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Article

Let's talk about money!

1 September 00

Author's view that lawyers must overcome their traditional inhibitions about discussing money and start giving clients an early indication of costs

by Fiona Westwood

This article continues my theme developed in earlier editions of The Journal encouraging firms to be both professional and commercial. It addresses the difficulties caused by professionals who are often reluctant to talk about money. There are two aspects to this reluctance - first, a failure to talk about money as part of partnership discussions and second, a failure to talk to clients at an early enough stage about the likely costs of a piece of work.

Professionals in general find talking about money difficult. This appears to stem from a number of reasons. We pay little attention to business issues in our formal university and technical training, concentrating on the professional content. We feel that we are above such discussions and draw a distinction between running our firms, which are service focused and running “businesses” which are profit focused. At an even higher level, we argue that to place a monetary value on our services somehow “devalues” what we do. All of these perceptions impact on our ability and willingness to talk about money, both internally within our firms and externally with our clients and contacts.

Internal discussions

As discussed in earlier articles, we are facing a need to become more business focused in the way that we manage our firms. This implies a sound understanding of finances - of cash flow, of profitable clients and areas of work, of costs and overheads. Lawyers are typically more comfortable with words rather than figures, which can result in a luddite approach to management accounts. However, we need to understand at least the basic elements of accounting and I would encourage all firms to carry out some basic training in this area for ALL of their fee earners. Such concepts as break even analysis, fixed and variable costs are useful tools to illustrate fundamental financial concepts and allow the firm to make decisions based on hard facts about current workloads and future development options.

Accurate, up to date information

Talking about money at any partners’ meeting can be emotive. This is usually because finances are not mentioned until they become a problem. However, routine reporting should highlight areas of slippage, of over and under spend and allow a constant eye to be kept on the firm’s performance in general. Such reporting should happen monthly rather than quarterly. If firms adopt a quarterly approach, they can be looking at information which by the time it is produced is five months out of date. Also, the discipline of producing monthly information forces the firm to limit the amount issued to what is relevant and important.

Critical success factors should be built in, such as spread of work or dependence on key clients. Key performance indicators should extend beyond finance alone and include some qualitative measures of success, such as new business won and/or profile enhancing achievements.

The importance of having accurate, up-to-date information cannot be overestimated. This allows any discussion at partners’ meetings to be based on objective facts, rather than subjective opinions. Partners’ meetings can be counter-productive unless properly focused on relevant issues. They can become “emotive” with strong personalities tending to dominate discussions. Couple this with pressure on finances and they can be a recipe for a great deal of heat rather than light. However, if finances can be discussed routinely on the basis of accurate and relevant information, everyone will become more comfortable with the discussion and the firm will be able to respond to issues on a rational basis. It will improve understanding of the firm’s position as well as help people to become more comfortable about talking about money with clients.

Talking to clients

Given the public perception of lawyers being “fat cats”, many people would be astounded at the idea that we find it difficult to talk to clients about money. Yet, this is often the case. Many clients instruct us without any perception of the likely cost of a piece of work. We in turn expect them to write blank cheques, paying what we ultimately ask without question. Yet, how many of us would buy a car without a clear idea of how much we are prepared to spend and indeed what we will actually get for our money!

In the old days, with scale fees it was comparatively easy to provide the client with a fee quote. It seemed easier to do as there was no need to explain or justify the amount given that it was the benchmark for that type of work within the profession as a whole. With their abolition, we were often required to justify the rationale behind our basis of charges with clients often comparing firms and shopping around for the “best price”. This resulted in downward pressure of fee levels with people becoming even more defensive about their charge out levels. However, we should be able to explain our basis of charging. Encouraging the firm to be better aware of its costs and profits as described above will help our understanding and ability to offer such an explanation.

The effects of not talking about money up front with our clients can be considerable. If we have no basis of consensus, clients can be unhappy about the final amount. If they are also unhappy with the outcome of the file, they will be doubly unlikely to pay. They will become critical of our technical skills and competence. It will take up time to resolve these issues, payment will be withheld, cash flow affected, and we may be forced to restrict the fee (already restricted in practice due to passage of time). The client will be unlikely to refer work to us which, as we know, can be an effective source of new business.

The other trouble with not talking about money at the outset is that it becomes increasingly difficult to do so as the matter progresses. The result is that as the clock runs, we become increasingly reluctant to render a fee unless we have something positive and/or tangible to show the client. We often lie out our time for a considerable period and then when we do eventually render a fee note, we restrict the fee to what we feel the file is worth. However, if we fee more regularly, not only are most clients comfortable with this approach as they can budget accordingly as well as more aware of what is happening, it improves our cash flow and the cumulative fee is higher.

Why we don’t?

When prompted to explain the reasons behind this reluctance, professionals offer a range of explanations. One of the main ones stems from the belief that to mention money seems to devalue the professional-client relationship which is based on trust and integrity, rather than commercial gain.

A second stems from the fear of chasing clients away if we mention costs before they have committed to us. A third offers the difficulty of quoting an accurate fee up front as we do not know how long the matter will take or what might be involved.

Another reason focuses around that many of us are genuinely uncomfortable about the hourly rates that we charge, seeming to feel that we are not worth £90+ per hour. Yet we have spent years becoming experienced in what we do, invest a great deal in staff, offices and IT upgrades and are faced with claims if things go wrong. Look at the comparison with garage repairs charge out rates!

What should we do?

We know how to take clear instructions. The essence of any client relationship is the need to have a clear and agreed understanding of what is required and when. But failing to talk about money induces exactly the opposite of this. We need therefore to learn how to talk about money at as early a stage as possible. To do so reinforces rather than undermines the professionalism of our client relationship. It should encourage openness and trust rather than put a price tag on what we do. The client may have an economic decision to make as to whether to proceed or not, but at least the client is then able to make that decision upfront.

To argue that we cannot give an estimate at the outset because we do not know how much will be involved is to some extent a “cop out”. Most of us who are experienced in what we do and do it on a regular basis, have a rough idea of what a typical conveyance or matrimonial file will take to do and how long. We can give the client a rough approximation of the likely costs and timescales i.e. between £500 to £800 and around three months with the caveat that we will keep him/her up to date and will revise that estimate in good time if we have to.

The last element to consider is why we are sometimes uncomfortable quoting rates of £90+ per hour. This takes us into the area of self worth and self esteem. We should be comfortable in our ability to deliver a quality professional service rather than attempt to justify our hourly rates. We should turn the conversation around from that defensive position to help the client understand what it could cost if he/she did not pursue this course of action. We are not responsible for the situation he/she is in. Instead we are here to help them resolve the problem. So far as possible, we should move away from a discussion of hourly rates into giving indications of total likely costs (see above).

In conclusion

Professionals need to become more comfortable about talking about money, both within their firms and with their clients. With increasing demands on resources, firms need accurate, up to date information about their financial position which is discussed as a matter of routine. Not only does this help address problems before they become critical, it allows a better understanding of the basis on which fees are charged and recovered.

Talking to clients about fee levels and charges is important. Agreeing these at as early a stage as possible improves fee recovery and cash flow, and at the same time maintains good client relations.

Not talking about it can cause commercial and professional problems for the firm.

Fiona Westwood and her firm Westwood Associates specialise in providing management and training consultancy to the professions. The theme of this and earlier articles have been developed in her book, ‘Achieving Best Practice’ to be published by McGraw Hill in September 2000. More information on it and her firm can be found on her web site www.westwood-associates.com or telephone 0141 339 0240.