Looking at Fees and Billing with a Fresh Eye

What if collection problems prevail across your entire clientele – not just a few accounts?  It may be time to turn a critical eye toward your current fee structure and billing practices:legal_document_istock_0

Switch to AFAs – Alternative Fee Arrangements

Combining flat and hourly or hourly and contingent fees may solve at least some of your cashflow problems. In litigation it’s easy to dismiss flat fees as unworkable: “I just can’t do it because the nature of the case is too unpredictable.”

Is this really true or is it an excuse not to change?

Let’s take dissolution.  I would expect nine out of ten lawyers to reject flat fees outright, but wait a minute.  Fees aren’t “all or nothing.”  More accurately, they’re anything you want them to be (almost). Therefore, it is perfectly doable in dissolution to flat fee at least the first stage of the case:  initial client interview, client follow-up, preparing and serving the petition, initial mandatory discovery.  Go hourly thereafter, but look for other opportunities (stages/discrete tasks) where you can propose flat fees.  In short, be more flexible.  Done right, an AFA could mean collecting a flat fee up front for the initial stage of the case with a requirement for an evergreen retainer once hourly billing kicks in.

Do a Better Job of Educating Clients

As I’ve noted before, many a collection problem can be traced back to the initial client interview when the lawyer failed to adequately discuss billing practices. If you don’t have an honest, open discussion about fees, costs, and billing practices, reform now!

  • Reinforce what you tell the client by using billing brochures enclosed with your fee agreement.
  • Or if you don’t like the brochure idea, attach a one page bullet list of your billing procedures.
  • Prefer to be paperless?  Send clients to a private web page that serves the same purpose. Consider requiring clients to read and accept your web-based billing procedures before eSigning your fee agreement.

Why am I suggesting brochures, lists, and web pages?  The brutal truth is that even the shortest fee agreement is probably too long for the average client to digest.  But we can make billing more understandable!

When you separate and reformat billing details using brochures or bulleted lists you improve readability.  [Much like what I did in the preceding paragraphs.]  Improving readability increases comprehension and understanding.  If you go the Web page route, use the same or similar formatting techniques.

Change How You’re Paid

It’s hard to imagine a law firm that doesn’t accept credit cards, but I know you’re out there.  If you’re part of this group, and you’re also experiencing collection problems, start taking credit cards.  Yes, there are a few things you need to know – for example – how to pick a merchant to process payments and what to do about merchant fees (aka credit card surcharges or transaction fees).  But I’ve got your back.  Read the hyperlinked posts included above and you’ll get the answers you need.

Not convinced? Statistics reveal that 43% of consumers prefer to pay by debit card, 35% with a credit card.  Granted, legal fees are not a typical consumer purchase, but still: why would you disregard what many consider a preferable payment method?

Credit cards can be an ideal solution for collecting flat fees earned upon receipt or the cost of an initial consultation.  Many a family law lawyer has shared that clients would not be able to afford their services without the ability to put their bill on a credit card…

Be More Like Bugs Bunny

Yes, this is the carrot/stick metaphor.  It’s this simple: discounts are a client motivator.  If you want to collect a retainer, up-front fee, or take care of an outstanding balance give the client a financial incentive to pay you.

Here are some examples:

  • Your rate is $250 per hour if the client is invoiced, but if the client establishes a retainer, your rate is reduced to $200 per hour.  [Establishing a retainer triggers the lower hourly rate.]
  • You offer preparation of a complete estate plan at $2,500, due and payable upon completion.  If the client is willing to pay up front before work begins, your flat fee is reduced to $2,000.  [The earned upon receipt fee triggers a $500 savings to the client in return for being paid now.  Remember to comply with earned upon receipt payment rules and get your fee agreement in writing.]
  • You offer 10% off your bill if the client remits payment within 10 days (instead of the usual 30 or more).  [Your early payment discount saves the client money and allows you to collect the outstanding receivable in one-third the usual time.]

There is no magic wand in collections, but a willingness to start over and shake things up can make a difference.

All Rights Reserved – Beverly Michaelis – 2017.

The Perils of Unsigned Fee Agreements and Engagement Letters

Does this scenario sound familiar?

On November 1 you meet with Jane Client.  You have a good feeling about Jane and her case.  She is definitely someone you want to represent.  After the meeting, you send Jane a standard fee agreement/engagement letter.  You tell Jane that you will need documents and additional information to proceed.  You also explain that Jane must establish a retainer of $2500 before you begin work on her case.  On November 3, Jane sends you an email with the required documents.  Four days later, she provides the additional information you requested.  On November 8 you and Jane speak over the phone. On November 10 Jane sends you a check for $2500.

