Andrew McDermott

Five Principles to Getting Paid for Lawyers

September 2, 2015 By Andrew McDermott Leave a Comment

“How can you get out of paying your attorney fees?”

An anonymous user on Quora submitted this question; at first glance, they seem to be interested in accepting their attorney’s hard work on their behalf. They just don’t want to pay for it. Maybe this is an overreaction; perhaps this client has simply run out of money?

Here’s another question.

“What’s the best way to fire an attorney and recoup fees?” The intent of this question is abundantly clear. The client is dissatisfied, more than that, they don’t want their attorney to be paid for their work.

This is unethical.

Delinquent clients are part of attorney billing

Or are they?

Is there a way to change this for the better? Can you increase the likelihood that your clients will pay your invoice completely and on time? Here are five principles you can use to ensure you’re paid well for your hard work.

Principle #1: Choose the right clients

This isn’t something you’re taught in law school. Rainmaking is an important part of a successful legal practice, yet it’s something many attorneys struggle to do well. Many attorneys focus their attention on clients who need their services and agree to pay for said services.

This line of thinking is backward.

Instead, it’s more profitable to focus on the clients that meet two important criteria. They must be willing and able to spend the resources needed to retain your services.

Isn’t this the same thing?

Not at all.

Clients who are willing to spend: These clients understand the value behind your services; they also see value in your firm specifically. They’re eager to retain you, and they have a respectful tone, and in some cases, a kind of reverence in their tone when they speak to or about your firm.
Clients who are able to spend: These clients can invest the resources needed to retain your services over the long term. They have the time to work with you on their matter, the money needed to solve their problems, and the necessary information to ensure you provide them with a reasonable to ideal outcome.

Your clients should meet both criteria.

Clients who are unwilling to invest tend to become vampires. They believe they’re the special ones in the relationship, so they require you to bend over backward to keep their business. As their demands increase, the amount of revenue you receive decreases.
Clients who are unable to invest string you along with promises; they use tactics like guilt and shame to tug at your heartstrings. They plead for understanding, for second chances, for more support. These clients drain your time and your bank account.

Focusing on clients who meet both criteria addresses:

Clients who refuse to pay on time or at all
Fee disputes from unhappy clients who refuse to pay a cent more than they have to
Clients who spend less time and money with the firm
The perception that invoices + follow up is sleazy, rude or offensive
Losing billables to shrink
Clients threatening to file a bar complaint

Research from Hee?Woong Kim et al. shows that there are two kinds of relationships clients have with their service providers.

Constrained relationships.I have to stay with my law firm to get what I want.
Dedicated relationships.I want to stay with my law firm.

Choosing clients who have both the willingness and the ability to pay creates both dedicated and constrained relationships. If your clients want to stay, they’re far more likely to do what it takes to remain a client (i.e., pay your invoice).

Principle #2: Set and enforce firm-wide policies

With firm-wide policies, your firm operates as a single unit. Attorneys are expected to turn in their timesheets at the same time, LEDEs is standard operating procedure, and everyone uses the same minimum billing increments when adding their time to their timesheets.

If this sounds obvious, it’s not.

But it’s an important step as this helps firms track their hourly billings, improve utilization and realization rates, and create more accurate revenue projections.

Just one problem.

Setting policies is one thing; enforcing them is another. According to an Altman Weil survey, law firm partners were the number one impediment to change in the vast majority of law firms.

“In 69 percent of firms, partners’ resistance to change is an embedded drag on progress, and recent economic successes may obscure any clouds on the horizon – at least for the short-sighted.”

Law firm leadership is most likely unwilling to change. If you’d like their cooperation, there needs to be a sufficient amount of pain involved.

69 percentof law firm partners resisted most change efforts (up from 44 percent in 2015)
66 percentof law firms experienced insufficient economic pain to motivate change
60 percentof partners were unaware of what they might do differently

If these firm-wide policy changes will be successful, change needs to be driven from the top-down, firm leaders need to lead by example.

How does this help attorneys get paid?

It’s easier to follow client billing guidelines. It’s easier to make changes or campaign for client support if everyone is on the same page. Timekeeping is easier and more streamlined, billing, and invoicing more fluid. It’s easier to send clients the information they need to make good on their promise to pay.

