Your clients should have a clear and firm understanding of your firm’s pricing. (2.) Your pricing should be flexible and free to adapt to changing circumstances (e.g. a change in representation, +/– payment history, time constraints/requirements, etc.)

This isn’t common.

Most firms, especially solo/small firms, treat pricing as a static issue. That’s detrimental to your firm. Matter management, the circumstances surrounding representation, client history, they all change.

Your pricing should adapt as well.

Your realization efficiency depends on client expectations and perceptions

Your clients need it.

But you need communication as well. Realization rates aren’t falling due to some unseen force or mysterious factor. The causes are clear, straightforward and right in front of us.

Perception is the problem.

Are you afraid your clients will recoil at an unexpected amount on their invoice? Concerned they’ll balk at your hourly rates?

Give them the why.

It seems it’s impossible for firms to achieve a collection realization rate of 100 percent. Skeptics are quick to mention that this is the way it goes for everyone in the legal industry. It doesn’t have to be that way for you.

Communicate.

Work with your clients and the timekeepers in your firm. Create the right structure, add the right policies and you’ll find perfect realization rates are entirely reasonable.

Does your law firm have abnormally high realization rates? A Thompson Reuters report found that collection realization rates are on the decline. Believe it or not, this is actually very good news.

This sounds strange, I know.

Hourly rates are climbing. Firms are doing more work. Yet they’re discounting consistently and collecting less revenue. How is this good news?

It’s great news if you’re willing to accept the truth

What truth?

If your realization rates aren’t where you’d like them to be there’s work to be done. At first glance, this seems obvious. Of course there’s work to be done!

Only it’s not.

Many firms accept poor realization rates as the new normal.

Is it though?

I’d argue that it isn’t. There are several distinct causes of poor/less-than-ideal realization rates.

1. An expectations mismatch. Your client has a desired price range, sets an ideal budget or expects a specific rate. They miscalculate the amount of time and effort it takes to resolve their matter properly. Naturally, they’re surprised when they see your invoice, impacting realization rates.
2. Clients are dissatisfied. They feel you failed to follow their billing guidelines. They’re dissatisfied with the work on their matter. They’re unhappy with the amount of value your firm delivered regarding their matter. The reason, the why, for your client’s dissatisfaction is just as important as the what.
3. A failure to communicate. Clients have asked for more help than their budget allows. They’re desperate for you to resolve their matter but they’re unwilling, for whatever reason, to pay for your team’s continued help and support. They assume you know what they want, you assume they know what they’re getting into. Frustration abounds.
4. Inaccurate time tracking. Are your employees tracking all (billable, non-billable) of their time? Are they tracking it accurately? Poor time tracking means less-than-ideal realization rates. Poor habits produce time leaks (e.g. an associate completes 12 hours of work but only reports 8) which leads to under or overbilling.
5. Poor systems and procedures. Have clients received their invoices? Are they aware of your payment terms or client expectations? Do you have follow-up systems and procedures (e.g. phone calls, payment reminders, late fees, etc.) to deal with delinquent clients? Is it easy for clients to pay you for your work/time?
6. Predatory clients. These are the clients who suck up a significant amount of your time and energy. They refuse to acknowledge or pay your invoices. They demand discounts and they induce write-offs. They’re generally focused on extracting the greater amount of value from your firm at the lowest possible cost, even if it breaks you financially.

This isn’t a comprehensive list.

But it covers the vast majority of your collection realization problems. Solve these issues and your realization rates will climb automatically. This is how you fix less-than-ideal realization.

Can you see it?

Here’s the realization detail waiting to jump out on you

Five out of the six items listed above are “problems” you can fix, without your client’s help. Four of these causes don’t even require your client’s involvement.

Why is this significant?

It’s easy to assume that clients are primarily responsible for a firm’s realization rate. It’s also easy to assume that clients are unwilling to pay for requested work.

These things happen.

But they’re not the primary cause of our realization woes. These woes are caused by our ability (or inability) to plan and optimize around realization.

How do you plan for this?

One strategy is optimizing your firm’s realization rate. This sounds simple until you realize there are actually three realization formulas you’ll need to account for in your firm.

