Client billing makes some lawyers feel uncomfortable according to a recent LexisNexis survey of 309 small law firms based in the U.S.
“Attorneys have a problem asking for money after the retainer and throughout the process of working,” wrote one respondent, a paralegal.
“[It] makes me feel greedy to call a client about a past due bill or to issue a written past due statement,” said another, an attorney.
“At my firm, the attorneys have to make collection calls to any clients that are late paying. I would prefer to have a staff member take care of that. I find it damaging to my relationship with my clients, and distasteful,” added a third, also an attorney.
That’s a challenge in its own right, but the survey also provides a sense for the scope of the problem. More than 70% of law firms say they experience past-due accounts and about half say between 10% and 30% of their client base are typically past due. For small law firms, in the toughest of places, this means about 4 in every 10 clients are past due.
Why do Clients go Past Due?
Most law firms in this survey – more than 80% – cited client financial hardship as the primary reason clients fall behind. However, there was considerable data to suggest business process, or the lack thereof, was also a contributing factor. For example, law firms also cited:
- Client challenged the value of charges (21%)
- Miscommunication between client and attorney (21%)
- Bill was for services rendered too far in the past (15%)
- Client disputed services (12%)
- Legal bill format unclear to client (11%)
In addition, about one-fifth wrote in other reasons in a comment section which also underscored process challenges such as:
- Invoices were not sent regularly
- Poor tracking of fees and services
- Bills sent too infrequently and reflect larger than expected invoice
- Inconsistent billing
- Technical errors in the billing format
In other words, law firms find billing unpleasant and openly admit to a number of business process flaws – yet also believe overwhelmingly the root cause of past due bills is client financial hardship.
This thought process has some skeptics.
“It’s really hard to believe that 4 out of 10 clients are financial hardship cases,” wrote Stephen Fairly of the Rainmaker Institute in an analysis titled, Why Aren’t Lawyers Getting Paid? “In the survey, attorneys admitted to something we all know is true (and is a lot more believable than client financial hardship): lawyers hate asking clients for money.”
His advice is simple: “If you pursue your work on your client’s behalf with passion, you should pursue payment for that work with the same passion.”
5 Tips for Removing Discomfort from Billing
The survey asked: If there was one thing you could change about the process of billing clients what would it be?
This question drew an eclectic array of unstructured responses including one that perhaps sums up the overall sentiment quite well:
“I would love not to have to bill clients at all.”
Idealist perhaps, but in the business world this simply isn’t practical. However, there are some helpful recommendations that can help remove some of the discomfort in talking to clients about money.
Profile your ideal client. A majority of law firms (67%) use software with integrated invoicing and billing – but do not use the reporting features these tools provide to analyze their client base. Such analysis helps a law firm build a profile of an ideal client so the firm can focus its marketing and business development efforts to attract more clients that fit the profile. Examples of typical reports a solid practice management program ought to be capable of performing include:
- Time-to-pay. Identifies which clients or types of clients are fastest to pay invoices.
- Outstanding accounts receivable (AR). Analyzes which clients, or types of clients, have bills outstanding and for how long.
- Time tracking analysis. Comparing work invoiced vs. actual work performed (this is useful for understanding the profitability of a flat fee).
- Client profitability. Distinguishes which clients and what types of cases are most profitable.
- Top clients. Characterizes a law firm’s top clients by fees billed vs. fees collected.
Develop a billing process and document it in policy. While more than 80% of law firms report having a process for billing, just about half of those put that process in writing. This means the institutional knowledge that exists is only inside someone’s head and that understanding isn’t always passed along as the firm grows or turns over staff. Documenting a billing policy helps in a number of other ways:
a) a document is the central point of understanding that eliminates billing inconsistencies
b) a written process is more likely to be updated and modernized with time
c) it helps educate clients and manage billing expectations from the outset
d) it’s usually easier for employees to stand firm on bills when it’s “a matter of policy”
Collect the money upfront. In the survey, one attorney commented, to the effect, if a client cannot pay when they need you the most, they are not going to pay you when they no longer need you. In other words, it’s best to collect money for legal fees before the work begins, rather than after it’s complete. Attorney Lee Rosen adds color to the concept by calling the moment a client opens a bill the “red zone.” He wrote, “Clients making decisions about a fee before they owe it are happier than clients hit with a bill after the fact.”
Avoid discounting legal fees. The practice of discounting or writing off fees is pervasive. A majority of law firms surveyed (71%) report providing discounts or writing off legal work even before invoicing clients. Interestingly, an analysis comparing law firms that “always” and “never” provide discounts appears to show a correlation to past due accounts: Those law firms that reported never providing discounts on legal fees also reported substantially lower percentages of clients who allowed legal invoices to become past due. Discounts arguably send a message that it’s okay to be late in paying legal fees.
Develop a collections strategy. Most law firms experience past due accounts, so while most of these tips are aimed at reducing the volume, it’s quite plausible the firm will still have late clients. A collections strategy should encompass the entire process – from understanding the scope of the problem and root cause – to communications with internal staff and the client. In some cases it may be reasonable to “fire” a client, which brings us back to the first point about profiling your ideal client.
A little less uncomfortable
Invoicing, billing and collections may indeed be uncomfortable, but it’s also pretty clear it’s vital to the health and success of a law firm. About half of small law firms (46%) say the odds of collecting fees for invoices that are 90 days or older are unlikely.
Mike O’Hora places this into context when he wrote, “The impact of this is staggering. If these arrears are largely uncollectible, the best the lawyer can do is break even. Most law firms have a gross profit margin of roughly 32-36%. If you fail to collect 39% of your receivables, you’re working really hard to operate at a loss.”
By comparison, a billing conversation suddenly seems a lot more comfortable than the alternative.
ABOUT THE AUTHOR
James Paterson is senior director of Product Management for the LexisNexis software division.