Principle #3: Follow billing guidelines

Successful client billing begins with communication.

Communication ensures that you’re paid completely and on time. If you’d like to avoid a billing dispute, you’ll need to identify the billing guidelines that govern the relationship. You’ll want to flush out:

What’s required or permissible
Billing details or steps that require approval by the client
Actions that are forbidden or unacceptable
Stop words or hidden rules that immediately flag your invoices for review

The vast majority of billing issues can be narrowed down to communication. Address these issues at the beginning of your relationship with clients. Then, respect any boundaries you and your clients have set to avoid any potential deal-breakers or issues with nonpayment.

Principle #4: Make it easy for clients to pay you

According to LawPay, law firms that accept online payments get paid 39 percent faster. If you offered your clients Net 30 terms, this means you’d be paid 11.7 days faster. This would have a drastic effect on your cash flow if you received payment for every invoice faster.

The easier it is for clients to pay you for services rendered, the more likely they are to do it.

Accepting online payments can and will increase your revenue. Research by Richard Feinberg demonstrated that consumers with credit cards were willing to spend 50 — 200 percent more, above and beyond cash or check expenditures.

Principle #5: Use alternative fee arrangements

A Legal Trends report found 44 percent of law firms list client’s inability to pay all at once as the most common reason for nonpayment. Firms also state that 31 percent of clients pay late even when they have the funds. This is, of course, the problem; neither party actually wants to communicate.

The majority of your client relationship concerns revolve around money and communication. This is good news because it gives savvy firms a chance to use this knowledge for their benefit.

How do you fix this?

You have a discussion about alternative fee arrangements with clients at the beginning of your relationship. You bring this up as part of your client intake process, presenting the options that work best for you and your client. Research shows 22 of the 650 law firms serving the Fortune 1,000 rely on AFAs. AFA usage is at an all-time high, but it hasn’t gone fully mainstream yet.

But flat fee work isn’t as profitable!

That’s the real reason why so many firms refuse to integrate alternative fee arrangements in their practice. Is this actually true? Here’s what an Altman Weil survey found:

“When asked to compare the profitability of non-hourly work and hourly work, 84% of proactive firms find their non-hourly projects to be at least as profitable as their hourly projects. This is the case in only 51% of reactive firms. Narrowing the focus, 40% of proactive firms report their non-hourly projects are more profitable than their hourly projects, compared to only 10% of reactive firms. The lesson is that firms that make a rigorous effort to understand and manage a new or evolving market tactic like alternative fees generally succeed in doing so, and enjoy increasing benefits over time.”

Alternative fee arrangements are worth testing, especially if it produces more revenue for your firm. It’s an excellent way to combat the downward pressure on fees, sluggish realization rates, and poor financial performance.

Attorney billing is successful when you get paid

Use these five principles, and you’ll increase the likelihood that your clients will pay your invoice completely and on time. Choose the right clients, create the right environments, follow billing guidelines, and you’ll find your realization rates continue to improve.

With consistent effort, you’ll find you’ve created dedicated relationships with clients who are eager, willing, and able to spend, no defaults necessary.

3 Tips to Getting Paid Faster

July 29, 2015 By Andrew McDermott 2 Comments

Can you identify a successful firm vs. a shrinking firm?

According to a recent Legal Trends report, successful law firms maintain a 90 percent (or better) collection rate from clients, with no exceptions. What about shrinking firms?

Their collection rates decline to 81 percent over time.

The research shows firms that struggle, fail to perform in two key areas: (1.) They don’t have the processes they need to collect payments reliably from their clients and (2.) They aren’t able to find high-quality clients who are both willing and able to pay.

Why getting paid faster matters to law firms

Investopedia explains why getting paid faster is so important to a law firm’s cash flow.

“If your payables (your debts) are due before your receivables (money from a sale you haven’t collected yet) come in, you’ll face cash flow problems. This, in turn, means you won’t be able to pay your bills on time, which can lead to bigger problems, like making payroll in a timely fashion and facing questions of creditworthiness.”

If you aren’t able to regulate cash flow, your firm will eventually experience a cash flow crunch, leading to the headaches listed above and layoffs or a loss of talent. CB Insights performed a postmortem on 101 and one failed businesses, identifying the most common reasons for failure.

