Building a Better Revenue Cycle Presented by Seelin Naidoo, MBA FM02 Saturday, 10/26/2013 9:30 AM - 10:45 AM
Building a Better Revenue Cycle Best Practices and Industry Benchmarks About Intelliteach Intelliteach: Provides Accounts Receivable Management & Information Technology Outsourcing, Consulting, and Software Services to the Legal & Accounting Markets. CMS Management Solutions acquired Intelliteach in Feb, 2012 and decided to retain Intelliteach as the name for the combined entities. Currently engaged with over 40% of the AMLAW 200. Presenter: Seelin Naidoo - Chief Executive Officer. 1
Industry Overview The legal landscape has changed dramatically over the past 3-4 years. The key drivers causing these changes are: Weak economy. Lower client demand, more competitive market, resulting in lower rates. Increased operating cost. We have a new - normal. Demand for Legal Services: Recession has put pressure on many firms earnings less work to do and more competition for the high value work. 3.7% CAGR from 2004-2008, but decline of 0.4% for 2008-2012. Trying to address excess capacity has affected margins. General productivity stats have decreased around 10%. There is an increasing number of firms who have failed or who have entered mergers out of necessity (more so than of convenience). Expenses, as a percent of revenue, have been increasing in many firms at a 5% rate even in 2013. Clients have become more demanding through: negotiated discounts, AFAs, or simply through rejection of rate adjustments. Back Office Expense Pressure Finance, 27% Intake & Conflicts, 6% Library, 6% Marketing & Communications, 6% Professional Development, 2% Attorney Recruitment, 4% Human Resources, 7% Administration & Office, 20% Information Technology, 22% Most Law Firms spend over 11% of revenue on non-secretarial and non-occupancy staff functions. For a firm with revenue per lawyer of $500K, that is over $50K per lawyer in the back office. FA&O and IT represent 69% of total spend. Many firms have already cut back office and that is not sufficient in itself to battle market trends. 2
YOY Hourly Rate Comparison Even in this tight economy, hourly rates have managed to show a slight increase. However, 2012 saw a loss of an average of $49 per hour from worked rate to collected rate. The firms used in our poll generated an average of over 340K worked-hours last year. Recovery Performance The Recovery rate shown measures collections percentage from the Total Open A/R pool for each year (Total plus Billings). As you can see, the industry recovers a decreasing amount of its open balances each year. As expected, this causes the average Days of A/R to increase. Write-offs continue to increase as percent of total A/R. This is a clear indicator that clients are holding on to their cash like never before. Now that we understand the industry pressures, how do we counter it? 3
A Better Revenue Cycle Improves Profits After cost cutting, firms must find additional ways to improve profits. Clients are slower to pay, and law firms must respond. Realizing more from the work already performed has huge potential to improve a firm s profitability. To do that, firms must increase realization from what was worked (Billing Realization) and from what was billed (Collections Realization). Firms must find ways to reduce risk from non-paying and slow-paying clients. Your tools should include: Engagement Letters. Client Intake Programs. Retainers. A Collections Strategy. A Collections Escalation plan with support from the Management Committee. To be able to measure improvements in these areas, you need to know where you are now. Industry Billing Realization Time is your enemy - the more time that passes, the harder it is to bill all of the time worked. How does your firm compare? Do you have policies that control time entry? Do you make this information available to billing attorneys? Do they see how they compare to their PG peers? 4
Industry Collections Realization 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 97.0% 94.5% 94.3% 90.8% 87.0% 82.1% 77.4% 72.2% 67.3% 62.1% 59.5% 52.3% 53.9% 50.0% 44.9% 44.1% 36.7% 41.1% 35.9% 33.0% 27.5% 20.0% 30.8% 26.0% 21.2% 10.0% 17.7% 14.6% 0.0% Industry Average Best in Class When does your firm start collections? at 120 days? at 90 days? Does the Collections Department have access to the AR? Or is much of it held by the attorney and marked Do Not Contact (DNC) for the collectors? More important, whatever your firm policy, if activities are moved up 30 days, say from 90 days to 60 days, your likelihood of success increases by10%. Client Intake and the Bottom Line A Client Intake Program assesses risk, reduces bad debt, and minimizes collections issues. This program is not always designed to turn away new clients. It identifies risky clients and minimizes their ability to build up large unpaid balances. It may result in the increased use of retainers to eliminate the firm s exposure while still working with clients that have cash-flow issues. Risk Assessments can be performed simultaneously to conflicts checking so no delays are incurred. Firms should establish when a Risk Assessment should be performed, who will review the evaluation, and who will be responsible for monitoring risky clients. 5
What is Your Firm s Culture and Tolerance for Risk? Is the function pre-acceptance or post-acceptance of new clients or new matters? Most firms perform the function after a client is onboard or postacceptance. What is the Firm s tolerance for risk? What is the estimated billing? Grading system needs to be collaborated and endorsed by the Firm. Risk analysis should result in evaluation grading of low, medium, or high risk. Escalation and Thresholds What is the escalation process for non-complying attorneys? How aggressively will the Firm manage compliance? Determine scope of process: How many new clients are signed each week/month? Does the firm want to perform an evaluation of existing clients with new matters? Begin with thresholds review new clients whose estimated billing will be greater than $10,000 annually (tweak for your firm). Established clients when scope of business changes significantly, for example from $20,000 annually to $100,000. 6
