Practice Management: The Importance of Reigning in Write-Offs

2/10/2016 - By Zachary Farrington

Discounting works in retail — not in a law firm. In fact, write-downs of billable time can be one of the largest “expenses” of a law firm.

How costly are they? Well, here’s where some careful accounting comes in. Assume you have a $50,000 receivable that is written down to $40,000 — a $10,000 write-down. At a glance, it’s easy to dismiss the adjustment as “only” a 20% discount on your legal fees.

The reality is that the true impact is more than double that. Assuming your profit margin is 40%, the impact to your bottom line is actually closer to a 50% loss.

There’s also the very real cost of replacing the value of services written off. Assuming the same profit margin, it will take $25,000 in new revenue to replace the $10,000 lost to the write-off (i.e., dividing your write-off by your profit margin). So, $40,000 in write-offs would require $100,000 in new legal fees to replace the lost income.

More Common Than You Think
According to a 2014 LexisNexis® Legal & Professional report, 71% of law firms surveyed reported providing discounts or writing off legal work … even before invoicing clients.

Write-downs are sometimes unavoidable — for example, you’ve promised a long-time client a discount or the matter has taken longer than expected because you’re training a new associate. But they should never be routine.

Still, they do happen, and for an array of reasons. Yet, when adjustments start adding up, the problem can usually be traced to some permutation of this fundamental issue: Ineffective procedures are being used to do the work.

It could be that the time biller assigned to the matter isn’t as familiar with the area of law as he or she should be. Or perhaps it’s a matter of poor delegation and the work is not being performed at the “lowest” (or least expensive) level that is competent to meet the client’s needs. Whatever the case, it results in excess time that may not be billable to the client, or the client balks at paying.

Put the Brakes on Write-downs

An unacceptable level of write-downs means it’s time to take a look at who’s doing the work and how they are doing. Additional training, more strategic file assignment, enhanced communication and better delegation can go a long way toward eliminating, or at least reducing, costly write-offs.

It may also mean that the firm needs to critically evaluate how it reviews and approves writing down recorded time. Here are a few pointers:

Stress timekeeping - “Hindsight” timekeeping is a recipe for billable time slipping through the cracks. Better: Have all timekeepers track their time contemporaneously and submit time records daily.

Establish limits - Establish firm policies regarding billing lawyers’ ability to write off unbilled time (e.g., write-offs should not exceed the greater of $500 or 5% of fees, all costs in excess of $100 should be billed, etc.).

Hold partners accountable - Either on a write-off form or at a monthly billing meeting, billing partners whose write-downs are in excess of established limits should be held responsible for explaining their adjustments to the other partners.

Watch the year-end rout - There is definitely a cyclical nature to write-offs. Most of them happen at year-end, when partners seek to “clear the books.”

Watch aggressive/complicated billing - Clients may push back on a bill that is higher than expected or contains confusing pricing variations (e.g., different billing rates for various employees, functions and projects that result in a client being charged different rates for similar matters, etc.).

Get some mileage out of adjustments - Unseen discounts get you nothing. If you’re going to write down time, make sure the client sees it — as a professional courtesy reduction, a good client discount, etc. Just be sure to show the client that they got some special consideration.

Reward billing realization - Compensate partners based on their realization of standard fees, not on gross billings. Billing frequency and A/R collections should also be a part of your partner compensation guidelines.

A Matter of Profits - Managing discounts and write-offs is essential to law firm profitability. The math is pretty hard to beat: When you tighten up on billing practices, the firm enjoys additional profits without anyone really having to work any harder.

Why Law Firms Write Down Time
Big or small, law firms write off all sorts of time: associate time, partner time, practice group time, etc. Of course, there are a variety of reasons — some are cause for alarm, while others may be unavoidable.

Not-So-Worrisome

Associate training: New lawyers need to be trained. Unbillable time that results from getting them up to speed is usually unavoidable.

Billing rate increases: As a firm increases its partner and associate billing rates, it can expect a proportional increase in write-downs as price-sensitive clients push back. For some firms, writing down time on a small percentage of clients makes sense when the firm can, in turn, collect increased fees from a larger overall percentage of clients.

Unforeseen delays: Sometimes, circumstances will cause delays that cannot be avoided. This requires extra work that could not have been foreseen and for which the client should not be charged.

More Worrisome

Pre-emptive reductions: Call this the “I’m-not-worthy” syndrome, but some lawyers simply have a gut fear that their hours are just “too high” or that “the client won’t pay that.” When it comes time to bill, they cut the time charges.

Action: In many cases, this type of write-down can be minimized by effective control and review procedures.

Scope of work creep: If the scope of work detailed in the engagement letter is exceeded — and the budget overrun not promptly discussed with the client — a firm really has little defense when the client refuses to pay for the unapproved overruns.

Action: Obviously, clear communication with the client is key. But also be sure to assign lawyers/project managers with the expertise to understand all phases of the matter and properly establish cost expectations.

Associate creep: Without clear instructions or clear time restrictions, associates may be spending too much time on a matter. They may also be feeling pressed to maximize billable hours.

Action: Set time and scope parameters and ensure they are being followed.

Identifying revenue leaks starts with collecting and analyzing data about write-offs and write-downs. Conduct an internal review to see if your understanding matches the rest of the law firm’s understanding.