Your…

1. Billing Realization Rate
2. Collection Realization Rate
3. Overall Realization Rate

 

1. Billing Realization Rate

Herbert bills at a rate of $325 per hour. This is his standard rate. If he billed 120 hours at this standard rate he would bill a total of $39,000. However, due to discounts and write-downs, he actually billed $30,000.

That’s a 76% realization rate.

Here’s the formula I’ve used to calculate that out.

Billing Realization Rate =	Billings (actual)
	Value of Billings at Standard Rate

This immediately directs your attention to key problem areas, identifying the questions you’ll need to ask. Why so many discounts/write-downs? Are you discounting heavily? If so, why? Are you targeting clients who are unwilling or unable to pay? Ignoring billing guidelines? Catching clients off guard?

What?

2. Collection Realization Rate

Your collection realization rate answers a simple question.

How efficient are you at turning billings into cash? 

In our example, Herbert was able to collect $23,500 of the $30,000 he actually billed during the month. This means his collection realization rate is 78%.

This could be better.

Here’s the formula I’ve used to calculate that out.

Collection Realization Rate =	Cash (in)
	Billings (actual)

Seventy-eight percent isn’t ideal.

Is Herbert dealing with delinquent or slow-paying clients who prefer net 60 payment terms even though you’re only offering 30? Are clients forgetting to pay their bills entirely due to non-existent payment reminders? These questions focus Herbert’s attention on his clients.

He needs to revisit client payment arrangements.

He also needs to address the underlying cause of his poor realization rates and sluggish cash flow.

3. Overall Realization Rate

Herbert wants a macro-level analysis.

What’s his realization rate overall? Is this a complex problem that requires a mix of solutions to a problem he thought was simple?

Let’s take a look.

Herbert brought in $23,500 (cash) but the value of his billings at his standard rate is $39,000. What’s the overall impact on his realization rate?

His overall realization rate is 60%.

Here’s the formula I’ve used to calculate that out.

Overall Realization Rate =	Cash (in)
	Value of Billings at Standard Rate

Herbert’s realization rate is nowhere close to ideal. What does this mean? His work/life balance is probably not where it needs to be. There’s a very good chance that Herbert is: (a.) losing time to billable/time leaks (b.) spending a large amount of time on non-billable work and (c.) losing revenue to underbilling.

This is sobering.

But it’s also an unpleasant reality for many, many firms.

Realization restoration: Where do you start?

It all depends.

Improving your billing realization rate typically means directing your attention to internal issues. Details you can resolve with little to no client involvement.

• Verify employees are tracking all of their time accurately
• Utilize automatic time tracking to plug time leaks
• Improve ongoing client communication
• Reduce/eliminate discounts and write-downs
• Confirm clients understand and agree to fee arrangements and schedules ahead of time
• Maintain compliance with billing guidelines

Focus on internal-led details to improve your billing realization rates.

Improving your collection realization rate means directing your attention to both internal and external issues. Details you and your clients need to resolve.

• Create automated/semi-automated payment systems and procedures
• Ensure clients follow previously agreed upon systems and procedures
• Attract quality clients who are both willing and able to pay
• Terminate relationships with delinquent, parasitic and dysfunctional clients
• Follow-up with late-paying clients via a variety of methods (mail, email, SMS, etc.)
• Maintain a positive relationship with decision makers, accounting depts. and clients
• Identify the “why” behind low/slow cash flow issues
• Make it easy for clients to pay
• Maximize the amount of value you provide

Hold clients accountable.

Give them the details they need to fulfill their obligations then, ask them to do so.

Under promise, over deliver.

Improving your overall realization rates requires a high-level view of your team’s performance.

• Improving your firm’s utilization rate
• Billing value instead of billing time
• Selecting alternative fee arrangements (e.g. fixed rate, subscription, fee caps, etc.)
• Minimizing non-billable burden
• Optimizing document management and retention to minimize challenges
• Providing non-financial incentives for early invoice payments
• Managing your client’s fuzzy, implicit and unrealistic expectations
• Minimize client dissatisfaction
• Optimizing your systems and procedures
• Terminating your relationships with toxic, dysfunctional and predatory clients

Can you see it?