The Process Where to Start Design an operating process: Determine workflow. Establish risk tolerance. This is not a credit check; it is a risk assessment. Compliance and escalation process. Accountability track and measuring tools. Credit/collection specialist or manager takes responsibility for analysis. This is imperative! Financial people, not billing attorneys, should perform the analysis. Process for Risk Investigation to Create Risk Ratings Request a LexisNexis, Westlaw, etc., public records information report on both the business and principals in the business. Based on the risk rating criteria, rate the client. Briefly identify good and/or negative information. Draw attention to red flags. Risk evaluation/narrative: The credit/collection specialist or manager will complete the risk assessment form. Remember to keep it concise to the point! Attorneys time is limited; must be brief. Copy Firm management/committee. This should be sent to the attorney and any committee which is involved (Billing & Collection Committee, Finance Committee, etc.). 7
Process.continued Retainer/Risk Recommendations: Low Risk No retainer unless it is firm policy to require same. Medium or High Risk Retainer should be equal to 2 times the monthly billing rate. The retainer should be replenished when the accumulated balances of AR and WIP equal 75% of the retainer. Intelliteach Consultant or designee would manage this process. Client Risk Rating Low Risk Commercial: More than five years in same business. Address of business is same as address client listed. Association with other businesses does not create conflict with current business. No suits, judgments, liens, bankruptcy filings or other blemishes. Consumer: No suits, judgments, liens, bankruptcy filings or other blemishes. All information appears clean. 8
Client Risk Rating Medium Risk Commercial: Fewer than five years in same business. Address of business is same as what client listed. Principal is involved in ownership of other businesses in a major role. Paid-off liens or judgments or active filing or other derogatory marks which could increase the probability of a client paying slowly. Consumer: Paid-off liens or judgments or active filing or other derogatory marks which could increase the probability of a client paying slowly. Law Suits. Client Risk Rating High Risk Commercial: New or less than one year in business. Address does not match if client claims ownership. Principal is involved in several businesses which may create a conflict of interest or may cause them to not be managed successfully. Bankruptcy within last seven years or active suits, judgments, or liens which may indicate a high probability of slow pay or no pay on the client s behalf. Consumer: Bankruptcy within last seven years or active suits, judgments, or liens which may indicate a high probability of slow pay or no pay. Other red flags. 9
Follow-Up on High Risk/Red Flag Clients When clients are rated medium or high risk, a retainer is recommended. Retainer Management: Best Practices: clients retainers should be replenished when WIP and AR approximate 75% of the initial retainer. Continually monitor AR and WIP stay on top of these clients. You have now successfully reviewed information available to you and have made the best decision possible to protect the Firm s assets.its accounts receivable! A Collections Strategy Front & center to any successful collections strategy is the ability of the organization to manage their A/R balance flow through. Establish thresholds for each aging category, for example: A/R 0-90 days should be 50% or more of your total A/R balance. A/R 91-180 days should be no more than 30%. A/R 181 plus should be no more than 20%. Then determine how your AR is managed: Statements are sent every 30 days after invoice date. Welcome calls after 45 days of invoice to establish receipt. Attorneys are notified of past due accounts at 45 days. They are informed that client calls start at 60 days. Clients are contacted at 60 days. All accounts over 90 days past due are reviewed by AR Committee. Problem accounts are escalated to the AR Manager at 180+. At 365 days, accounts should be reviewed for write-off. 10
Portfolio Access Attorneys must assign accounts to the AR team in order for the effort to be successful. Firms should create an exceptions policy managed by the Finance Committee. An attorney can exempt an account from the AR team only by obtaining a written exception. Every firm has white glove clients. Outside of your top 10 clients, firms should be very critical of allowing exceptions. Transactional work, AFA, Contingent, and other special payment arrangements may take precedent over this policy as well. The object is to get ALL the truly workable accounts in the hands of the AR team. Measuring Success Firms need benchmarks in place to know if their A/R management efforts are successful. These can include simple calculations like open AR balance. Is it declining? What percentage of your open A/R is over 90 or 120 days? Is that improving? 11
Industry Days of A/R 90 80 70 67 77 79 78 82 83 84 80 77 74 76 73 60 50 48 45 48 46 44 46 47 47 48 48 47 45 40 30 20 10 0 Jan-2012 Feb-2012Mar-2012 Apr-2012 May-2012Jun-2012 Jul-2012 Aug-2012Sep-2012 Oct-2012 Nov-2012Dec-2012 Best in Class Industry Days of A/R is an indicator of how much time elapses from invoice to payment - but only for those items that get paid. Thank you! 12