"Don't Do Stupid"

We have identified six areas for your consideration and rethinking. This is not an exhaustive list by any means, nor are the suggested alternative approaches the only solution. They are meant as a starting point and perhaps a stimulus to re-look at all the old tried and true practices within your firm.

1. Associate Compensation

First year associate compensation in the AmLaw 200 and elsewhere now ranges from $125,000 to $190,000 before annual bonuses. In most firms, associate compensation is fixed by graduation year, and every year, every associate gets the same step increase. Some law firms distinguish between associates with their bonus payments, but not all. The majority that do distinguish between associates usually base their decision on the number of billable hours — the number of hours being used as an indicator of quality of legal work. The question is, why? Why don't law firms evaluate individual associates and increase annual compensation based upon individual performance?

The two most common reasons I have heard over the years is that:

1. Evaluations would negatively impact associate morale; and
2. Evaluations require too much time to prepare and deliver, and everyone is already too busy.

I believe most associates quickly determine who among their class are the hard chargers and those who are pursuing their legal career at a more leisurely pace. The associates know who stays late and who is working on the weekends. If there is a morale killer, I would suggest it is in the failure of the firm to recognize the differences that are morale killers.

Annual performance management systems give feedback to all associates and provide a roadmap for them to follow to improve their legal skills. A written evaluation (at the conclusion of a major matter or after a predetermined number of hours on smaller matters) delivered by the supervising partner is the basis of the system.

All of an associate's annual evaluations would provide the associate committee with the basis upon which to base their annual performance review and make meaningful compensation decisions. Documented attorney feedback would also mitigate the chance that the firm's promotional policies will be challenged in court at some point in the future.

2. Invoice Collections

Based upon our work with law firms, 50% (and sometimes more) of all collections occur after Labor Day. In many firms, December collections represent the majority of annual distributable profits. Why let it go that long? Often clients receive a fee discount to pay by year-end. In effect, law firms are training their clients to pay late and rewarding them for doing so. We have found that a combination effort of a partner committee (Billing & Collections) focused on billing and collections, working with the CFO and the firm's in-house collectors is much more effective.

The committee should meet with the CFO monthly through June, twice monthly through September, and weekly the remainder of the year. The committee should:

• Review the firm's accounts receivable;
• Identify potential problem invoices (all those past 45 days);
• Contact individual partners to discuss potential problem invoices and agree on a plan of action. Either the partner follows up or the firm's CFO and/or collections staff follow up with the client to secure payment;
• Review all payment plan progress at the next committee meeting in addition to new accounts receivables; and
• After 90 days, responsibility for contacting the client should shift to the CFO and/or the collections staff who should report progress to the committee.

3. Timekeeping

The starting point of law firm billing is, of course, the prompt recording of an attorney's time. When I started my career in consulting (at Price Waterhouse), the concept of not inputting your billable time on time was unimaginable. The consequences were swift (usually within a day or two) and dire (a call from the practice MP was standard).

In law firms today, as 30 years ago, there is a percentage of timekeepers (10% to 15% in my experience) who are always late — some by days, some by weeks, and some by a few months.

The havoc that late time input causes is well known. A significant amount of late time never gets recorded because attorneys cannot recall what they did 30 to 45 days ago. Another percentage of late time never gets billed because the matter that was worked on has been final billed or the client will not accept late billed time.

Every month CFOs juggle when to close and run pre-bills and how much time has not been submitted. There are of course the exceptions: an attorney who misses a close once a year. But they are the exceptions. It is usually the "usual suspects" who fail to submit time promptly.

There are a number of technological tools that help, such as mobile time entry software for cell phones, or timers installed on attorneys' PCs, or telephones that record time as it is incurred.

But I think the only real solution is to impress upon new attorneys when they join a firm the importance of prompt time entry. Partners must be role models in this effort and not laugh at or excuse late time entry by associates or other partners.