Can you see why your realization rate is actually great news?

Realization: Your instant profit lever

What if your realization rates aren’t where you’d like them to be?

It can still be a win.

Hourly rates are climbing. Firms are doing more work. Yet they’re discounting consistently and taking home less revenue. Many firms accept poor realization rates as the new normal.

It doesn’t have to be.

Use your billing, collection and overall realization rates to produce the results you’re looking for. Your realization rates can be the profit lever your firm needs.

Just optimize.

Solve your internal and external issues and you’ll become the one. The law firm with abnormally high realization rates.

Have you missed the blind spots that affect your firm’s realization metrics? They’re easy to miss. In fact, when it comes to collection realization rates, our attention tends to be squarely focus on one thing.

Getting clients to pay.

This is natural and somewhat unavoidable. We’re supposed to asses these metrics. Realization metrics should be viewed as part of the story rather than becoming the whole story.

We’re conditioned to focus on what we can see

We’ve sent out our invoices.

Did our clients pay it? How many of our clients paid our invoices? How many paid early or late? How many are chronic late payers?

These are great questions to ask.

But they leave us with a lopsided view of the full picture.

Why?

There are disaster zones lurking in our blind spots, ravaging our realization rates and profitability. And, because they’re in our blind spots, they’re essentially impossible to fix. The adage, while cliché, is true in this case.

Knowing truly is half the battle.

Let’s take a look at three of the blind spots affecting your firm’s realization metrics.

Blind spot #1: A lack of understanding

What did they agree to?

Do your clients know specifically what they agreed to when decision-makers decided to hire your firm? Did key decision makers share the memo with everyone else on their team?

Or, is there something else going on?

Imagine that, as a corporate attorney, clients have signed on to have you handle a specific matter. You, decision-makers and your point of contact are all in agreement.

Accounting is not.

They received a very different set of instructions from someone in their company with authority to override your agreement.

Perhaps not knowingly.

But, your realization rates have been affected all the same. How do you handle this?

You communicate.

You let the appropriate teams know: (a.) what your original agreement is/was and when it was signed. (b.) that a specific decision maker approved your request (easily confirmed with a friendly cc).

It’s a win.

Here’s why. If there’s any foul play this flushes duplicity out into the open. If it’s an innocent mistake, it’s easily corrected and the accounting department learns to trust you and your firm.

It’s simple to do but it’s not always easy.

Blind spot #2: Clients are unwilling to pay

The reasons are plentiful.

Maybe you didn’t follow their billing guidelines. Or, they’re unhappy that their invoice doesn’t match expectations.

Assessment isn’t as helpful here.

A focus on metrics gives you the “who” and “what.” The clients who have paid vs. those who haven’t.

It doesn’t give you the “why.”

You can’t improve your firm’s realization rates without understanding the why. The why gives you context. It exposes the deeper underlying problems behind your client’s resistance.

Two interesting things happen when you make it a habit to search for the why.

1. Your realization metrics lose prominence. This is a very good thing. Answering the why shows you that, while realization rates are important, the specifics of your situation should take priority.
2. Your collection realization rates go up. As you begin to identify and address the why, your relationships with clients begin to change. Clients realize you’re eager and willing to take their concerns seriously. They see that you’re willing to commit to self reflection.

This creates a virtuous cycle.

Clients begin to realize that your interests are directly aligned with theirs. If the team you’re working with is fair and reasonable, your realization rates will begin to climb.

This is vital.

But it’s also a frequently ignored detail.

Blind spot #3: Inaccurate employee data

Are your employees tracking all of their time? It’s easy to assume your employees are tracking most of their time accurately. Sure, they hate filling out timesheets, but they’ve done it consistently.

Why would there be a need to think otherwise?

Because it’s not true. How do we know?

Time leaks.

This is a failure to produce or accurately record billable time. This immediately results in over or under-billing. An associate performs a particular task but they don’t fill out their time sheet until the end of the day or the end of the week. They completed 12 hours of work but only report 8.

