The following post is the second in a six-part series on legal billing excerpted from our white paper, Houston, We Have a Billing Problem.

legal billingWe’ve taken observations from thousands of law firms, extracted some criteria, and constructed a simple scale of billing effectiveness. Typically, we see law firms falling fairly neatly into one of these five levels. If you’re like most, you’ll be able to identify almost precisely with one of these levels.

LEVEL 1
Invoices do not get generated on a regular basis. Systems are not in place to capture time and create bills in a streamlined manner. Firm is at risk for trust accounting violations due to sloppy practices. Billing system runs basically on an ad hoc/seat-of-your-pants system, with weekends and free-time spent billing. Collections lag: 75% or more of clients are more than 30 days behind in payment.

LEVEL 2

Some time and billing systems are in place but they are inefficient, unreliable and very prone to human error (e.g. “I track my time on Post-its during the day and aggregate them all at day’s end on a legal pad). Invoices may be generated soon after work is performed but without any regularity. Collections lag – 50% or more of clients are more than 30 days behind in payment.

LEVEL 3
Disciplined time capture in a consistent, firm-wide system is more the rule than the exception, but it’s not universal. Invoices are generated regularly but in a time-consuming manner, possibly at additional expense (i.e. dedicated staff) or additional cost (i.e. lawyer billable time) to the firm. Some clients have retainers or evergreen retainers, which help avoid most collection issues. Enough financial reporting is generated so that tax returns and a year-end financial review is not incredibly painful, but no meaningful financial analysis (e.g. budgeting, forecasting) is taking place.

LEVEL 4
Time capture is a natural part of the firm’s operations; invoices are generated in bulk and with regularity. Quarterly financials are generated and reviewed. Clients pay regularly, partners would like to generate more revenue, but generally agree that current collections are under control. The ship is running smoothly, but the waters ahead are somewhat unclear due to a lack of metrics that enable forecasting and pro-active tactics.

LEVEL 5
Financial metrics are used to forecast law firm revenue growth, accurately budget, and understand what type(s) of work the firm is best equipped to efficiently deliver. The firm has the ability to creatively price, or offer other competitive differentiation alternatives because they understand their costs, margins, and so forth. Billing isn’t something dreaded that interferes with the practice; rather, it actually enhances the practice, and ultimately enables the firm to provide great client service and a high degree of job satisfaction for its lawyers and staff.

If you identify with Level One or Level Two, don’t feel badly: it’s where we find about 75% of law firms. As with many other things, the first step in fixing a problem can be admitting you’ve got a problem in the first place. Seeing where you are and, more importantly, where you could be (read: Level Five) is a great motivator for action.

Not surprisingly, Level Five law firms often categorize themselves as prosperous and successful. Our product specialists, who speak with hundreds of firms on a daily basis, tell us this regularly. Some of these firms actually give us great suggestions and ideas that we, in turn, share with other firms.

Moreover, we’ve also noticed that Level Five firms have a tendency to grow faster than other firms. (We use an increase over time in the number of users per Rocket Matter account as a proxy for overall firm growth.) Perhaps most importantly, here’s something our product specialists never hear from lawyers or staff at Level Five firms: An assertion of “I hate being a lawyer,” or that unmistakable, “Hurry-up- I’m-completely-stressed-out” tone in their voices. Lawyers at Level Five firms – by and large – are friendly, a pleasure for us to serve as our customers, and tell us that they love practicing law.

The correlation between having one’s billing under control and one’s relative happiness in practicing law is far too prominent to be coincidental. And as is later detailed, these firms are also extremely well positioned to capitalize upon competitive differentiation techniques that will also help them tremendously in an increasingly tight market for legal services.

On the flip side, firms who have not optimized their billing systems also have a lot in common. The lawyers working in law firms that are constantly scrambling, and scraping out a suboptimal existence in Level One or Level Two are frequently unhappy. Regardless of whether they are solo practices, boutiques, or multi-lawyer shops (Level One and Level Two firms come in all shapes and sizes – it’s not just small firms), they overwhelmingly tend to:

  • Take days, often at the cost of foregoing weekends, family time, or vacations to get bills out the door;
  • Rely on legal pads, emails, calendars, and sticky notes in an attempt to accurately reconstitute billable time;
  • Are unable to determine which of their cases or practice areas are the most beneficial to their firm (i.e. which types of services generate the highest value for my time?)
  • Have no idea what percentage of their time they accurately bill, and then collect for.

Sound familiar?

In a Level One and Level Two firm, the bills take way too long to generate, often go out late, and result in a dreaded, yet completely predictable domino effect. Late or infrequent bills inevitably mean late payment, which can mean firm cash flow problems, which can mean mounting financial stress, which can lead to all sorts of negative outcomes.

In addition, using ad hoc billing tactics (doing “one-off” bills, doing bills whenever time permits, etc.) can result in a significant amount of otherwise billable time being lost and – perhaps worse – spending an inordinate amount of time doing work that lawyers just shouldn’t be doing. What comes of this?

  • Stress
  • Job Dissatisfaction
  • Less Time Helping Clients
  • Fewer Hours With Family and Friends

It can even ultimately impact the quality of legal services provided to clients. That result is entirely unintentional – it’s the last thing any lawyer would want – but the pressures created by financial stress can’t help but adversely impact a lawyer’s available time, psychological state, and possibly even her overall attitude. Unless you’re already independently wealthy (and have enough wealth to maintain that status for the foreseeable future), good time and billing practices are a critically important aspect of your law practice.

The problem of inefficient time and billing is typically just a symptom of a much deeper, much more dangerous issue to the long-term viability of the firm. “I’ve got a billing problem” is usually the tip of the iceberg. It’s not unusual for us to hear “our billing is out of control”, followed by a laundry list of reasons (more like rationalizations) why the problem hasn’t been addressed yet.

But beneath the surface, inefficient billing practices are symptomatic of underlying, deeper issues. The problem isn’t just a current, immediate one. By not having a solid billing system these firms are also losing extremely valuable data about their business, key business insights, which – if not addressed – will result in a massive competitive disadvantage going forward.

POSTS IN THE SERIES:
How Bad is Your Legal Billing Problem?
Legal Billing: The Five Levels of Success
Your Legal Billing Problem Needs to be Solved Yesterday
Legal Billing: Which Law Firm Wins the Business?
How Legal Billing Practices Can Differentiate Your Firm
7 Steps to Fixing Your Legal Billing Problem