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Law Firm

Overview:

    A small law firm with three full-time attorneys and four support staff had annual revenues of approximately $375,000 on a cash basis.  The firm was operating at a loss, yet all of the employees were diligent and hard-working, and the firm had an excellent reputation for the quality of their legal work.

Problem 1:  Cash Collection

    After conversations with the firm's personnel and reviewing the firm's financial statements, only 80-90% of the work they billed was actually being paid by clients.  While this seems low, it is not uncommon in professional services firms, particularly law firms.  At the time our consultant came in, the firm had $100,000 is past due receivables, 90% of which was over 90 days old.  Even assuming an 85% collection rate, this translated into $66,000 a year in lost revenues ($375,000 / 85% collection rate = $441,000 billed fees - $375,000 collected fees = $66,000 uncollected fees). 

    One of the first things our consultant developed was a two-pronged approach to improve collection efforts.  First, we developed a screening system for them to use to identify clients likely to have payment delays.  Work performed for financially stressed clients was billed more frequently and in smaller amounts, and the total expected costs of all work was shared with clients much earlier in the process. 

    For example, divorces can be accomplished for less than $1500, but only if uncontested and both parties are willing to work together amicably.  If either side chooses to fight, the cost can easily exceed $10,000 or more.  Unfortunately, all that most clients heard was $1500, not "or more..."  By being more upfront with a prospective client as well as asking the client the right questions, the firm was able to make better estimates of the actual costs for a specific client, and then create a working/billing arrangement that fit within that client's budget.

    The second prong to solving this collection problem was a revised collection procedure that starts with mailing invoices to clients and carefully tracks and logs all conversations with past due clients throughout the entire collection process.  We developed scripts for the office assistants to use, as well as form letters, and even a timeline of when to call and when to mail for past due clients.  If you wait until an account is over 90 days past due to begin collection efforts, the chance of getting paid is low.  If, however, you start the process on Day 1, your chance of getting paid is very high.

    Example:  "Thank you again, Mrs. Jones, for giving us the chance to work with you in developing your new estate plan.  I'm just calling to make sure that you received our invoice yesterday, and that you are happy with the work we performed..."  This is a very easy, friendly conversation to have with a client.  It shows you care about your work and the client's satisfaction, but also stops the client from saying 40 days from now, "Oh, I never received an invoice from you - please send me a new one," followed by (usually around day 50), "Actually, I wasn't really happy about how you handled X - I'd like to you redo it and then I'll think about the bill later."

Problem 2:  Nonexistent Billable Hours

    The firm had three full-time attorneys, and each attorney was billed out at $300 per hour to clients.  In a law firm of this size, attorneys should be averaging a minimum of 1500 - 1600 billable hours per year.  At that rate, annual revenues should be $1,350,000 (1500 x $300 x 3).  However, the firm's cash revenues were only $375,000.  Actual billed hours suggest that each attorney was only averaging 400 billable hours per year.  Conversations with staff supported this, as much of the attorneys’ time was spent on class-action contingency cases that, while potentially resulting in large payouts in the future, were not listed as billed hours.

     Because of the overemphasis on class-action cases, revenues were approximately $1 million less than they should have been, given staff size. 

    Most of this revenue shortfall was not due to non-paying clients (see Problem 1 above).  Furthermore, based on observing the attorneys and their staff, none of the attorneys had significant idle time.  This suggested that while they are all busy, much of their work is spent on non-billable projects such as contingency cases and class-action litigation. 

    Contingency cases had to be reduced in size and frequency; too many of the company’s resources were going toward projects with no immediate payout.  Not only were payroll costs high to support these projects, but other fees were significant, as well.  The firm was covering court fees, expert witness testimony, and a host of other out-of-pocket expenses associated with these projects (by my estimates, as much as $50,000 per year).  Once we put a budget in place, the firm was able to determine how much of the firm’s time and money should be allocated to these types of projects. 

    Class action litigation can be profitable, but generally requires a large firm with extensive resources and significant cash flow to continue working on a case that might not result in revenues for years.  Creating a budget and planning for contingency litigation enabled the firm to still maintain a presence in this area of law, yet manage their exposure to the financial requirements of such actions. 

Conclusion:

    This project required about two weeks, during which time we identified Problem 1 and Problem 2, set the company up with QuickBooks for an accounting system (the company had none beforehand), helped them hire a part-time experienced bookkeeper, and developed the framework for a partnership agreement between the firm's two partners. 

    The firm took our advice regarding caseloads and withdrew from a number of class-action cases.  The partners then had to make a decision on how to use that time.  While they could have eliminated one attorney plus reduced some of their support staffs' hours, saving approximately $150,000 annually, they chose instead to retain the existing support infrastructure and make a commitment to grow the business.  The firm already had sufficient client business to fill some of the time that had been freed up; previously, the firm had been turning down existing clients' requests for paid legal work, due to their other (non-paying) commitments.

    Goals for the project were:

  • Develop a system to generate accurate, timely financial statements for the partners.
  • Uncover the causes of the firm's losses and put a plan in place to return the firm to profitability.

    The end results of the project were:

  • 95% target collection rate on all billed work.
  • 30% target increase in billed work by focusing on existing clients' needs.

    Overall, the firm gained an additional $145,000 in annual revenues though improved collections ($45,000), and proper budgeting of caseloads (which enabled the firm to take on an additional $100,000* in revenues from existing clients). 

*This revenue was almost entirely profit, as the firm already had the attorneys and support staff in place.  Previously, these individuals and their associated costs were being paid by the firm to work on non-paying projects; now, their time and energy would simply be redirected to paying clients.


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