In fact, the longer your associates wait to record their time, the more inaccurate your realization rates will be.

• You lose 10% of your billable time if you record time the day of, once a day.
• You lose 25% if you wait 24 hours to record your time.
• You lose 50% if you wait one week.

Imagine making 50 percent more simply by recording your time as-it-happens?

Can you see what the data is screaming?

The 2018 Report on the State of the Legal Market states realization rates are well below 85 percent. This means firms are losing 65 to 85 percent of the revenue that rightfully belongs to them!

It’s a financial disaster hiding comfortably in your blind spot.

The best way to fix the problem?

Set up automatic time tracking. Create firm-wide habits to ensure (a.) timekeeping is accurate and (b.) you’re capturing all of your time. It’s an instant and simple way to improve collection realization rates.

This shows you the whole story.

You’ll gain valuable insights in to your top performers and your laggards, your efficiency as a firm and the things you’ll need to do to improve.

Improvement means shifting our focus

Metrics can be deceiving.

When it comes to collection realization rates, our attention tends to be squarely focus on one thing.

Getting clients to pay.

We’re conditioned to focus on the details we can see. We hunt for the “what” but we neglect the “why.” These blind spots affect your firm’s realization rates.

Don’t miss this.

Focus on the whole story. Analyze the what, but pursue the why. Reach out to your clients, study your employees. Do this consistently and you’ll boost your firm’s collection realization rates, one client at a time.

Could you do it?

If you had to, could your law firm go paperless today? If you launched a new firm, could you set up document storage, complete with dos and don’ts, in minutes?

It’s not as simple as it sounds.

Yet it’s something that every firm needs. Your document storage system provides your team with the data, access and controls needed to grow your firm.

“It’s a bad idea. You should focus on the advocacy”

It’s what your clients want.

They want you to represent their interests in the best manner possible. This is the common objection that’s made by purists. And you know what?

They’re right.

But that doesn’t mean what they think it means. Setting up document storage is the silent hero of advocacy. When you have data, you have the tools you need to represent your client’s interests fully, properly. This is the part many seem to miss.

Document storage is a part of advocacy.

I know, this sounds like a hard sell at first glance. In reality, it’s actually the opposite. Proper document storage sets the stage for outstanding (and profitable) legal work.

Here’s how.

• Your attorneys won’t waste 11+ hours a week sorting through their document management challenges.
• You’ll avoid the financial losses that come from non-billable work due to poor document storage/management
• Your firm will be better prepared for the legal matters you take on
• Ready access to more data means you’ll outperform/win a high(er) percentage of the cases, matters and projects you take on
• The firm’s productivity will increase. You’ll get more client work done
• This will attract more clients and more client work which will…
• Dramatically increase your firm’s billables (and profitability) as a result

It’s a virtuous cycle.

And it all stems from, you guessed it, excellent document management and storage protocols.

Do you have the storage + protocols you need?

Customization, flexibility, these are the enemy.

They’re not absolute enemies in the sense that they’re things you should avoid. They’re conditional enemies when they’re mismanaged or mishandled.

Mishandled how?

Software providers tout customization and flexibility as a compelling value-add. You should be free to run your firm your way, they say.

This is dangerous.  

You know the law. You, more than anyone, understand the legal expectations and requirements placed on you. The heavy burdens you’re required to carry.

Like what?

A recent study found 70 percent of IT managers surveyed “know or believe that users have business data in their own personal file-sharing accounts.”

This is a disaster.

If your firm handles protected health information (PHI) on behalf of a client, you generally fall under the business associate classification.

You see where I’m going with this, right?

You’re (probably) responsible for protecting and securing PHI data. What if you take on a financial services client? You’re expected to provide assurances to your client even if you’re not required to comply with privacy obligations.

Now juxtapose the two.

• 70 of IT managers know users have private business data in their own personal file-sharing accounts
• Your firm is required, as a business associate, to comply with specific HIPAA requirements

What does non-compliance mean for your firm?

What specifically does non-compliance mean for your client? For the other clients in your roster who depend on your firm’s outstanding work?

