It’s universally understood that if we do some professional work, we can expect to get paid for it. Yet this causality doesn’t hold true in the legal sector. As Joey Perez explains, firms are often not paid the full value of the work they do, because the revenue pipeline in law is very leaky. However there are steps that firms can take to plug those leaks.
You do the work, you get paid. Isn’t that how it goes? But actually, for law firms, not really. For a variety of reasons, firms are routinely not paid in full for what they do. The revenue pipe leaks. There are two components to this: there’s the work done that never makes it to the invoice; and the work that’s invoiced, but goes unpaid. Indeed it’s well recognized that there’s a persistent gap between what firms bill and what they collect. Average law firm realization in North America has remained stubbornly between 89 per cent and 90 per cent for the last decade. In the last year it’s actually slipped down a little. It means in effect that firms are giving clients a 10 per cent discount. But what we should bear in mind is that that figure can be flipped into a 10 per cent uplift in revenue if firms tackle it in the right way. It falls to each individual firm to make a decision on whether it wants to act to minimize leakage of revenue. What follows will give you an idea of the steps that can be taken if you do.
Where Leaks Happen
Where does revenue get lost between work being commissioned and payment being collected? It starts at the very beginning of the pipeline where rates are agreed. There are two models: fixed fees and hourly rates. In either case, the firm has to determine in advance the rates at which it can profitably (and competitively) execute the work. There are many versions of fixed fee including blended rates; matter-based rates; hourly rate volume discounts; role cap and exception rates. The list goes on. But whichever fixed or alternative fee arrangement is in place, the firm must very accurately anticipate its costs before rates are agreed. To do otherwise is to risk leaking revenue that would otherwise have been achieved had the initial rates more correctly reflected the work required.
The next area of major leakage is time capture. This is an activity that’s universally loathed by attorneys. Yet it’s essential to an efficient revenue pipeline. The principal sins are again twofold. There’s the work that never makes it on to the timecard in the first place because it’s overlooked. This happens in particular to smaller tasks done in shorter time periods and to work that’s undertaken when the attorney is outside of the office, or outside office hours. Clearly that’s been happening a lot over the last year. It also typically happens because there’s a significant time lapse between the work being done and when it gets logged.
Then there’s the work that’s included on the timecard, but in a fashion that lacks sufficient accuracy and detail. Thus it attracts close client scrutiny and is at greater risk of write-off. Again, this happens when the attorney’s recollection of exactly what they did, and precisely how long it took them, is vague because there’s been a delay between activity and time logging. This is poor timekeeping hygiene. From the firm’s point of view the problem is compounded by the fact that attorneys habitually underestimate the time taken – rather than risk “overcharging” the client. The term used to describe the time lapse between activity and time entry is “velocity”. There’s an established inverse relationship between velocity and revenue: as velocity comes down, revenue goes up, and vice versa. This is another area where there are leaks that can be plugged.
The final area of significant leakage is at the end of the pipeline, when the invoice is in process. This can take several forms. First, poor timekeeping hygiene can result in work not even making it past the pre-bill stage because the firm’s relationship attorney – usually a senior partner – removes an entry from the invoice because it’s too unsubstantiated, ambiguous, unqualified or vague. This is often to avoid uncomfortable or confrontational conversations with the client that risk souring their relationship with the firm.
Second, and relatedly, an entry can be removed from an invoice before it goes to the client because it infringes or is not accepted within the agreed Outside Counsel Guidelines. Again, the senior partner may well take the view that it’s better not to “push” things with the client.
The final area of leakage is once the invoice makes it to the client, with unsubstantiated or in some other way, unsatisfactory entries. The client uses this lack of precision to dispute elements of the bill, and discounts and write-offs are agreed, not least in order to expedite the payment of the portion of the invoice that is accepted.
Cumulatively, all three areas of major leakage will add up to a significant hit to the firm’s profitability, comprising both that which is apparent, and that which, iceberg-like, is hidden from view. Whatever the cost of this leakage, it should be stopped where possible. And this can be achieved with a couple of actions.
Plugging the Leaks
Firms will plug pipeline leaks when they address the causes. They can do so by increasing the accuracy and accessibility of the data used to calculate profitable rates and fees, and by raising standards of billing hygiene. And in fact the two go hand-in-hand. Where billing hygiene is scrupulous, it follows that accurate data is generated with which to make those crucial rate decisions.
How’s it to be done? As I said, there are two actions. One is that the firm tackles its timekeeping culture. This means ensuring that the importance of meticulous timekeeping hygiene, and the many ramifications that flow from it, are clearly understood by fee-earners. In addition, the firm’s policies and processes must be checked, and possibly new ones instituted, to ensure that a positive timekeeping culture is supported within the firm.
In addition, firms should deploy the right digital toolkit to achieve two related objectives: these being the maximization of billable hours, and the minimization of non-billable hours. Maximizing billable hours, as we’ve seen, relies on lowering velocity. That calls for tools that automate timekeeping as much as possible. The gold standard is truly contemporaneous timekeeping, in other words applications that passively capture time while it is being spent. Time doesn’t get lost and leak away. And of course the happy corollary is that the best timekeeping automation simultaneously generates pinpoint accurate timekeeping data that will increase the accuracy with which rates can be calculated. The best applications go even further. For instance the one that I work with uses very smart automation to generate a draft time entry narrative that appears directly in the user’s time entry system.
Which brings me on to automation that minimizes non-billable hours. The logic being that in reducing the time spent on non-billable administrative tasks like email filing and timekeeping, you increase the time (and energy) that can be applied to billable work, thus increasing net billable hours.
It’s also important for the firm to understand the cumulative impact of automating tasks. If each email takes four or five clicks to file, that’s four or five micro-decisions and physical actions. Across a firm with 1,000 attorneys, filing 20 emails per day each, and taking a mere 15 seconds per email, the total time that could be saved by automation amounts to 83 hours per day. Monetized at $350 p/h that’s more than $29,000 a day.
Creating a timecard takes between eight and 12 mouse clicks in most systems. Add 30 seconds to create a narrative. Add more time for when the OCGs slow down non-compliant entries. You’re looking at 40 seconds plus per time entry. Multiply that by only five time entries a day, times 1,000 fee-earners and it becomes 55 hours a day. This is time that could be re-allocated to fee-earning activity and at $350 p/h that would add $19,000 of revenue each day.
The last 12 months have been exceptional. In response, many law firms have survived by adopting a fighting stance. They’ve increased the attention given to billing and collection. Larger firms in particular have instituted a renewed focus on accurate and low velocity time recording. Firms have been more assiduous about how and when they present invoices and in tackling client payment delays. This is all useful because it’s kept the revenue pipeline flowing. But there’s still more that can be done with automation and culture to plug some significant leaks.
ZERØ is a Silicon Valley-based disruptor committed to developing, engineering and deploying breakthrough artificial intelligence for law firms. Using machine learning, neural networks and smart automation, ZERØ’s mission is to help firms become more profitable by making them smarter and more efficient.