FM Feature

Managing and Mitigating Financial Risks

Policies and procedures legal managers need to adopt to safeguard law firm profitability.

By now, you’re used to having the pulse of what’s going in many facets of the firm. One area you can have great impact on is profitability. From managing the client intake process to assuring invoices are paid on time, legal management professionals are accountable for a variety of processes requiring extensive overall knowledge.

In fact, managing risk in a law firm encompasses the entire order-to-cash process. From client development through collections, it is imperative to have processes and procedures that address how law firm employees will manage financial risk.

“[Law firms typically have] no traditional lens on credit and not much focus on collections,” says Dave Mlsna, Leader, Customer Success, at Dun & Bradstreet. Proactively, legal managers can play a key role in risk management by educating attorneys and management on the importance of avoiding risk. In law firms with fewer than 100 attorneys, legal managers have more bandwidth and flexibility to assume a hands-on role in risk management.

The following are some key steps for how you can support attorneys by adopting risk management policies and procedures that safeguard law firm profitability.

STEP 1: CLIENT DEVELOPMENT

A key component of providing revenue support to attorneys is ensuring accurate new client setup. ““[Legal management professionals] can take lead role in establishing ongoing communications with attorneys about new clients,” says John Weil, who has been practicing law for 37 years and has been a Partner in several law firms. He is currently with Tomasi Salyer Martin.

Knowing the details of potential future transactions as well as identifying work in process (WIP) invoices are an important factor in managing risk. Monthly touch-points provide the forum needed to keep everyone informed of outgoing invoices and WIP billings. Weil stresses the importance of ensuring bills go out correctly and timely and applying payments accurately. “[It] results in good client relations.”


Legal managers need to constantly review practices, update and automate processes where possible to eliminate errors and inefficiencies.




Typically, attorneys review prebills prior to sending invoices to clients and determine which bills should be sent and which should be held. However, a survey published by Forrester Research/ARMA Institute found that 55 percent of organizations manage legal holds without the benefit of software support. That can mean trouble, considering manual processes can result in myriad issues, including errors, unaccounted billings, inconsistency, inefficiency and increased administrative burdens. Moreover, it creates a lack of an audit trail.

Legal managers need to constantly review practices, update and automate processes where possible to eliminate errors and inefficiencies.

STEP 2: ACCOUNT MANAGEMENT

Due to lack of insight into the aging details, attorneys may be unaware of who the law firm’s “best” clients are in terms of payment. “I’m not keeping day-to-day track of the receivables aging, so having communications with the legal administrator regarding billing status is key to ensuring prompt payment and managing any issues as they occur,” says Weil.

That’s why creating a monthly report to indicate which clients pay accounts on time, have minimal disputes, and are profitable for the law firm can illustrate for attorneys the “stars” of their portfolios. Encouraging attorneys to increase their cases with low-risk clients can generate additional and profitable revenue through more billable hours.

The art of collection management involves the ability to develop a rapport with clients, taking necessary action on aged receivables and resolving issues as quickly as possible. In addition to the attorney, legal managers can be seen as a key contact in the relationship through consistent follow-up on client issues.


To mitigate fraud, an established process to review inflated booked hours or continuously unbilled hours should be part of law firm policy.




STEP 3: CONFLICT OF INTEREST/FRAUD

In addition to the proper client setup, it’s important to know the client. In order to understand corporate hierarchy, global ownership and the ultimate beneficiaries, firms need to drill down to the shareholder and individual level of corporations.

“[Law firms] are starting to look at the granularity of who is the ultimate beneficiary in an organization,” says Mlsna. “In addition to looking at linked entities and past clients, it is important to understand at the shareholder level, who is the ultimate beneficiary.”

Determining if a client is an adverse party is key to remaining compliant and within regulatory statutes. Utilizing a service that can automate the checking and monitoring for the firm or manually reviewing government lists are proactive steps that can be taken to ensure that law firms are compliant with governmental regulations.

Monitoring, controlling and reporting any adverse actions taken against current clients will keep the firm informed and avoid the potential risk of fines and penalties associated with doing business with adverse parties.

To mitigate fraud, an established process to review inflated booked hours or continuously unbilled hours should be part of law firm policy. Clients who claim an invoice is paid when the receivables show an open balance could indicate possible fraudulent activity. Keeping stringent oversight on the invoicing and cash application processes within the law firm and ensuring that firm is adhering to policy and procedure will help manage risk for fraudulent activities.

Managing risk appropriately from client on-boarding through invoicing and payment increases profitability, reduces operational costs and improves the efficiency of the order-to-cash process.


Monitoring, controlling and reporting any adverse actions taken against current clients will keep the firm informed and avoid the potential risk of fines and penalties associated with doing business with adverse parties.




STEP 4: BUILDING ATTORNEY RAPPORT

Legal management professionals can establish rapport with attorneys over coffee, lunch or a short meeting. This is a great way to introduce policy and procedures as well as talk about the law firm’s expectations regarding the order-to-cash process.

And don’t be afraid to be proactive. Provide a monthly report on receivables aging to attorneys prior to meetings, and take the initiative to seek out an attorney as client issues arise so any problem can be handled quickly. With the attorney’s direction, you can work directly with the client, while providing timely status feedback to the attorney.

You can also facilitate monthly meetings with a specific agenda to ensure all topics are addressed. Such meetings can provide a forum to discuss nonpayment and problem accounts.

Weil says one way for legal managers to develop client-attorney rapport is to make sure the attorneys recognize what they bring to the table. He suggests taking one of your firm’s attorneys to your professional meetings, so they can see what you do and how you are recognized in your professional groups and learn about industry trends and network together — you never know when you will uncover potential client opportunities.

REMEMBERS: DETAILS MATTER

As more firms continue to stay innovative, one area that shouldn’t be overlooked is how to best manage financial risks and mitigate potential issues. When the firm has proper procedures in place for dealing with some of these risks, it can go a long way to ensuring the health of the firm.

About the Author

Pat Sand, CCE, has more than 30 years of experience in credit and financial management. As a former regional and corporate credit manager, she’s provided process improvement recommendations in the order-to-cash space.

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