Document management is a (silent) component of advocacy.

There’s more.

You know it. I know it. How do you set your document storage system properly?

Focus your firm on the present, not the past

It’s a massive undertaking.

Migrating your data and documents from your existing storage system is a massive undertaking. Setting up document management – importing all of your files, assets and documents – it’s a lot like spring cleaning. It’s tedious, difficult and takes time.

A better option? Stick with the present for now.

Picture this use case.

Use case #1: The semi-established corporate firm

David runs an existing corporate law firm. He’s just made the switch to a document management system. He’s excited as this will give his team ready access to his firm’s scattered data.

He’ll need…

1. A solid folder/file naming convention. If he’s running an established firm with a solid folder/file tree structure, he should use what he already has. No need to reinvent the wheel as that will require more training. See my [previous post] for details.
2. Transfer existing conventions to his new document storage system. He’ll want to fill in the blanks here. If he’s going paperless for the first time, he’ll need to create rights and permission protocols. Can junior associates access unrelated projects? What do senior associates have access to? Partners?
3. Start with the present then work your way out. If he decides to import documents from the past he needs to pace himself. He would be wise to scan, index and migrate things over slowly. To avoid burning his team out at all costs. He’ll work through share drives, Outlook, Box, desktop and server locations as needed. Scan paper documents in, incrementally.

It’s prudent and sustainable.

Instead of chasing down a colleague who drafted that services agreement four years ago, his associates will be able to search for what they need. His firm’s productivity will improve as he focuses on the present.

Use case #2: New virtual law firm

Carla is preparing to launch her virtual law firm. She’d like to recruit personal injury attorneys and clients in four states. In order to achieve traction her firm will need four things:

1. Systems and procedures (e.g. practice, security and document management protocols) for her firm. She’ll need software that works with the guidelines she has in place.
2. Cloud-based software (e.g. practice management, document storage/management) to operate her firm remotely.
3. A secure online portal to communicate with clients remotely.
4. Virtual assistants and freelance specialists (e.g. attorneys, paralegals) to handle the overflow of work.

Here’s the problem.

Left unchecked, each attorney will apply their own file/folder naming conventions. Productivity will quickly and rapidly decline. Timekeeping and invoicing will deteriorate into chaos. If Carla wants to hit the ground running step one is key.

She’ll take the time to:

• Outline compliance and legal requirements for the firm at the Federal, State, Local and Client level.
• Define user roles and permissions for her practice and document management software.
• Outline the rights and responsibilities of each user role.
• Outline how these roles and responsibilities will help to maintain compliance.
• Create templates for a variety of use cases including client/matter folder structure, file naming conventions, acceptable file formats and more.

She’s decided to modify a folder template (see below) and make it her own.

• Client name
• Matter name
• Admin
• Notes and research
• Client documents
• Third party documents
• Witness and exhibits
• Correspondence
• Costs
• Discovery
• Experts
• Drafts
• Pleadings
• Notes
• Trial preparation
• Accounting
• Retainer (or agreements)

She’s created a simple and straightforward file naming convention that maximizes accessibility and clarity for each of the associates involved.

Date | Client | Matter | Abbreviation | Description

160823_SpaceX_Litigation_LTR.Meet and Confer re.BC554258

Finally, Carla’s outlined where both created and inbound files go once they’re received or developed on behalf of a client. She outlined user rights and permissions ahead of time, so she stays on top of compliance requirements.

Can you see what’s happening?

Her remote attorneys aren’t confused or surprised by the data, documents or requirements that come in. Carla offers consistent reminders about her firm’s naming conventions.

Her software/tools maintain the firm-wide boundaries she’s set which means…

These firms can focus on the advocacy

They’ve realized the truth.

Gartner found that most law firms are missing almost 50 percent of their data. Eighty percent of the intellectual property a firm handles is communicated with or stored via email.

This doesn’t serve your client’s interests.

Proper document storage/management is a (silent) component of advocacy. Your clients expect you to represent their interests in the best manner possible. That includes managing and protecting their data.

You’re an excellent attorney.

