Lock up your partners
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8 April 2014
Clifford Chance's refusal to grant partners their quarterly equity payments after building up a lock-up lag of £200m has sparked questions about billing procedures and how they can be improved. Abigail Townsend investigates
If you want to take home a profit, you have to make sure the cash keeps coming in. Accountancy for beginners maybe, but last week partners at Clifford Chance learned it the hard way.
The partners have missed out on their quarterly equity payments under the accelerated distribution programme because they clocked up a lock-up lag of 20 weeks (The Lawyer, 31 July).
Lock-up is the period from time recorded to cash collection. Clifford Chance's time lag represents approximately £200m in unpaid bills and the missed payments have resulted in plateau equity partners not getting their quarterly bonuses of £50,000.
They will eventually get the money but management is keen to get the message across that partner inefficiency has postponed July's payment.
Chief operating officer Garth Pollard told The Lawyer in an interview last week, that the message to partners is clear: "If you are all a bit better at this and do it quicker, you will get your cash quicker."
Clifford Chance's accelerated distribution programme was introduced 15 months ago to act predominately as an incentive. It is designed to focus partners' minds on getting money in through efficient time recording, billing and cash collection.
The firm's profits were previously paid out between 12 to 18 months in arrears, so the scheme's introduction was also a way of speeding up equity payments.
Outside the legal profession, the onus of raising invoices and collecting payment generally falls to the accounts and credit control departments. But law firms have to rely on partners, as it is they who decide how much to bill.
Clients also expect to deal with partners. "I have had one or two letters from credit control departments. I get upset because getting a note like that, rather than a phone call from the partner I have the relationship with, is offensive," says one client.
Clients also expect a narrative with their bill. One head of legal at a FTSE 100 company, and a Clifford Chance client, says: "We want to have a certain amount of information on the bills. What the hours are and who worked on it - the whole narrative. Have there been 27 lawyers working on it or one lawyer doing 27 hours of research? We do not want just a piece of paper."
But it is this that eats into partners' chargeable time. "If you are very busy, trying to sit down and arrange your billing - to check a narrative, agree a fee - all takes time. They are best at being lawyers, and while they know that they have got to put a bill in, the administration side of it is not something they enjoy," says the in-house lawyer.
This is a scenario that Giles Murphy, a partner at accountants Smith & Williamson, is familiar with. "When a client is billed, it is down to the partner's professional judgement. There are time recording systems but these may not be suitable if the arrangement is a fixed fee with, for instance, a 10 per cent bonus upon completion. The partner is essentially the one who is accountable as well as being responsible," he says.
But even when the bills do go out promptly, partners appear to be reluctant to follow up cash collection. Murphy says: "Partners do not like to be involved with credit control because it is like a dirty word."
He therefore applauds Clifford Chance's decision to withhold equity payments as a way of focusing partners' minds. But he warns that partners must be informed that the system is in place before payments are withheld. Otherwise management will have a number of disgruntled partners on their hands which will not encourage efficiency.
One senior lawyer at a magic circle firm feels that the Clifford Chance way is not for them. "Withholding money would be harder on the junior partners who have school fees and mortgages, more so than the senior ones," he says.
Instead, his firm plans to tighten up the credit control procedures if lock-up time starts to drift upwards. While he concedes that billing starts with partners, he adds: "The credit control department gets to know people from the paying side of the client."
But as a final measure, and particularly if the lock-up delay is caused by inefficient billing, he believes that informing partners that they may have to put up more capital is the best way to focus minds. It also hits the more senior partners. As he says: "Avarice always works well. Otherwise, it is just too indirect."
As well as affecting the firm's cash flow, poor lock-up times can have an adverse effect on client relationships. "We do not want large bills coming when our books are closed because someone has been slow in billing," says one in-house lawyer.
"In large organisations, things can go missing and get lost and so on. But they have to manage their cash flow because if they don't, there is a danger from our point of view that the fees could go up."
Another head of legal remembers one major City firm which managed to completely disrupt an entire year's budget. "We were not billed on one matter for a year and a bit. Then we got a very substantial bill and it was difficult to know if it was properly time recorded. In terms of cash flow and budgets it was a real problem and 40 per cent of our annual budget went in January because that bill came in," he says.
As targets for chargeable hours increase and firms get bigger, controlling lock-up time is a major management consideration. The top tier firms bear more resemblance to large public companies than traditional partnerships. And, of course, they are selling services, not products. As Pollard says: "This is not like the gas bill. You can't just send it out and then cut off the supply if it is not paid."
Technology is therefore arguably the most important management tool for firms looking to prevent lock-up time sneaking upwards. However, it's not what you've got, but how you use it. Clifford Chance accepts that because of individual client whims and the many demands on partner time, the way forward is transparent billing. The aim behind this concept is to develop on-going discussions with clients about billing as soon as time starts being recorded. That way, clients and partners know exactly where they are at any given moment.
One firm that is ahead of the game on this is regional stalwart Walker Morris. It has developed an online system called Reach (remote enterprise access channel), set up 18 months ago. Managing partner Philip Mudd says: "We wanted to try to find out what the key issues were for our clients. One of the biggest responses we got was that clients wanted greater openness in the partnership and transparency of fees."
As well as providing a range of services such as online advice and documents, Reach allows clients direct access to time records. It means that they are able to see exactly how much time, and hence costs, are being clocked up.
Partners have to make sure that the time records are up to date, as clients are able to check them at any time. The dialogue between clients and partners on bills is therefore on-going, open and accessible.
It also means that different client needs can be accommodated, something key to a corporate firm dealing with as many clients as Clifford Chance.
Pollard says: "Some clients welcome regular billing but on the other hand, if you are doing a big flotation, clients prefer to be billed afterwards and that could run over two or three months."
But of course, without good IT systems, even the best ideas are useless. As Murphy says: "As firms increase in size, they are more and more reliant on the systems and if there is a disruption in the firm, either positive or negative, the system will come under strain. So it becomes a question of how effective is that system?"
It is an issue that Pollard is well aware of. "Firms have to think about whether there are ways that the processes can be improved and one of the things going forward is the use of technology," he says.
"One of the things we hope to have is transparent billing. But that will require significant system changes and these are not easy things to do."
The lock-up period is an everyday element of any business. But for firms the challenge lies in ensuring that partners focus on administration as well as practising law. Firms also have to take into account different types of clients demanding different kinds of service. But either way, the cash has to keep coming in and profits going out, and transparency of billing could be just the answer.