Almost universally, management teams in law firms buy into the cash-is-king mantra. Yet, I still see scores of back-bench partners – hard-working, service-focused and technically excellent – who still fail to understand the link between their drawings and their ability to generate cash from their clients. Indeed, it often seems to me that the bigger the firm, the greater the chance of the cash disconnect. In contrast, the much-maligned sole practitioner is only too brutally aware that the payment of his mortgage and other household bills next month depend predominantly upon him or her getting work done, invoicing it and getting the clients to pay. Part of the problem is that law firm leaderships are – perhaps unsurprisingly – tempted to treat their partners as mature sensible adults who will display an appropriately commercial and balanced attitude to their client relationships and key account management. Sadly, it seems that in many firms, this trust is misplaced; partners abound who will do almost anything in their power to stick just to legal work and to avoid any conversation with their clients about money.
Poor cash management is not always the fault of the front-line legal teams. A combination of arcane client-driven invoicing requirements and clunky time and billing systems conspire in many legal corners of the world to make the invoicing process a logistical and administrative nightmare. There are also still some management teams who have not bought into the principles of stable financial management. In a recent speech, Samantha Barrass, Executive Director of the SRA highlighted some indicators of financial instability in law firms that included some ‘worrying practices’ that the SRA is encountering. These included payments made to partners irrespective of ‘cash in the bank’, partners out of touch with office account bank balances and even the use of VAT receipts as part of the firm’s working capital.
So, better financial management definitely starts with the firm’s leaders setting the right example of sound and stable cash management.
I think there are also five ways of improving the cash disconnect at backbench partner level. First, the firm’s leadership should invest in ensuring that partners receive proper training, not just in financial management skills but – more saliently – in legal project management skills, which skills include the negotiation, proactive management and cash-flow control of the fee budget. Many partners simply fail to understand that slow and sloppy billing practices are as much a turn-off to clients as they are an affront to the firm’s management team.
Second, the leadership team should encourage and support their legal teams to negotiate better payment terms (such as monthly interim billing) with their clients and by investing in more transparent and user-friendly invoicing processes. This does not necessarily mean heavy financial investment in new systems. In many firms, some partners are still unaware of some of the features of their back office systems that they might find helpful in making the billing process easier.
Third, I believe firms should be doing more to restore the link between drawings and cash collection as part of the firm’s performance management of their partners. There are several ways of achieving this. One way is to reserve the right to withhold drawings from individual partners if – after due warnings – they fail to comply. Another is to reduce standard monthly drawings and to increase the frequency of further pay-outs as and when cash targets are reached.
Fourth, firms should create performance indicators that relate to cash collection, and – in firms with any element of performance related profit sharing – should link those indicators to the partner compensation and rewards system. Using the compensation system to reward or penalise partners is a very blunt and backward-looking instrument the impact of which is often only felt long after the event. It is a weapon that should be used very sparingly and only as part of an overall management process. Part of this step is to be much firmer in holding partners accountable for their performance and behaviour. This is something that is best done person to person, with partners left in no doubt that poor behaviour or sloppy practice will ultimately be reflected in the level of their profit shares.
Finally, there is the issue of intra-partner communications. The old adage is that you have to communicate something seven times in seven different ways before it will get through to employees and colleagues. Communicating the cash-is-king message can rarely be repeated too many times. It is sound governance practice to keep partners fully aware of the firm’s cash position and, through it, the firm’s continued viability and stability.
None of these five steps is new or novel, but few firms seem to be able to pat themselves on the back that they are doing all of them optimally.
This article first appeared in the July/August 2013 issue of Managing Partner Magazine and is reprinted with their permission