How to Get Paid: It's in Your Hands
By Edward Poll
In recent columns, I've addressed a variety of issues—structuring an engagement letter, raising your fees, working with your banker on cash flow management—all of which have the same basic theme: helping you get paid.
There are two fundamental measurements of law firm financial performance that relate to this important issue:
- Realization: the amount of a lawyer's time actually billed and collected; and
- Collection rate: the speed at which billable work is turned into cash receipts.
Realization is sometimes discussed 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 ratio of less than 80 to 85% is a recipe for trouble. An overall ratio of greater than 95% may mean your rates are too low - clients could be paying quickly because the amounts are not burdensome to them.
So, how do we get as high a realization as possible? These considerations are all important throughout the realization cycle.
1. Get fees and budgets in writing. This is the heart of the engagement letter. Before beginning every engagement, you should get the client's written agreement regarding the fee to be charged, how it will be calculated, when the fee is to be paid and the consequences of non-payment, including the lawyer's right to withdraw. Every engagement letter should also provide a budget that addresses events, time and money. This increases the chances of collecting your fee significantly because the client understands what to expect.
2. Offer payment convenience. I believe lawyers should accept credit cards for payment as a convenience for both parties. We must make it as easy as possible for clients to pay for legal services. Clients today live on plastic and therefore paying legal bills with credit cards is easier for them. One of the benefits of paying with credit cards is that there is roughly a six-month window in which to raise a dispute and request the credit card company reverse the charge.
Payment for a disputed legal bill could be placed in a suspended account. At worst, the credit card company could reverse the charge, credit the customer and debit the law firm. Prevent this by getting the client to agree that no dispute with the law firm will be raised with or adjudicated by the credit card company. In other words, the client agrees that the charge is non-refundable. The credit card company, when shown the client's agreement, will not credit the client nor debit the law firm. The proper forum for adjudicating the dispute remains with the judicial system.
3. Manage your collection cycle. Develop alternatives to diversify your receivables stream, for example, by billing one-fourth of the alphabet each week. You'll receive money from one-fourth of your clients weekly, rather than once per month. This evens out your receipt of cash over the month. You could also shorten your monthly billing cycle, sending out invoices on or about the 25th of the month so that clients receive statements on or before the first day of the following month. Since most people pay their bills on or abut the first of the month, a bill that comes after that is frequently kept for payment until the following month.
4. Send statements after a particularly beneficial psychological event. If you bill when clients are happy because you've won a motion or negotiated a favorable deal - even if somewhat before or beyond the normal billing date - they're more likely to pay quickly. Such billing places the client on the peak of the "satisfaction curve," the time of least resistance for payment of fees. Later, the client will invariably forget how important you were in the process of the result and wonder why the bill is so high. One in that state of mind, the statement for services will sit unpaid until some future date.
5. "Age" your accounts receivable once a week. Regularly determine which clients are behind on their payments. Forgetting or ignoring "old" clients results in forgetting or ignoring the accounts receivable. This results in the failure to collect your money. Remembering old open accounts is vital. On one hand, you will be able to pursue collection with the regular, weekly reminders that money is owed to you. On the other hand, you’ll be able to thank a client who has paid, the kind of courtesy that pays off in increased goodwill.
6. Communicate constantly. If a client has the ability to pay but is not paying, my experience is they're unhappy with some aspect of the representation. They choose to express that by slowing down or stopping the payment schedule. To avoid such a situation stay in continual touch with the client about progress according to the budget. Make note of any additional time and expenses that may be incurred. If a slowdown in payments does take place and you suspect it may be due to client dissatisfaction, talk with the client and find out what the issue is.
7. Don 't ask for money yourself. If payment hasn't arrived, I advise lawyers not to be the ones to call the clients about it. Instead, ask someone from your staff who's good with people and sensitive to their needs to make the call. If the lawyer calls, clients may become confused about whether the call is to request information, seek new business or request payment. Don't confuse the client. The best practice is separate yourself from the collections function.
8. If necessary, use a collection service. There are certainly ethical snares involved, but you can avoid them by disclosing to a collection service only those details that are absolutely necessary for them to do their job without jeopardizing client confidentiality. However, it is a given that a collection effort should not be made unless you have reviewed the client file and made sure that there is no evidence of negligence on your part.
9. Consider arbitration to collect fees. Lawyers who consider using a collection service or suing a client to collect a fee are well advised to first offer arbitration of the fee dispute through the legal disciplinary system. To my knowledge, there are no mandatory arbitration or mediation provisions in any jurisdiction. That means that a client can always reject an offer of arbitration or mediation, but it also means that a lawyer can reject an arbitrator's award and still sue for the fee after the hearing. Check the rules and regulations of your jurisdiction.
The topic of fee collection is discussed at length in my book published by the American Bar Association, Getting Your Fees Paid From Intake to Invoice. In that book, I wrote: "Law firms are not the victims of their delinquent clients. You and the firm itself cause your collection problems by not telling clients from the beginning what you expect from them and continuing to follow through. Thus, you and your firm are the only ones who can solve your collection problems." The solution can come at my point in the engagement continuum, in a variety of ways. But it is always in your hands. If you’re interested in the book, please visit www.lawbiz.com.
Edward Poll (edpoll@lawbiz.com) is a certified management consultant and coach in Los Angeles who coaches attorneys and law firms on how to deliver their services more profitably. He is the author of Attorney and Law Firm Guide to the Business of Law: Planning and Operating for Survival and Growth, 2nd ed. (ABA, 2002), Collecting Your Fee: Getting Paid from Intake to Invoice (ABA, 2003) and, most recently, Selling Your Law Practice: The Profitable Exit Strategy (LawBiz, 2005).
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Comments/Discussion
Dear CBA:
I listened with great interest to the new podcast on collecting lawyers' accounts.
First, it is excellent in that it covers off the common sense steps and procedures that should all be followed without exception by all law firms, both small and large.
Second, it highlights nicely the requirement to have a collections policy, to go over it with every client and to consistently apply it. These are musts.
Third, however, it remains so conventional in its approach. One innovation that greatly enhances recovery in cases of overdue accounts is including in the Retainer Letter security interests over the client's personal property to secure all unpaid accounts and all enforcement costs if needed. We have included this in our engagements for many years, and we are aware of many other law firms who do the same. You must, of course, allow the client or potential client to consider the effects of this grant of security. Thus, the Retainer Letter should not be signed when you first meet the client. It should be fully discussed with your collection policy. Then, a cover letter sending it to the client and offering plenty of time for the client to consider it and obtain independent advice is essential. But, no work should be done until it is back, signed. Period.
Fourth, the podcast mentions credit card payment, but why not have automatic payment by credit card when the account is rendered. Again, we have done this for some time with great success and client satisfaction. The client may stop this process at any time, but at that time, a final account is rendered and paid using the credit card, then arrangements are made for future work before it is performed.
Finally, we benefit greatly from the CBA practice hints. PracticeLink is super. As a gift in return, our law firm attaches a draft blank copy in MSWord of our form of engagement letter that includes these features. It is easily revised to apply to commercial or litigation engagements.
All the best to you and your readers,
Dale Doan, Cleveland Doan LLP, White Rock, B.C.
By: Dale Doan, Cleveland Doan LLP, White Rock, BC
Posted: 11-30-06
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A lawyer should do his/her own follow-up on collection isues. It is a lot more effective than leaving it to a collections clerk. Clients should understand that law is a business and collection matters are an important part of a relationship. The lawyer should not be 'above' collections.
By: Anonymous
Posted: 07-14-06
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