The Ultimate Guide to Legal Billing
You want to make more money? Let me introduce you to the ‘Ultimate Guide to Legal Billing.’
You’re in business to make money. If you aren’t, you have a hobby. So, unless you’re sitting out on your porch carving whalebone right now, the question of how to make more money for your law practice is germane to you. Much of legal practice management, in whatever form it takes (and it’s usually taking the form of technology, marketing and financial management), is concerned with revenue generation for law firms.
Now, you’re probably not really into scrimshaw. (Right?) So, this is the guide for you.
You want to make more money? Let me introduce you to the ‘Ultimate Guide to Legal Billing.’
Table of Contents
|Chapter I: Rate Setting|
|Chapter II: Time Tracking|
|Chapter III: Billing|
|Chapter IV: Collecting|
|Chapter V: Software|
One of the most difficult tasks for law firm owners is establishing fees. When you’re starting out, it’s like groping your way through a dark passageway; and, after you’ve been at it for a while — it’s kind of like groping your way through a slightly less dark passageway. In other words, setting fees is hard starting out; but, it’s not like it gets any easier.
The economics of larger law practices are very different from the economics of smaller law practices; and, the general economy and consumer trends also significantly affect what people pay (or are willing to pay) for legal services. It’s a lot for a small law firms to manage. But, there are ways to unlock effective rates for your law practice, from the outset and moving forward.
When you embark on the challenge of establishing (or reestablishing) your law firm’s fees, there are some useful touchstones for getting after the numbers that matter to you.
Step 1: Ask Around
The most traditional method for getting a baseline legal fee set is to ask around — if you can get people to talk. Now, that sounds silly in the Internet Age; but, keep in mind that law is a profession that treasures the old school. So, it should not shock you to learn that there are precious few forums in which to openly discuss legal rates. Save for a few enterprising attorneys, who are game for the conversation, and open about what they charge, there’s not much information out there.
Bar associations are no safe harbor, due to (legitimate) concerns about the specter of antitrust centered around price fixing for lawyers who talk about their fees at bar association-sanctioned programs or online portals. And, even if you can find a place where attorneys are freer with their words (and their prices), it’s going to be very difficult for you to gather information about pricing from your direct competitors; neither do you want to look like a noob, and risk your professional reputation — potentially before it’s even begun to develop.
So, everything you’ll hear about your competitors’ pricing is going to be hearsay, and potentially unreliable. Some lawyers place their rates online; but, most don’t. As it stands — and, this will probably continue to be the case — law firm rates are generally kept under lock and key. You may be able to sift through publicly available as well as private information to get a broad sense of the price ranges out there; but, those numbers are going to be far from sure things.
Step 2: Work Backward
In order to settle on a rate structure that works for you and your law firm, you should endeavor to reach for the very definition of serenity: control what you can control. Instead of relying entirely on outside resources to gather information about how to set your rates, work backward from what you need.
In the first instance, determine your budget requirements. Make sure you can make enough money to hit those. Next, decide on a number for a livable annual wage for you, then make that paper. Lastly, set up a goal (maybe a big, hairy, audacious one), and try to make more money than you need. Once you’ve got those figures in place, run the numbers back. Let’s say you need to meet a $10,000 budget, need to make $20,000 to acquire a living wage, but want to make $30,000 a year (in 1910, I know — but, bear with me, so I can use round numbers) . . . and, you’re an estate planning attorney and you’re thinking of charging $500 per estate plan. That means you need to complete, bill and collect on 20 estate plans in a year to meet your budget, 40 to make a living wage and 60 to hit your revenue goal.
Now that the math works, you can tweak the numbers to get to a comfortable workload for yourself. This is, in many ways, a better way to set rates: Most lawyers focus completely on clients when establishing fees; but, this analysis forces you to consider your own interests, and the realities of your business plan.