The second biggest reason?

The business ran out of cash and was unable to remain solvent.

CB Insights - why startups fail — CB Insights – Why startups fail.

Source: CB Insights

Cash flow management is the foundation and the most important component of your business. Getting paid faster reduces the odds of your firm experiencing a cash flow crunch. Here are # tips you can use to get paid faster and remain cash flow positive.

Tip #1: Build a firm clients fight to retain

How do you accomplish this for your firm?

You create a compelling value proposition for your law firm. A value proposition answers the question, “why should I retain your firm?” with an actionable and persuasive response. If your value proposition is compelling and well known in the marketplace, it’ll be easier to attract, win, and retain top tier clients.

What makes a value proposition so special?

It creates an economic moat for your law firm. Warren Buffet popularized the idea of an economic moat. An economic moat helps your business retain clients; it minimizes churn, and it makes it extraordinarily difficult for competitors to attack your business.

Here are five moats that affect your law firm.

The brand moat.With the brand moat, clients are willing to pay more for your services because of your reputation and the benefits they receive in return (e.g., winning, prestige, conferred trust, etc.).
The secret moat.Intellectual property – copyrights, patents, trademarks, trade secrets — anything that fits into these categories makes direct copying (or stealing) illegal, making it harder for competitors to compete with you. Amazon’s one-click, Google’s search algorithm, and KFC’s secret recipe are all secrets.
The toll moat.This means you have exclusive control over a market or niche. You’re the only game in town, so if clients want the [best], they’ll have to come to you. This could be a collection of data, an experienced employee roster (i.e., all of our attorneys are former judges).
The switching moat.Businesses with a strong switching moat are an intrinsic part of their client’s life. These clients are so dependent on their firm that switching or separation is incredibly difficult.

With a strong value proposition, your firm can fight off larger or better-funded competitors who are looking for a way to infringe on your marketshare.

Why does this work?

It turns the attorney/client dynamic on its head. It shows clients that they need you more than you need them. If you have a waiting list of clients who are eager to work with you, clients aren’t as willing to relinquish their position.

As a result, clients are motivated to perform.

They’re far more likely to pay you fully and on time. They’ll avoid misbehaving; they’ll focus their attention on cooperating with you. A compelling value proposition enables you to attract clients who are eager, willing, and able to pay for your services.

Tip #2: Create payment systems and procedures

As we saw in the beginning, struggling firms often don’t have the systems and procedures needed to stabilize collections. If they remember to bill their clients, they’ll send out an invoice.

In time, this produces a cash flow crunch.

Adopting the right systems and procedures is an easy way to speed up the payment process. Here’s a sample process to show you what I mean.

Compile invoices accurately, adhering to client billing guidelines
Shepherd your client’s invoice through ebilling, looking for red flags or trouble spots
Send invoice to your client, making sure to clarify due dates and methods of payment
Send an email payment reminder to your client on the invoice due date
Call your client once the invoice is one week late
Call client again, send out an email, and snail-mail reminder once the invoice is two weeks late
Visit client in person once the invoice is one month late [special cases only]
Place client account with a collections agency, suspend or terminate representation

Can you see what’s happening?

You’re making a good faith effort to reach out to your clients, this way there’s no confusion about your outstanding invoice. You’re approaching them directly, asking for what you want, and concluding the relationship if they’re unwilling to cooperate.

Here’s why these systems and procedures are essential.

They keep your firm healthy. If you’re dealing with a delinquent client, there’s a definite end to the relationship if they’re unwilling to maintain their end of the deal. If they’re struggling with hard times or they’re willing to restore their account to good standing, there’s a path forward.

Tip #3: Use alternative fee arrangements

A Legal Trends report found 44 percent of law firms list client’s inability to pay all at once as the most common reason for nonpayment. Firms also state that 31 percent of clients pay late even when they have the funds. This is a cash flow crunch waiting to happen.

How do we know?

In Cash is King: Balance and Buffer Days, JP Morgan analyzed 600,000 small businesses, to see how they managed their cash flow. Here’s what they found.