Clients Like Jane are Tempting…

Jane is a very appealing client.  You have good rapport and confidence in her case. She is cooperative, responsive, and paid your retainer.  So what’s not to like?  If you proceed to represent Jane (or let’s be honest: if you continue representing Jane), you do so under substantial risk.  How can that be?  Let’s explore some of the issues that come to mind:

The Perils of Unsigned Fee Agreements and Engagement Letters

  • No enforceable written contract.  I wouldn’t want to be without one.  I’m not saying all hope is lost collection-wise, but you certainly have a far tougher row to hoe without the client’s signature on a written agreement.  Fee agreements should always be in writing, countersigned by the client, regardless of the practice area.
  • No proof of scope of representation.  This could lead to several problems: demands by the client that you provide additional, unintended services; liability exposure for unanticipated (but arguably related) services; or inability to withdraw as attorney of record before an agency or tribunal.
  • Voidable fees in contingent cases.  ORS 20.340(1)(a) provides that all contingent fee agreements “shall be written in plain and simple language reasonably believed to be understandable by the plaintiff.”  In addition, a model explanation of the contingent fee agreement is required.  ORS 20.340(1)(b).  “Any contingent fee agreement entered into on or after September 26, 1987, that does not comply with the requirements of subsection (1) of this section is voidable. [Formerly 9.400]”
  • Ethics complaints related to flat or fixed fees paid in advance.  Oregon RPC 1.15 and 1.5, together with Oregon Formal Opinion 2005-151, describe a specific set of conditions for “earned upon receipt fees,” the most basic of which is that such arrangements must be in writing.  No exceptions.

Fixing the Problem

Since Jane is otherwise an ideal client it should be easy to pick the phone and have a conversation about the necessity of signing and returning your fee agreement and engagement letter. It is possible she simply overlooked your paperwork.  You may also learn that your fee agreement or engagement letter is too long or too complicated.

  1. If you are asking the client to sign an “earned upon receipt” fee agreement after the fact, consult with private ethics counsel or contact OSB General Counsel before proceeding: “Without a clear written agreement between a lawyer and a client that fees paid in advance are earned on receipt, such funds must be considered client property and are, therefore, afforded the protections imposed by Oregon RPC 1.15-1. In re Biggs, 318 Or at 293 (discussing former DR 9-101). If there is a written agreement with the client that complies with the requirements of Oregon RPC 1.5(c)(3), the funds belong to the lawyer and may not be put in the lawyer’s client trust account. If no such agreement exists, the funds must be placed into the trust account and can only be withdrawn as earned. See, e.g., In re Hedges, 313 Or at 623–24; OSB Formal Ethics Op No 2005-149.” OSB Formal Opinion 2005-151.
  2. Going forward, streamline your engagement/fee agreement procedure.
    1. Give the client a heads-up about the importance of signing and returning your agreement/engagement letter during the client meeting.  Let the client know to expect the letter, what it will say, and why it must be signed before you can proceed.  Encourage clients to call with any questions or concerns.
    2. Consider presenting the fee agreement or engagement letter to the client as part of the client meeting [not my personal favorite, but it is an option] – or – experiment with eSigning.  Services like DocuSign are simple, easy, and secure.  Another option?  A click-wrap agreement.
    3. If you use surface mail, consider enclosing a stamped, self-addressed return envelope).  Be sure to include an extra copy of the agreement for the client’s records.
    4. Set a date to follow-up with the client about returning your agreement and enter the follow-up date in your calendaring system.  If the agreement is not returned by the date specified, contact the client.
    5. Solicit client feedback about other changes you can make to improve return of signed fee agreements and engagement letters.

Make it Easier for You and the Client

Clients want agreements that are short, simple, and understandable.  This presents a challenge because we are tempted to cover every contingency in great detail. Odds are your fee agreement has room for improvement when it comes to use of Plain English, and room to spare when it comes to verbosity.

Consider this option:  Instead of devoting a page of your fee agreement to the subject of billing, enclose a separate one page bullet list of “Billing Practices” describing when/where/how you bill. While technically a “cheat” (you just added another page), it will shorten the actual agreement while giving the client the information they need in a more understandable format.

Or if you prefer not to add another physical page, send the client a link to the billing practices section of your website.  (Which can be a stand-alone page not visible in your navigation menu.)

This concept – enclosing a bullet list or providing a link to content on your website – can be applied to other issues covered in a typical fee agreement/engagement letter. Using this approach should not jeopardize the viability of your contract or collection of accounts if you use language that incorporates the referenced practices as part of your agreement.  Be sure to use effective dates on any enclosures or web pages and retain links to archived firm policies or procedures. If you choose to transition content in this manner, do you own research on enforceability/viability.

Final Thoughts: Learn More!

