Paul W. Carlson, CPA :
Hi, this is Paul Carlson, CPA with Law Firm Velocity. In this video, we're going to be looking at potentially the holy grail metric for firms that bill based on flat fees, firms that bill by the hour. One of their key metrics in monitoring employee productivity is they look at how much money was collected per biller, and that way they can see health of production. That is the person putting in time that the clients are paying for. And so here we have a report that shows that Madeline has $1,000 collected for the period.
(00:36):
Why this has not worked in the past for flat fee based firms is one, we didn't have accounting and practice management systems that were integrated into one app. If accounting is one app, practice management is another app, that the collections numbers within the practice management system would be inaccurate. They would usually be so off that it's not even worth looking at them. The bigger problem is a lot of the practice management systems could only allocate flat fees to one person. So you'd set up the matter and in the bottom of the matter, there'd be a box. It'd say like, "Matter Owner."
(01:20):
And when the matter was paid, that person would receive all the revenue on the collections report for the matter. Well, if we have matters that have multiple people billing into the matter, that the matter owner gets all the collections and the other billers get zero collections, and the numbers are just wrong so you can't look at them. So what we've been working through is we're working within Actionstep, and Actionstep is integrated practice management and accounting into one app, so that fixes a first constraint.
(01:58):
And then Actionstep has a process where it supports a concept of general retainers. There's some states that allow prepayments for fees to be deposited into the operating account and then you bill against that prepayment, and the client invoice is just a way to keep score that the client prepaid X amount, we billed out Y amount, and there's Z left for future bills, that they don't have to move money when they bill, that it's just more of them having to earn the fees out.
(02:34):
And so what we're using is we're using that process with an Actionstep to trick our way into getting real collections numbers. Let's walk through an example. So in January, we have a flat fee deposit for our flat fee matter, that the client pays the full $2,000 flat fee. And within Actionstep, we can click a few levers and we can get that to post into a general retainer. And now we'll actually flow through on the income statement where it'll say general retainer revenue for the month. So firms that do flat fees and the money goes into operating, they want to show that they have the $2,000 of revenue in the month in which they get paid. And so, we have accomplished that criteria. And then for productivity report, no one did anything in January, so the per person collections amounts are zero.
(03:33):
So in February, we do all the work. We do all the work, but nothing is billed. So the income statement has no changes because we picked up the general retainer in January. Nothing else appears on the February income statement for this matter, for revenue. For the productivity report, we can see that the attorney billed $1,500 into the matter, that we set up the matters that everyone bills time against the matter using goal billing rates. So we're treating this like an hourly matter and the paralegal put $1,500 into the matter, and so the productivity report shows that we, the billers, have come up with $3,000 of billable time for the month. Just to keep the story flowing, that we know based on SKUs that the paralegal exceeded the billing goal by $1,000, that the paralegal should have billed 500 of time into the matter and they really billed 1,500. So, we have an exception.
(04:41):
So that's what we have for February. Then we come down to March, and in March we actually create an invoice for the matter. The clients are never going to see this invoice. The invoice is only for internal reporting, that we go in and we create the invoice and in the process, we say that we know that the attorney's time was right, that they were on goal for the SKU. So we leave that I collected to 1,500 and we know that the paralegal was over by 1,000, so we go in and we adjust time entries to bring the value of the time down to $500, and so the time matches the prepayment. We create the $2,000 invoice and we apply it to the general retainer, and the invoice is paid off and the general retainer is cleared off of the general retainer reports.
(05:36):
So at the end of the month, the income statement would show legal fee revenue of positive 2,000 and general retainer revenue of negative 2,000, that what we're doing is we're applying the general retainer to the invoice and so it's going to take the revenue out of general retainer and move it up to legal fees. I'm pretty sure I'm going to get phone calls asking why this number's negative in months where it's really big in negative. But here we have real collected numbers for the matter that we can... So for the matter, they're correct, and we can accumulate these numbers across multiple matters and we're going to start to get real collections metrics for each timekeeper. And with this we can start to understand which timekeepers might need additional training or understand the health of production.
(06:38):
So a couple questions I have with this process, that's why I'm sending this video to get some feedback, is in this process of taking the $3,000 of time charged to the matter and converting it to $2,000, how would we do that? Would we just say if the variance is less than 20%, to go ahead and adjust everyone the same amount? So in this case, if we're over 19%, that the value of everyone's time gets pulled down 19%. And then if it's over 20%, we go through some manual process. I would think it'd be useful if we made that discussion part of a weekly team meeting, because if the goal here is for continuous process improvement, that having everyone look at this matter that didn't go awesome, that they could see that yes, there was an issue here and they could also from that conversation identify which time needs to be pulled back.
(07:42):
It would take a unique firm to be able to handle that kind of conversation, but if you can get there, the feedback would be tremendous. Second question, is tracking this time and creating an invoice for each flat fee matter too much overhead? That this is going to be what, 15 minutes per matter? And you have to consistently close all of these invoices or the reports are never going to be meaningful. And then the other thing we want to look at, if we do need to note the lag on coming up with accurate collected numbers. January, no one did any work so those numbers are okay. February, we have the billable numbers, but this number's bad, that this number doesn't really represent how much that person produced because they went over on the matter, that we need to wait down till the matter is closed before we start to get clean collected numbers.
(08:43):
I believe our estate planning firms will close out a flat fee matter in a couple months, so I think that lag would be doable. It's better than not having any feedback at all. Our immigration clients, I think some of them have matters that can stretch months or years, that for those, the thought would be to create the invoice for the 80% of the work that's done now, and then leave the other remaining 20% of the matter value in the general retainer and close that out at a later date. I'm a little fuzzy on that exact workflow when a immigration matter crosses such an extended period, and so with the lag. And then, does this provide good enough information? If I had a firm that was doing flat fees and I got this number three months late, I think that'd be a tremendous level of feedback compared to now where there's no accurate or any sort of collections reporting. And I left these billable numbers as question marks because these are going to depend on everyone's feedback and the exact process we use in converting the overage into collected numbers. All right, thanks. Bye-bye.
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