But without proper systems and procedures, without document management, you can’t provide clients with the exceptional care they need. Document storage is the unsung hero of advocacy. Ready access to data gives you the ability to represent your client’s interests fully.

Take the right approach and your firm will have the data, access and controls needed to grow quickly.

Do you know where your data is?

A recent report from Gartner found that most law firms are missing almost half their data. Eighty percent of the intellectual property a firm handles is communicated with or stored via email.

What does this mean?

Attorneys in your firm are losing as much as six hours a week to document management.

Why document management is so challenging

An IDC whitepaper found knowledge workers wasted 11.2 hours a week sorting through document management (DMS) challenges. This whitepaper calculated the loss at $19,732 per knowledge worker, per year. A 21.3 percent loss in the firm’s total productivity.

What’s going on here?

Why is document management so challenging? Are there any storage or retention challenges making this difficult for attorneys?

As a matter of fact, there are.

1. Unable to find the documents you need

When documents are lost, there are typically no naming conventions or systematic processes in place. In a truly disorganized firm, each attorney creates their own system for naming files. As the IDC whitepaper shows, individual attorneys or paralegals lose approximately 2.3 three hours a week searching for files.

Searching, not finding.

When these documents aren’t found, firms typically waste another two hours requesting or tracking down files that are lost.

2. Recreating lost documents due to poor retention or version control

According to AIIM, 81 percent of law firms struggle with access – sharing information across multiple platforms. Most firms are struggling to find the documents they need.

What does this mean?

When documents are difficult to find, your team recreates them. When your team needs mobile access but that access isn’t available, they ask someone else to recreate them.

This complicates things further.

Which version is required for your client’s matter? Who has the right version? Is it you? Are you sure this is the right version? Do you have access to the right version?

See the problem?

An AIIM 2015 study found 25 percent of knowledge workers failed to comply with document management and retention policies. Non-compliance means retention and version control becomes extraordinarily difficult.

3. Documents have poor permissions and security

Your staff is sophisticated.

They’re aware of the benefits that come with cloud computing. They’re able to adapt to your firm’s document management system of choice. They’re familiar with cloud storage and they store their personal data in the cloud.

This is dangerous behavior.

A recent study found 70 percent of IT managers surveyed “know or believe that users have business data in their own personal file-sharing accounts.” Often times this isn’t malicious, it’s simply due to poor document management protocols.

This is the issue.

The ABA’s Model Rules of Professional Conduct 1.6: Confidentiality of Information (c) A lawyer shall make reasonable efforts to prevent the inadvertent or unauthorized disclosure of, or unauthorized access to, information relating to the representation of a client.

Files require permissions.

Your document management system should easily confirm or deny user access, something many organizations struggle to do.

Document retention shouldn’t be challenging

But it is for many firms.

Missing data, poor document retention policies, no version control. These are the issues that stem from a poor document management system.

Most firms are missing half their data.

They’re not sure what they have, where to find it or who has access to it. Document retention and storage doesn’t have to be difficult. It does need to be precise.

Most firms aren’t as precise as they could be.

As a result, they’re losing 11.2 hours per week or $19,732 per employee, per year. It’s an expensive decrease in productivity. How do you fix these problems? In my next article, we’ll discuss the solution to these common document management problems.

“It’s too vague.”

“I’m not sure what I’m getting for my money.” These days it seems clients have a wide range of claims against the billable hour. It seems clients aren’t fond of the billable hour.

Are they right?

Is the billable hour an antiquated and obsolete billing method? If we take the above complaints at face value it certainly seems that way, doesn’t it?

Here’s the problem.

These quotes aren’t describing hourly billings

It’s actually the opposite.

They’re actually talking about fee schedules. In the late 1930s and early 40s State Bar associations began publishing minimum fee schedules. Set pricing for a variety of legal services. $500 for a contested divorce, $75 for drafting a will, etc.

Here’s the interesting part.

These fee schedules were voluntary in name only. In reality, they were enforced by the threat of disciplinary action. For example, if an attorney’s fees were too low the Virginia State Bar stated these attorneys would be presumed guilty of misconduct.