Step 3: Don’t Deviate, Iterate
Once you’ve established a fee schedule that works for you and your clients, write it down. It’s no good setting rates, if you give yourself permission to deviate from them constantly, just because you hear a sob story, or because you feel like you really need the business, and are willing to discount to the studs to get it. Create a fee schedule for your law firm, then, that includes a built-in discount structure. Don’t move off of it; be cognizant of, and confident in, your value proposition, and make the math work the way you set it up in the first place.
But, also recognize that your law firm rates are not the Ten Commandments; these things are not (and cannot) be set in stone: You need to adjust for consumer trends, inflation, client service costs, etc. Smart business people understand that stasis is death; and, never changing your rates will come to represent the slow death of your revenue. Schedule a review of your fees annually.
Since most law firms still offer legal billing rates on an hourly basis, time tracking is essential. But, even if you’re offering alternative fee agreements, it’s still important to understand the time component of the value equation. The most die-hard flat fee billers have to admit that time is a factor in setting value. Even if you’re not tracking by the hour per se, it makes sense that 10 hours of your time is more valuable than 2 hours of your time.
Time tracking is largely driven by the contemporaneous nature of its recording. It’s pretty much axiomatic at this point to say that the lawyer should track time immediately upon completing the task for which the time is recorded — because it’s extremely difficult to reconstruct events. How many times do you walk into another room, and forget why you went in there? Exactly. When you’re talking about trying to rebuild your legal billing, now you’re playing with real money — you’ll find your car keys eventually. Keeping time when you make it is also important because it is more efficient than trying to remember what you did later. So, whatever you need to do to make yourself do it, track your time immediately, within your legal billing software.
Technology can be a beautiful thing for lawyers who are overwrought about timekeeping. There are now automated time tracking services that follow how you spend time on your computer (just stay away from all those cat videos on YouTube now), and create a log that can generate client-specific information (you’re sending an email that links to an existing law firm client’s contact), which you can then edit and add to. If you feel like manual timekeeping is cramping your style, that’s an option.
Manual Has Come a Long Way
But, manual time tracking has become far easier to use than it was even a few years ago, too. If you’re using a legal billing software or a law practice management software that allows you to start and stop a timer within your system (that will automatically avoid double billing), user experience is now much improved, and it’s also far easier to keep track of time in a software you spend your whole workday using.
If everyone in your law firm is on the same timekeeping system (and especially if you can avoid the process of using timesheets that staff enter into another system, as such ‘workflows’ are fraught with errors and inefficiencies, while pretty much guaranteeing that you’ll lose billed time), you’ll make money — simple as that. However, keep in mind as well that time is not the only thing you should be tracking. Law firms are too little concerned with overhead; but, as discussed above, it’s the starting point for determining law firm pricing and revenue. So, be sure to use your case management software for expense tracking, as well. And, that’s not just for expenses that you’ll eat as a law firms — that’s also for expenses that you can charge back to your client. Not getting back repayment from your clients on expenses they should be repaying you for is another surefire tactic for bleeding money.
Consumers and law firm clients both have the notion that legal billing rates are too high. As a lawyer, it’s your job to either combat that idea, or to present clear value for the services you provide. In this way, much of legal billing is about optics. The way that your invoices appear absolutely is reflective of the percentage of payments you receive. Every time you send a bill, you’re re-convincing the client of the value you told them you would provide when you signed them on.
Every Invoice is a Selling Conversation.
To that end, the invoices your law firm produces must be professional and compelling; and, it’s not easy to marry the two. In the first instance, strive to create a professional invoicing system. Your invoices should all share a consistent look and feel. Your logo and color scheme should be consistent. Your contact information should be exacting: for example, if you’re using parentheses for your phone number in one invoice, keep it that way for all of them — manage your electronic letterhead like a boss. Make sure that your billing information is easy to read, coherent and consistent. Include trust accounting information on your bill (which many state ethics codes require), by providing the starting total, funds used and remaining funds for that period, for that client. And, ask for referrals! It seems obvious; but, if you’re confident that the service you provide meets the value proposition you introduce to your clients, then make sure that they can pass that value proposition onto friends and family who may come to require your services. Make sure that your law firm billing starts and ends as a sales proposition. The narrative of your billing is also important. You can supplement the value conversation by indicating where you have done work for the client, but not charged them, and also by providing enough description, in language that a layperson (non-lawyer) understands, in order to cement the value proposition for each line item, as well.