The median small business has average daily cash outflows of $374 and average daily cash inflows of $381, with wide variation across and within industries.
The median small business holds 27 cash buffer days in reserve.
Small businesses in labor-intensive or low-wage industries hold fewer cash buffer days than those in capital-intensive or high-wage industries.

Clients are unwilling to pay all at once, while firms are expected to wait for payment that’s rightfully theirs. This unpleasant scenario can be avoided if you’re willing to use alternative fee arrangements (AFAs) in your firm. So far, only 22 of the 650 law firms serving the Fortune 1,000 rely on AFAs.

Maybe these AFAs are unprofitable?

Actually, it’s the opposite. As I mentioned in a previous article, 84 percent of proactive firms find their non-hourly projects to be at least as profitable as their hourly projects. Nontraditional AFAs can generate a significant amount of income.

Here are several ways you can use AFAs to get paid faster.

Require clients to prepay (they will if you’ve done tip #1)
Use fixed fees to systematically increase your rates and pay in large blocks (i.e., 25% upfront)
Increase contingency fees via barter (i.e., get cash advance now)
Require prepay via holdbacks
Use portfolio fixed fees to auto-bill clients for a portfolio of bundled services each month
Create subscriptions for routine work at a predetermined price that’s both prepaid and paid monthly

What does this mean for your law firm?

It means a cash flow crunch is optional. With the right strategy and tactics, you don’t have to experience a crunch on a regular basis. Even better, you can use these ideas to produce more consistent income for your law firm.

Successful firms get paid faster

They collect on 90+ percent of their invoices, and they maintain that average with no exceptions. Shrinking firms struggle to maintain a high collection percentage. They attract the wrong clients, and they neglect the payment systems and procedures that would boost their revenues.

A cash flow crunch is all but inevitable for these shrinking firms.

Cash flow is the lifeblood of your law firm. Attracting high quality clients is not enough; you need these high-quality clients to pay you for your hard work. They need to pay you quickly and completely, without extensive discounts, write-downs, or write-offs.

Follow these three tips, and you’ll find you’ve left the shrinking firms in your industry behind.

The Advantages of Accepting Online Payments

June 30, 2015 By Andrew McDermott Leave a Comment

Would you like your clients to pay you faster?

This doesn’t usually happen.

If you offer your clients Net 30 terms via traditional payment methods, what’s likely to happen? The payment terms you provided your clients may become Net 45 or Net 60. If this continues, firms may find it difficult to stay on top of their financial obligations.

Do your clients care about online payments?

Card payments are mainstream for most clients. They’re comfortable using their credit and debit cards for large and small, routine, or one-time transactions. Clients expect their providers to accept online payments, but it’s something the legal industry still hasn’t adapted to fully.

Maybe clients aren’t as eager to use credit cards? Let’s take a look at the data. According to Statista:

There are 1.1 billion credit cards in the U.S.
There are 97 million MasterCard holders in the U.S.
345 million Visa credit cards in circulation

TSYS’ 2018 U.S. Consumer Payment Study confirms these findings stating that 80 percent of consumers prefer to use their credit or debit card over cash (14 percent) alone.

What about business to business transactions? Are business clients interested in online payments as well? Forrester Research thinks so; they forecast that U.S. B2B ecommerce transactions will reach $1.1 trillion by 2020.

Even more surprising is the fact that B2B clients spend more than offline-only clients. “Omnichannel customers spend more than single-channel, offline-only customers. For example, 60 percent of B2B companies report that their B2B buyers spend more overall when those customers interact with multiple channels.”

What are the advantages of accepting online payments?

Your clients are used to online payments; are the benefits worth it for law firms to invest? If several firms have an established book of business, why go to the trouble of accepting online payments?

Benefit #1: A substantial revenue increase

Drazen Prelec And Duncan Simester, researchers at MIT, published Always Leave Home Without It: A Further Investigation of the Credit-Card Effect on Willingness to Pay.

“This empirical note presents new evidence supporting the proposition that consumers are willing to spend more for a product when using a credit card. This is the first study that demonstrates that willingness-to-pay is increased when customers are instructed to use a credit card rather than cash. The results are surprising both due to the size of the premium and the ubiquity of credit card use.”

The obvious question here is, how much more?