Strange yet true.

In fact, the ABA’s model ethical code stated it was unethical for an attorney to “undervalue” their services.

Whatever that means.

This would remain in effect until 1969.

Here’s the thing about all of this. Law firm clients were unhappy about the billing state of affairs a century ago. They were unhappy about it during the 1930s. And they’re unhappy about the state of affairs today.

How did they do things back then?

The hourly rate was rare back then

Attorneys used a variety of methods to bill their clients. Contingency, retainers, fixed fees and estimated value. Which is why clients became dissatisfied. Clients weren’t entirely sure what they were paying for. They claimed their bills were “too vague.”

In the 1960s this began to change.

The demand and complexity of legal work grew. Hourly billing was already being used by a few firms but it wasn’t the ubiquitous standard we see today.

Far from it.

In fact, it took 40 years for the timesheet and hourly billings to catch on in the legal profession. Research shows hourly billing isn’t something clients asked for.

It seems firms can’t win!

Clients were unhappy then and they’re unhappy now.

So this means you should bill value rather than time?

Here’s the interesting part.

Clients were unhappy with retainers, fixed fees and value pricing. Attorneys were unhappy with fee caps/schedules and these were the standard fee arrangements. Both clients and attorneys aren’t happy with hourly billings today.

Can you see it?

The source of your collective stress, anxiety and fear?

No?

Let’s look at two examples then.

A fixed fee example:

Here’s a hypothetical scenario shared by Bill Josten, Legal Analyst at Thompson Reuters.

A law firm and client agree to work for a flat $1 million. The client is happy. They feel this price is fair. The law firm is happy because the margins are reasonable. The work is rewarding.

Along comes Mr. all-star attorney.

Mr. all-star attorney is ambitious and eager to provide value to the firm. He comes up with a new way to complete the same amount of work, with superior results for a meager $50,000. The quality is top shelf.

The client is pleased.

Until they see the shadow bill. Suddenly they’re furious. How could their firm bill them $1 million dollars for work that only cost $50,000 to produce?

See the problem?

If the law firm spent $950,000 producing the work and billed $1 million, the client wouldn’t have batted an eye. The law firm didn’t cheat their client. They found an innovative way to get the work done.

Okay then.

Let’s look at an hourly example.

An hourly example:

Here’s an example from the ABA Journal.

“Michael Cooke, a Bluefield lawyer, had apparently billed the West Virginia Public Defender Service more than 15 hours a day on 37 different occasions over an eight-month period beginning on Jan. 21, 2014, according to the April 20 opinion (PDF) by the Supreme Court of Appeals. On five of those days, he billed more than 20 hours, and on two days more than 24 hours…

Dana Eddy, executive director of the public defender service, testified that Cooke’s alleged overbilling wasn’t as frequent as that of other lawyers flagged in a billing review. One lawyer “rubber-stamped” the same time for each day, Eddy said, while another billed for 900 hours of travel in a three-month period.”

See it yet?

The fee arrangement isn’t the problem. While many argue for or against the merits of a particular method this isn’t the consistent theme here.

There are actually four of them.

1. Alignment

Your interests should be aligned with your clients. Attorney Matthew Schmidt writes:

“Litigation is still, and will always be, a zero-sum game. And in nearly any zero-sum game, if you take two evenly matched sides, the one that puts in more work is usually going to win.

Smart clients know that incentives matter, and they want their lawyer’s incentives to be aligned with their own interests. And they want their lawyer to be incentivized to look for one more case, one more angle, or do a little more preparation.”

The fee arrangement you choose should align with (a.) your clients socioeconomic status, (b.) their interests e.g. hourly billings for litigation and (c.) their goals and objectives.

2. Transparency

Clients are often afraid. They’re afraid they’ll be overcharged or underserved.

The fee arrangement is irrelevant.

• Clients are often afraid they’ll be billed for work that hasn’t been done.
• Fixed fee. Clients are afraid They’ll be overcharged dramatically for inexpensive work.
• Hourly billings. Clients feel they’re writing a blank check and fear they’ll be drastically overcharged.

See where I’m going with this?

