Five ways to tackle the cash disconnect at the backbench partner level

Almost universally, management teams in law firms buy into the cash-is-king mantra. Yet, there are scores of backbench partners – hard-working, service-focused and technically-excellent lawyers – who still fail to understand the link between their drawings and their ability to generate cash from their clients.

Indeed, it often seems that, the bigger the firm, the greater the chance of the cash disconnect. By contrast, the much-maligned sole practitioner is only too brutally aware that the payment of his mortgage and other household bills next month depend predominantly upon him getting the work done, invoicing it and getting clients to pay.

Part of the problem is that law firm leadership teams are – perhaps unsurprisingly – tempted to treat their partners as mature, sensible adults who will display an appropriately commercial and balanced attitude to their client relationships and key account management. Sadly, it seems that, in many firms, this trust is misplaced; partners abound who will do almost anything within their power to stick to just legal work and avoid any conversation with their clients about money.

Poor cash management is not always the fault of the frontline legal teams. A combination of arcane client-driven invoicing requirements and clunky time and billing systems conspire in many ?legal corners of the world to make the invoicing process a logistical and administrative nightmare.

There are also some management teams who have still not bought into the principles of stable financial management. In a recent speech, Samantha Barrass, executive director of the Solicitors Regulation Authority, said the regulator had encountered some ‘worrying’ financial practices in UK law firms, such as payments made to partners irrespective of cash in the bank, partners out of touch with office account bank balances and even the use of VAT receipts as part of the firm’s working capital.

So, better financial management definitely starts with the firm’s leaders setting the right example of sound and stable cash management.

Five key steps

There are five ways of improving the cash disconnect at the backbench partner level.

First, the firm’s leadership should invest in ensuring that partners receive proper training, not just in financial management but – more saliently – in legal project management. These skills include the negotiation, proactive management and cashflow control of the fee budget. Many partners simply fail to understand that slow and sloppy billing practices are as much a turn-off to clients as they are an affront to the firm’s management team.

Second, the leadership team should encourage and support their legal teams to negotiate better payment terms (such as monthly interim billing) with their clients and by investing in more transparent and user-friendly invoicing processes. This does not necessarily mean heavy financial investment in new systems. In many firms, some partners are still unaware of some of the features of their back-office systems that they might find helpful in making the billing process easier.

Third, firms should be doing more to restore the link between drawings and cash collection as part of partners’ performance management. There ?are several ways of achieving this. ?One is to reserve the right to withhold drawings from individual partners if – after due warnings – they fail to comply. Another is to reduce standard monthly drawings and to increase the frequency ?of further payouts as and when cash targets are reached.

Fourth, firms should create performance indicators that relate to cash collection. In firms with any element of performance-related profit sharing, those indicators should be linked to the partner compensation and reward system.

Using the compensation system to reward or penalise partners is a very blunt and backward-looking instrument, the impact of which is often only felt long after the event. It is a weapon that should be used very sparingly and only as part of an overall management process.

Part of this step is to be much firmer in holding partners accountable for ?their performance and behaviour. This ?is something that is best done in person, with partners left in no doubt that ?poor behaviour or sloppy practice will ultimately be reflected in the level ?of their profit shares.

Finally, there is the issue of intra-partner communications. The old adage is that you have to communicate something seven times in seven different ways before it will get through to employees and colleagues. Communicating the cash-is-king message can rarely be repeated too many times. It is sound governance practice to keep partners fully aware of the firm’s cash position and, through it, the firm’s continued viability and stability.

None of these five steps are new or novel, but few firms seem able to pat themselves on the back that they are doing all of them optimally.

Nick Jarrett-Kerr advises law firms worldwide on strategy, governance ?and leadership development ?(www.jarrett-kerr.com)