We are seeing the development of two separate worlds of law. There are the BigLaw firms, most of which are representing global clients. And then, there are the rest. These other firms may have global clients and global issues, but their real focus is on small to mid-size businesses and on individuals. The volume and fundamental nature of these matters and issues mean they will always be there as long as people need lawyers. Using technology to address these issues efficiently, reduce the cost of legal services and pass the savings on to the client will be the winning game plan for future survival of the great majority of the legal profession.
Leveraging the efficiencies of technology will be a vital survival strategy for small practitioners in the "new normal" turmoil that law firms must deal with â€“ but only if technology leverage is combined with innovative approaches to billing. This point is crucial, because technology efficiencies without billing innovation will keep the firm from realizing technology's financial benefit. In fact it could be the road to financial ruin if combined with a rigid billable hour approach, or with inefficiency in receivables policies.
This requires a transformation on both sides of the fee equation. Clients must accept billing arrangements that would allow the lawyer to make more money while being more efficient. This does not mean regarding legal services as a commodity â€“ it means rewarding lawyers with more work for eliminating inefficiencies, duplications and unnecessary services. By the same token, for law firms to maintain profits while becoming more efficient requires embracing alternative fee arrangements. Using contingent, fixed, capped, value fee approaches where time does not determine the fee is essential to make the most of the leverage from technology.
Increased profit by increased efficiency through the use of technology under a fixed fee or alternative fee engagement agreement is a definite contrast to the traditional American law firm model, where profit is increased by raising the hourly billing rate. But change is inevitable. The Great Recession caused all clients to revolt against that model with its opaque standards and seemingly arbitrary price increases. The premise of any alternative billing system is that time is not the relevant issue to determine the fee. Value to the client sets the fee. If the firm and the client do not agree on the value provided, the rules of professional conduct must be altered to permit billings without reference to time, particularly if the appropriateness of fees is disputed.
Raising the potential for fee disputes emphasizes the importance of receivables. The road to disaster is continuing to do work for the same clients, extending credit rather than collecting fees in the hope that these clients will provide more work. Strive to get paid quickly for the work that has already been done. If the client hasn't paid the fee for the last matter while a lawyer begins work on the next, the firm is extending a no-cost loan to the client. Just as most banks will not carry customers in the hope they will pay an outstanding loan, it makes no sense to do the same thing with clients on a vague hope of being paid as expenses pile up.
In worst case scenarios, a suspension of all but the most essential marketing and production activity for a defined period of time will allow a lawyer who is behind on collections to focus on realization. Simple examples will show its importance. A lawyer who bills $150,000 in a given month but collects only $90,000 has a realization rate of 60%. In any business, including "The Business of LawÂ®," collecting 60 cents on the dollar will cause financial disaster. Realization exists in two levels: percent of billable or booked hours billed (billed to billable ratio), and percent of billed work collected (collected to billed ratio). The goal is to have a high collected to billable ratio. An overall realization rate of less than 85% is unacceptable. (Billed to Billable ratio is the subject of another article.)
Low receivables unquestionably require discipline and planning to turn around if they get out of hand. Return to the example of the lawyer with the 60% realization rate. If this lawyer realizes only 60% of what is billed, simple survival requires treating that 60% as 100% of the firm's income. In other words, all financial decisions will need to be based on the money actually collected, not on the billings sent out. If the firm can continue to run on the 60%, that would be fine, but few firms can.
For any lawyer, the order of practice priority is to get the work (marketing), do the work (production) and get paid (collections). For too many lawyers, a lack of balance more often overweighs the marketing and production sides rather than collections. They equate financial success with work done, whether measured in billable hours or, as proposed here, in alternative value-related methods. Either way, a lawyer's inventory is not what is billed â€“ it is the amount of cash that is realized from the billings that are outstanding. The greater the billings, the more effort should be devoted to getting cash into the firm.
Technology can again be the ally here, so take advantage of it. One simple way to do this is to email bills as PDF files (which cannot be modified by the recipient) rather than sending them through the mail; such speed and convenience often result in quicker payment. For larger clients, consider using an electronic invoicing service. Once initial setup and coordination is done, the billing service performs much of the routine work of follow-up and coordination with the client. Finally, for clients of any size, afford the convenience of paying the bill by credit card. But no matter what the method used, lawyers must vigilantly focus their energy on collecting what they bill. Failure to do so will cause economic disaster. Unlike good wine, accounts receivable do not get better with age.