Research by Richard Feinberg demonstrated that consumers with credit cards were willing to spend a significant amount above and beyond cash or check expenditures.

“Participants were asked how much they would be willing to spend for various consumer products in a setting where credit card paraphernalia — ostensibly unrelated to the task were displayed on the experimental desk. He found that by so decorating the experimental setting, he could boost hypothetical willingness-to-pay estimates by 50% — 200%, relative to the estimates of a control group. We refer to this increase as the credit card premium.”

This willingness to spend more is confirmed by other studies as well, so much so that “framing hypothetical purchases as credit card payments may significantly increase purchase likelihood and willingness to pay.”

Long story short?

The easier it is for clients to use their credit and debit cards, the more money they’ll spend with your law firm.

Benefit #2: Improved realization rates

The 2018 Report on the State of the Legal Market stated that realization rates were well below 85 percent. This trend hasn’t changed course. This means firms are losing a large chunk of the revenue that rightfully belongs to them.

Even worse, when it comes to realization metrics, most law firms are in the dark. They’re unaware of their predicament, and they don’t have the answers to important financial questions.

How many of your clients have paid your invoices?
Which clients paid early, which ones paid late?
Which clients consume your time but refuse to pay full price for it?
Which clients or practice areas produce the greatest amount of revenue for your firm?
Which clients or practice areas consume the most revenue?

If your law firm only accepts cash or check, it’s hard to answer these questions. It’s harder still to understand why these problems are occurring.

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

Your realization metrics matter less.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.
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 eager to commit to self-reflection.

Here’s why this is important.

The vast majority of firms are fighting their clients for revenue. Law firms increase their billable rates each year, and each year, clients fight their billable rates down. Realization rates continue to decline as firms are forced to offer discounts, write-downs, and eat write-offs to survive.

This is why benefit #1, a substantial revenue increase, is so important for law firms. Switching to online payments means boosts profitability and realization rates.

Benefit #3: Minimized billing disputes

If you’ve followed your client’s billing guidelines, and you’ve done the upfront work of setting expectations, scheduling payments should be a straightforward affair. If you’re doing exceptional work and clients have a predictable schedule to follow, billing disputes will be less likely.

Not so with traditional invoicing methods.

This makes sense when you realize the average client is afraid. Imagine that your attorney tells you they’re going to help you at the discounted rate of $768 per hour. They’re not sure what they’ll need to do, won’t know how much it costs, but they promise to let you know when they’re finished working.

You’ll receive their bill at the end of the month.

Clients aren’t happy with this, so it’s no surprise then that there’s a struggle for control. With online payments, clients are given a greater degree of predictability and control. You and your client receive more protection from your financial institutions and credit card processors, keeping billing disputes to a minimum.

Benefit #4: Decreased Costs

In my previous post, I referenced research from Finextra. The cost of traditional billing, via paper invoices and snail mail, is estimated to be 9.5 percent of the amount collected on your invoice. This estimate included three specific types of costs.

Direct costs: Obvious costs like envelopes, postage, printing, and franking are all examples of direct invoicing costs. This also includes unexpected direct costs like ink, toner, and network security for your printers
Indirect costs: Client service, bill storage costs, dealing with lost invoices, accounting, and reconciliation costs, and sending out undistributed invoices
Hidden costs: Unexpected transaction or payment processing fees, timekeeping, billing, invoicing, or payment processing errors

When compared with the unexpected expenses listed above, the 2.5 to 3.3 percent, many payment processors are asking for is a bargain. It means there’s a significant amount of money firms are leaving on the table if they choose to stick with the traditional forms of payment.

Accepting online payments comes with significant benefits

As we’ve seen, law firms that choose to offer online payments receive more revenue, faster. Their realization rates are higher, and they keep more of their hard-earned fees. Clients are willing to invest more if their firms position online payments well.

Card payments are mainstays for the vast majority of your clients. They’re comfortable using their credit and debit cards for large and small, routine, set, or one-time transactions. Your clients expect their providers to accept online payments, but the legal industry still isn’t on board.

You can choose to be different.

Find a payment provider that’s willing to shoulder the burden for you. Do what it takes to provide your clients with the flexibility they need to give you what you want, and you’ll find clients are willing to pay you faster.