Get your Billing Out the Door
One of the biggest challenges that many law firms experience in legal billing is actually getting bills out of the proverbial door. Law firms, especially those using antiquated software or accounting systems, sit on bills for months and months — and then, they wonder why they haven’t made any money! For many law firms, a good rule of thumb is to get your legal billing out the door every month — and, if that doesn’t work for your law practice: find a consistent publication model. Lawyers are (finally) beginning to tinker with billing models, after all this time. Some law firms have started to bill in far shorter increments (like every week or every two weeks), because those are smaller amounts of money, which are easier for clients to pay. Some law firms have even moved to subscription pricing on a monthly or annual basis, in mirroring what technology vendors have been doing for years. Who knew your law firm would become Netflix?
Now, sending the bills is one thing; actually get paid on bills is another matter altogether. Collections are probably where law firms lose the most money; it’s a long way from time tracking, for sure — and, a lot can happen in between. If you’re using a legal practice management software, it’s helpful that you can push time to an invoice that you can then build from a template document at the push of a button. That saves you time, and also makes it more likely that all your invoices get processed than if you need Edna to print them all up and mail them. So, a competent time tracking and invoicing workflow, likely means you’ll collect more.
Craft a Formal Escalation Procedure
But, a process for the actual collection action is important, as well. Without a comprehensive collection ritual, you’re likely to let your accounts receivable continue to age. And, as a business person, you know damn well that the older an account receivable becomes, the less likely you will be to ever actually receive that money. So, in order to make sure your accounts receivable become actual receivables, you’ll want to develop a formal escalation procedure, and also make your clients aware of it. When is a bill late? When is an interest charge applied? Is it simple or compound interest? Is there a process for forgiving late payments? When do you take a client to arbitration? When do you take a client to court? When do you just forget about the receivable, and write it off? If you can’t answer these questions, then it’s time to develop a collection process and cause your staff to adhere to it. Make sure that your clients know about it, too. Your collection procedures should be clearly laid out in your fee agreement, and explained to your clients in the same way.
Ditch Accounts Receivables
Of course, even if you do all of that, collecting on overdue payments still sucks. You can work up a collection process to rival Henry Ford’s assembly line; but, even if you do, your staff is still spending time collecting on old fees, rather than working to generate new ones. So, the best way to manage accounts receivable for the modern law firm is to not have them. Enter epayments, which allows clients to make payment for your services online, using credit or debit cards, as well as echeck. You don’t even need a physical terminal anymore.
Law firms that accept electronic payment get paid more, and get paid more quickly. And, if you allow your law firm clients to pay you by credit card, not only do you remove yourself from the role of creditor, but you also allow clients to pay you when they do not have your entire retainer amount in a back account — which is required to provide you with a bank check. That opens up a whole new client base for your law firm. Legal software providers offering epayments also understand that processing fees must come out of your operating account to avoid any issues touching upon trust accounting ethics.
Legal technology has been getting better and better, at a rapid rate. And, if you want easy legal billing, your best course of action is to select a law practice management software that integrates time tracking, billing, collection tools and accounting into one platform. If your software is not siloed, you’ll be more efficient, you’ll make fewer mistakes, and you’ll save money on technology — while you make more revenue.
If you’re anticipating complaints from your staff, just ask them if it would be beneficial for your business to make more money. If you’re anticipating complaints from your accountant or bookkeeper, just tell them that modern case management software can integrate with every CPA’s favorite tool: Quickbooks. Cloud-based legal practice management software links your most important data to your most important people: your staff, primary vendors and clients. It’s a seamless way to manage your billing across your entire law practice.
Say hello to easy legal billing.