Cutting-edge tracking of law-firm finances

The first things James O'Toole and 420 other lawyers at Buchanan, Ingersoll & Rooney P.C. see on their office computer screens every morning are graphics telling them how quickly their clients have been paying their legal bills.

There are tallies for each of the Pittsburgh-based firm's offices and a running count of how well the firm overall is doing in reaching its collection goal.

If any one lawyer falls too far behind, he should expect to spend some quality time with senior lawyers on the firm's collection committee, with the goal of figuring out how to get laggard clients to pay more quickly.

Welcome to the brave new world of law-firm finance.

Lawyers have been focusing for years on how to improve collections from the days, not too long ago, when they huddled with colleagues in virtual telephone boiler rooms at year's end to nag recalcitrant clients, all in an effort to make their numbers for the year.

But now, the process has become automated to a very large degree throughout the profession.

Buchanan Ingersoll software not only tracks receivables for each of the firm's lawyers and correlates that cash flow with the companywide budget, but it also spots troubling collection trends and spits out data that can help attorneys decide whether to give a client more time to pay.

Or whether the relationship is a lost cause and it is time to end the representation.

It also tracks hours logged on individual engagements, giving a real-time picture of whether a representation is on budget and profitable.

"Lawyers are best at practicing law," said O'Toole, an environmental litigator based in Philadelphia and a member of the firm's management team. "The challenge was to provide them with current information that could help them better manage their practice and help us manage our firm."

The focus on getting accounts receivable down to a more manageable number began two years ago when it became increasingly apparent that the economy was heading south and that the days of blithely raising rates were over.

Much of the data that the firm had on collections was kept on spread sheets. Accounts receivable were chased by nonlawyer collectors, but the process was cumbersome, and relationship partners, the lawyers who handle client contacts, didn't have easy access to billing information.

"We knew we had plenty of data; that wasn't our problem," O'Toole said. "It was how do you take these stacks and reams, literally pounds of paper," and make them more usable?

The firm created a database in which each lawyer could see, with a few keystrokes, how overall collections were going and, if they were falling behind, which clients were responsible.

Not only does the system provide practical information to lawyers who might feel the need to pick up the phone and call a client who has fallen behind by 90 days or more, but it also is intended to send a powerful message: The firm is a business, and every lawyer needs to be focused on the financial bottom line.

"It's the first thing that a lawyer sees in the morning when they come in," O'Toole said. "You are expected to bring in X number of dollars, and you are seeing every day how you are achieving that goal or not achieving that goal."

O'Toole, who has an MBA from Drexel in addition to his Temple law degree, says the approach has other spin-off benefits. Clients more readily relate to firms that institute cutting-edge business practices, he says, because it suggests they will more easily understand the bottom-line pressures faced by clients.

The database also helped the firm develop various billing arrangements for clients who didn't want to be charged by the hour, but rather preferred to pay a flat fee for service. In such so-called alternative-fee arrangements, the firm offers to handle a litigation matter or some other representation for an agreed-upon cost, rather than billing strictly by the hour.

Some clients like that approach because it sets limits on legal costs. To make such arrangements work, Buchanan, which has a 60-lawyer office in Center City, creates a budget for individual engagements, builds in a profit, and then tracks project costs by keeping a record of attorney project hours on its database.

"You get a very real sense on a daily basis of how your business is operating," says O'Toole.

The overarching theme, he says, is that firm profitability is more dependent than ever on sharp financial management.

"The whole practice of law is changing in a lot of respects, and one of them is you cannot simply drive profit year after year by raising rates," he said. "That never made sense before. It was not sustainable."