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Battling the Basics: Reduce Lag to Improve Year-End Numbers

Posted

TO Advisory Services ON

Sep 14 2015

By Russ Haskin, Director, Business of Law Consulting

It’s that time again when law firms around the world are beginning the big year-end collection push. Is your firm ready? If there’s one thing your firm can do to help improve your year-end numbers, it’s battle lagging time entry processes. Here’s why.

I’ll begin with a story.

I was speaking with a firm about how they’re heading into this year’s final stretch; they’re unsure whether or not they’ll make their targeted revenue goal. As is the case with most years, the firm hopes for a big fourth quarter push. The firm has no real understanding of what is available for collection. Why? Because of a wave of lagging time entry combined with an aging WIP balance. These reasons make sense in theory. If time is not entered into your timekeeping system appropriately, new WIP is not put into process. Then existing WIP (which was not being billed expediently) is allowed to age. For this firm, the basic components of the disposition of an hour worked had fallen apart – and the ramifications had impacted compensation, reporting, budgeting, forecasting, as well as inventory management.

At its core, the terms of providing legal services are easy to specify. A client engages a lawyer at an agreed upon rate, the lawyer works and then bills the client for his or her time, and the client (eventually) pays that bill.

Of course, there are a lot of other intricacies within the disposition of an hour worked, but again, the simple financial goal of all law firms is to convert work into revenue. But what happens when lag is introduced into this basic formula? Unfortunately for most law firms – and in the case of the firm I was speaking with – the downstream effects are significant.

Let’s address the financial impact first and use another example. A lawyer works 10 hours at $700/hour on June 1st. The lawyer neglects to enter this time until September 30th. The bill is generated on October 1st but the client questions the validity. After some back and forth, the client agrees that the charge is legitimate and pays promptly on December 31st. Under normal circumstances, the client pays in 30 days. But in this example, the process from hour worked to collection is 7 months, resulting in a 6-month lag effect. Using a common rate of return on domestic equity markets of 10% and the time value of money impact is $350 for this lag time. Admittedly this doesn’t sound like much, but remember, this is one lawyer’s work for one day. Expand this scenario to 1,000 lawyers and 20 days’ worth of work at the same rate. Now you have a time value impact of $7MM.

I recognize that this example may be extreme but the reality is that firms leave millions of dollars on the table every year simply because of lag, be it through time entry, getting the bills out the door, or ignoring A/R. Lag alone could make or break a firm’s budgeted revenue or profits per partner goal.

In my example, the firm and client reach a resolution. Many times that is not the case. A/R write-offs could occur or even worse – the uncollectable receivable simply stays in inventory, never to be addressed. In other situations, concessions are made and additional discounting may take place. All of these scenarios result in a diminished revenue number from the original expectation. Taking the impact of these discounts/write-offs and combining it with the time value of money impact described above results in a tremendous financial hit to the firm.

The secondary impacts can be just as alarming. Imagine if in my example, the lawyer was involved in a fixed-fee engagement. If other lawyers were exhibiting similar behavioral patterns with respect to time entry, those managing an engagement as well as the client reviewing it will be led to conclusions that do not mirror reality. Budgeting, staffing, projected outcomes, and client satisfaction could all be impacted simply because of lag.

Finally, I will circle back to the firm that has no idea what is collectible heading into the fourth quarter. When lag impacts the process of converting work to revenue, it impacts forecasting, budgeting, and compensation modeling. You simply cannot have confidence in your year-end numbers. Lack of confidence leads to confusion, which usually leads to guessing, which leads to even more problems.

The basics of law firm economics are not complicated. Entering time worked and billing and collecting on time are paramount to reaching revenue goals. Optimizing your software for more efficient processes can have a major impact your firm’s ability to complete these steps quickly. If you’d like to discuss how Wilson Legal Solutions can help you do this, please contact us or visit our website for examples of some of our services.