Any firm can lose money to the very partners who are bringing in the most of it.
That’s because firms measure partner profitability by revenues only, and that doesn’t show the full financial picture, says practice management consultant Andra Watkins of Positus Consulting in Charleston, SC.
There’s also a subjective side to evaluating each partner’s contribution. And that side counts.
It may turn out that the big income one partner is generating is overshadowed by the loss that partner is creating in uncollected fees, turnover, and clients who don’t come back. Even so, it’s not uncommon to see “one or two partners rule and always get their way at the expense of everybody else,” says Watkins. They may be bringing in the most money, but they’re also creating the most expenses.
Look past the revenues and focus on each partner’s contribution in terms of billing habits, client selection, and general attitude.
1. How efficient is the billing?
Poor billing habits are costly, Watkins says. No matter how much business a partner brings in, if the work isn’t billed on time, the firm loses.
Inefficient billing is especially common in smaller firms because the smaller the firm, the less the structure. The partners often practice almost as independent firms, and there are no required billing procedures.
In that situation, the big revenue producers may wait several months to send out their bills, and in the process “they put a choke hold on the cash flow.” The money does come in eventually, but in the meantime the firm has to stretch and even borrow to cover the payroll, the rent, and the general expenses.
And the damage goes beyond that to collection problems. When the bill doesn’t roll in until six months after a matter ends, the client can only think the firm isn’t too concerned about getting paid fast, so why not set that bill aside for a few weeks or even a few months?
What’s more, people have a greater appreciation for the work while a matter is still pending than they do after it ends. As each day passes, the work loses its value, and the client isn’t so eager to pay.
More still, if the client challenges one of the charges, the partner likely doesn’t remember enough about the work to respond and so writes it off just to avoid the aggravation.
Write-offs many times run as high as 20%, Watkins says, and that’s a tremendous loss. It’s also an unnecessary loss, she says. “The goal should be to collect 100% of what’s billed—period.”
What firms fail to realize is that they are being taken advantage of. “Attorneys who don’t want to bill consistently don’t care whether they get paid or not,” says Watkins. They don’t care enough to call a client and say “pay me.” They don’t mind writing off a lot of time. And they don’t care whether their associates get paid either.
Watkins offers a solution to the late-biller financial picture.
Draw up a chart showing the cash flow for the past several months and how the firm’s accounts have dipped when the billing is late and, if the firm had to borrow to cover its expenses, the interest it has paid.
Along with that, draw up another chart showing the collection rates of the attorneys who bill on time and those who don’t and how much money the latter have written off.
Don’t use any names on the chart. Just list the attorneys as Attorney A, Attorney B, and so on and let the numbers speak for themselves. It may be that seeing how much money they are losing will be impetus enough to get the outlier partners on the right track.
2. How select is client selection?
Poor client selection is even more costly than poor billing, because there the firm risks not getting paid at all.
Yet it’s common, particularly when business is slow. Seeing the revenues wane, firms relax their selection standards and take on new clients without evaluating either their ability or inclination to pay. They also accept new business from current clients who aren’t good payers or who still owe money.
Screen out the deadbeats, Watkins recommends. Ask client prospects what other firms they have worked with previously, and call those firms and ask why they are no longer representing them.
And to that she recommends adding a little used payment potential check: ask permission to check their credit. Go so far as to put a box on the intake form for them to give written approval.
The interesting part about doing that, she says, is that there’s no need to follow through and do the actual checking. The prospect’s response is all the firm needs.
If the prospect says okay, figure that person has good credit. “But if the prospect gives any push-back about not wanting the credit checked” or relates some sob story about how the credit score has been undermined, “that’s a clear sign of risk.”
Another little used check: even if there’s no conflict in the business, run the name past the other partners. In one client firm, she says, an attorney did just that and found that one of the partners had additional information on the prospect—he owed a significant amount of money to a firm down the street.
Finally, get retainers. “That’s critical,” says Watkins.
It’s not offensive to do all the preliminary checking the firm deems necessary. After all, says Watkins, “attorneys are working to make money like everybody else, and they deserve to get paid for the work they do.”
3. How difficult is the partner?
The third factor that needs to be included in partner evaluation is the partner’s ability to work with other people in the firm.
No matter how much money a partner brings in, if that partner is difficult to work with to the point of causing turnover, the firm is losing money.
“Turnover costs money and impacts morale,” Watkins says. The cost of replacing people—whether associates or staff—can be as much as 2 1/2 times the cost of keeping them.
What’s more, the partner’s rudeness and unpleasantness becomes known in the legal community such that it becomes difficult to fill the empty positions. And when the rudeness or unpleasantness is extreme, sometimes even the temporary agencies will refuse to help out.
She cites one client firm where a partner who brought in more than half the total revenues was so difficult to work with that new associates walked through “a revolving door.” The firm spent thousands of dollars hiring and rehiring “because he could not work with anybody.”
Unpleasantness like that can trickle down to client retention as well. It’s not unknown for clients to see a partner’s rude treatment of associates or even staff and take their business elsewhere.
It’s usually more than obvious who the difficult partners are, she says. But when there’s any question about why staff are leaving or why morale in one area is low, give staff an anonymous survey about job satisfaction and include a question such as “is there anything the firm can do to help you work with your attorney more effectively?”
And at the end of every question leave a space for additional comments. When a survey is anonymous and asks for opinions, the administrator gets to the truth.
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