Learn more about fee agreements at the upcoming CLE, “Fee Agreements – Ethical Dos and Don’ts,” on January 18, 2017.  Start the new year off right!

[All Rights Reserved 2016 Beverly Michaelis]

 

 

Accounts Receivable Do Not Improve Like Fine Wine

Unlike a fine cabernet sauvignon, your accounts receivable are at their best when less than 30 days old – and they definitely do not improve with age. Quite the opposite, in fact. The older you allow your accounts receivable to become, the more they cost you and the less likely your chance of 100% recovery. The trick is to keep from building up past-due accounts in the first place. Stay on top of your accounts receivable and keep that cash flow pouring into your bank account.

I couldn’t have said it any better!

This quote was offered by Ann Guinn in her presentation, Maximizing Firm Profits in a Challenging Economy, at the 2010 ABA Annual Meeting.  Ann is the author of Minding Your Own Business: The Solo and Small Firm Lawyer’s Guide to a Profitable Practice, published by the ABA in May 2010. 

Ann’s presentation was terrific.  Her advice was realistic, no-nonsense, and on-point.  With my own spin, here is some of what she had to say:

  • Collecting accounts receivable begins long before a potential client crosses your doorstep. The first step is to get a clear picture of your firm’s financial health.  For example, do you know the cost and profitability of your practice areas?  Your overhead-to-income percentage?  Your realization rates (percentage of fees actually collected)?  Your effective rate (your true hourly rate considering your realization rate)?  This information is key to assessing profitability.  
  • Do you have a written business plan and budget?  Don’t fall into the trap of thinking you don’t need these tools because you’re not applying for a loan or line of credit.  At all times you should know where you’re going, why, and how much it will cost to get there.
  • Properly screen clients and their cases to ensure payment.  Many a collection problem can be traced back to a client or case the lawyer should never have taken.
  • Communicate billing practices and procedures at the outset of representation.  Clients are more likely to pay and less likely to dispute your bill if they understand what to expect.  How are costs and fees billed?  What is your billing cycle?  When is payment expected?  What will happen if payment is not received?  These and other billing questions can be addressed in a client brochure or handout.  The PLF offers a sample billing brochure for clients on the PLF Web site.  Select Practice Aids and Forms > Client Relations > Billing Info Brochure.
  • Get adequate retainers up front or collect earned upon receipt fees.  Getting money before you begin work on a case is a no-brainer.  However, if you compromise and enter into an agreement allowing the client to make incremental payments, then monitor the arrangement closely.  Hold clients accountable and be prepared to withdraw if they don’t keep up their end of the bargain. 
  • Put it in writing.  Even if you do an excellent job of explaining your billing practices and follow-up your discussion with a brochure, you should still have a written fee agreement. If you are collecting a fee earned upon receipt, you may soon be required to put your agreement in writing.
  • Capture all your billable time contemporaneously. Lawyers who record their time after the fact almost always shortchange themselves by underestimating how much time a task actually took.
  • Resist writing your time off.  Clients should see all the work and effort put in on their case.  If you elect to mark an item “no charge,” that’s your decision, but don’t deprive clients of the complete picture.   
  • Clients love detail!  Studies show the more detailed your billing statement, the less likely the client is to dispute it, and the more likely he or she will pay promptly.  Your bill isn’t just the amount due, it’s an opportunity to demonstrate the value of your services.
  • Instead of tracking what Guinn calls the 4 P’s – Postage, Phones, Photocopies, and Phaxes – considering charging a flat two or three percent of monthly fees to cover these expenses.  Incorporate this approach into your written fee agreement, and your billing just got substantially easier.
  • Bill promptly and on schedule. If accounting isn’t your forte, outsourcing to a competent bookkeeper may be just the ticket.  In any case, get those bills out the door.  Clients can’t pay you if they don’t know what they owe.
  • Have a collections policy in place and follow it.  The first step might be as simple as sending a re-bill noting that payment was not received as expected.  For example, if your clients are expected to pay within 30 days of the billing date and no payment is received by day 31, a re-bill should be issued.  If the re-bill does not result in payment, outline the next step to to be taken and when.
  • Review your aged accounts report weekly.  If you have accounts that are more than a year past due, Guinn recommends writing them off (or making one last effort to collect, then writing them off).  Any account that is more than 90 days past due should be on a payment plan.  According to Guinn, you should have no more than two months’ worth of revenues in outstanding receivables.  For example, if you average $10,000 in revenue each month, your receivables shouldn’t exceed $20,000.
  • Last but not least:  Avoid suing your client for fees.

Minding Your Own Business: The Solo and Small Firm Lawyer’s Guide to a Profitable Practice, can be purchased at a discount through the PLF.  From the PLF home page, select ABA Products under the Loss Prevention heading.

Copyright 2010 Beverly Michaelis