Cutting Out Write-Offs
There has historically been an acceptance throughout the professions, and in law firms in particular, that write-offs are simply an inevitable cost of doing business. Partners will very often accept before even starting work on a case that a certain percentage of the final bill will be written off – because the client will not accept the bill with which they are presented upon completion.
Many firms even factor a certain level of write-offs into their planning and budgeting and, where this is not the case, write-offs can be considered a ‘hidden cost’ – an unplanned expense the firm will bear without it adding value to the operation. The truth is that, when clients are charged an hourly rate, some level of write-off is likely, although the scale of the problem in many mid-tier law firms is considerably more significant than it ought to be even under existing pricing models. If the agreed basis of charging is by the hour, the opportunities to achieve an uplift are far outweighed by the circumstances which lead to a reduction.
The legal profession is starting to emulate the accountancy world in taking as the starting point for eliminating write-offs a model of up-front costing, whereby the client is quoted a fixed fee for the job which is ideally based on value. Done well, this can produce returns far in excess of standard hourly rates.
Write-offs still occur under fixed-fee regimes, but this is often because there is a disconnect between the person quoting for the job and the people who are actually delivering. Thus, the time actually spent on the matter is in many cases not measured and linked to the fee quoted.
Clarity and Specificity
This can be addressed through a greater degree of clarity. It is important to be specific when costing the job up-front, and to be very clear not only about costs, but also about what will be included. It is likewise crucial that fee earners have clarity on how many hours they are expected to spend on a matter (and this will come from experience and from close measurement of ongoing work), and again on what is included in the job. As Alan Hodgart recently noted, quoting a fixed fee for a variable specification of work is a recipe for disaster.
This clarity and specificity up-front will avoid the two dangers of ‘scope creep’ and ‘scope seep’, as described in this video. Scope creep describes a situation in which the client identifies extra work that could be done during a matter – and requests that this is done as part of the job (rather than pricing for this as a separate piece of work).
Scope seep results in the same outcome, but is instigated by fee earners identifying extra opportunities but, again, including the work in the same job rather than addressing separately. This may seem like good service, but it in fact can destroy the extra profitability of fixed-fee work – and miss opportunities for significant further added value.
Write-offs are one of the most endemic and deeply rooted issues in the financial management of law firms, to the extent that a recent PWC survey of the Top 100 firms suggested that ‘strikingly, 40% of firms reported unplanned WIP write-offs greater than 10% of fee income.’ Our experience with other firms suggests that this is far from being a problem only of larger firms.
Culture and Education
However, they can be dealt with using some fairly simple techniques. The stumbling block is often culture, and this is where it is vital to educate all of the firm’s people about the model being employed, and to work hard to get everyone on board – and to use good systems and processes to measure the hours that are being put into each matter.
Those firms that succeed in doing so will see great benefits – after all, an increase of 10% or more in fee income would have a major effect on profitability.
Some areas of management attention produce marginal gains – eliminating write-offs has a far more significant impact. This is surely worthwhile, even for firms that have seen year-on-year increases in fee income and profitability.