Your fee arrangement isn’t the problem. It’s attorney/client transparency. When transparency is lacking billing disputes rise and collection realization rates fall.

This is avoidable. How?

1. Use billing and practice management software
2. Follow billing best practices
3. Send clients an invoice that breaks down every time entry and expense in detail
4. Communicate any significant variance preemptively (via email or phone)
5. Provide supporting documents – payments, invoices, expenses, etc. via your billing management software

3. Expectations

Your clients have expectations. Expectations, on their own, aren’t entirely unreasonable. They become unreasonable when they’re not managed properly.

What does this mean?

Your clients have fuzzy, implicit and unrealistic expectations. An important study outlined the differences between these client expectations.

• Your clients expect a change or result but they have no idea what this looks like. Fail to flush this expectation out and clients blame you, stating your representation or service was unsatisfactory.
• Your client has an expectation they believe is “obvious” or “self-evident.” Implicit expectations are dangerous because they become explicit when they’re ignored. Your clients blame you for this as well.
• These are expectations you’re either unable or unwilling to meet. Here’s what makes this expectation so unpleasant. They can be fuzzy or precise, implicit or explicit.

This seems unfair, doesn’t it?

It also complicates billing. How do you keep these expectations from impacting your collection realization rates?

It’s simple.

You make these expectations explicit. Then, you defuse them.

That’s not simple.

Where do you begin to look for these expectations?

1. What’s the client sentiment/commentary about other firms in your practice area? Do other attorneys in your practice area have a negative reputation or poor reviews? Analyze sentiment and you’ll find expectations.
2. Past experiences. Have your clients been burned before? How do they feel about their previous firm? About the top firms in your practice area? Is their overall experience positive or negative? Abuse, disappointment and negativity shape expectations.
3. What are competing firms promising in their marketing? What do clients believe about your practice area? Are those the sort of things you’re willing to commit to?
4. Personal needs. Your clients may be aware of their problems but that doesn’t mean they know how to solve them. Client expectations coalesce around personal needs. Look for desires, goals, fears and

Great.

You’ve identified your client’s expectations. How do you shape them?

• Sharing systems and procedures
• Using incentives (punishment and reward)
• Use honest psychological framing to change hearts and minds

It’s easy to deal with client expectations you know about.

4. Value.

Clients expect value.

It’s an unpleasant and unreasonable reality. But it’s also the third most common reason for late payment. Clients question the value of the services you’ve provided.

 

There’s also the fact that a minority of clients aren’t interested in paying for what they perceive to be a failure. The vast majority of clients are willing to pay for value.

Meaning what?

You’ll need to provide (a.) more value than you’re paid i.e. $20 a value for every two dollars you’re paid (b.) consistently communicating the value you’ve provided per matter, per client.

Most attorneys are terrible at this.

They’re fantastic producers. They create a tremendous amount of value for their clients and their firm. They’re just terrible at communicating it.

Why?

Because it feels like bragging. But it’s not bragging, it’s all about stating facts. And is an important financial reason for it.

Reciprocity.

When clients see the disproportionate value you’re producing on their behalf they feel compelled to reciprocate. This reciprocity increases the odds that your invoice, regardless of your fee arrangement, will be paid.

Billing value versus time: which one should you use?

It’s a red herring.

History shows clients are willing to accept a variety of fee arrangements.

“It’s too vague.”

“I’m not sure what I’m getting for my money.” These days it seems clients have a wide range of claims against the billable hour. As we’ve seen, clients have made complaints about a variety of fee arrangements. These complaints aren’t the source of the problem.

They’re symptoms.

Clients were unhappy with retainers, fixed fees and value pricing. Attorneys were unhappy with fee caps/schedules and these arrangements as well. Neither clients nor attorneys are happy with the billing state of affairs today.

Focus on the source.

It seems odd that these complex billing issues can be boiled down to a simplistic approach. Yet the evidence shows we’re on the right track.

Choose wisely.

Select the fee arrangement that aligns your interests with your clients. Set expectations, offer transparency and deliver value consistently. Follow these truisms and your profit and realization rates will continue to climb.