Practice leaders, office managing partners, and people in other leadership positions, should all support this effort. Nothing will focus the mind of a young associate like a call from the practice leader; nothing will wake up a partner like a call from the managing partner.

Prompt input of time is a hygiene issue and, like most hygiene issues, must be practiced every day.

4. Invoice Billing

Prompt billing is another hygiene issue that law firms struggle with every day. I have many clients who close their books on the last day of the month, run pre-bills on the first day of the new month, and distribute the pre-bills by the second day of the month, and then wait. Sometimes the wait is weeks long for the mark-ups to be returned to the billing function. Many firms struggle to get a month's invoices out by the close of the subsequent month. By the time a client receives a bill, the time can be 45 to 60 days old, and even if the client pays in 30 days, the time is three months old at best.

The memory of lots of good, hard work fades after 60 days, and if the law firm was in no hurry to invoice it, how important is it to pay the bill?

This represents the other half of the Billing and Collections Committee work. In addition to the firm's A/R, the committee should keep track of the firm's Work-in-Progress (WIP) and monitor not only the speed but the amount of time that is billed and the amount that is rolled over.

Some amount of time cannot be invoiced monthly (bankruptcy, some T&E, and by engagement letter agreement), but old unbilled time rapidly decreases in value and past 120 days is generally valueless.

5. Administrative Support

The days of one-to-three/four administrative support ratios are over. Studies show that younger attorneys (under 45 or so) do not need and do not expect the same type of administrative support that law firms used to provide. Most attorneys in the Millennial and GenX generations do most of their own document preparation. What they need is sophisticated formatting assistance, help with PowerPoint or Excel files, and clerical tasks such as filing, reservations and photocopying.

You do not need a highly trained (and expensive) legal secretary to perform those tasks. Our research shows that 35% to 42% of all administrative time is devoted to those activities, and it is a waste of time and money. In addition, most assistants do not like to do this kind of labor.

Numerous firms achieve much better ratios, improve service levels, and reduce costs through the introduction of an administrative system that includes legal secretaries and practice support specialists in pods of 5 to 8 that support 25 to 35 attorneys. The pods provide better service, more services over an extended period of time and at reduced costs.

6. Back Office

Companies moved their administrative services out of the head office in the 1960s. The major accounting and consulting firms moved their administrative service centers out in the 1970s and 1980s. All AmLaw 50 to 200 (and almost half of the under 50) maintain their administrative centers in the heart of major cities. Usually (for multi-office firms) they are located in the city where the firm first started. The result is that for all those attorneys outside the original home city the administrative service centers are outsourced. However, instead of being outsourced to smaller cities where you can leverage lower operating costs such as salaries, rent and utilities, the firms are outsourced to high-cost areas in large cities — the exact opposite of what their clients have done.

Moving to a smaller city not only reduces costs (15% to 30%), but often improves the level and quality of service provided. Law firm back office positions are desirable and firms become the employer of choice in the locations that they have chosen to move to.

The issue for smaller firms is the cost of developing these centers and the difficulty in managing a remote facility with limited management resources. That issue is being addressed with the development of an independently owned co-sourcing center that will provide dedicated services to multiple firms.

As noted, this is not the complete list of areas to rethink. There are many other practices that need to be rethought as well. When you do start to rethink, always begin with the end in mind: "Don't do stupid."

*****

Mark Santiago is a member of this newsletters Board of Editors and a certified Management Consultant (CMC). He is The Managing Partner of SB₂ Consultants headquartered in New York City. Mr. Santiago has consulted to the legal profession for more than 35 years in the areas of financial performance improvement, compensation systems, merger/acquisition due diligence and integration and administrative support outsourcing. While a partner at Deloitte & Touche he led the two largest law firm administrative outsourcing projects in the United States. Mark is a frequent speaker and author and was the Chairman of the Am Law CFO conferences for 11 years. He was also one of the three originators of LegalTech in 1981 and a member of its Board of Advisors.