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Taking the Risk of Payment Out of New Client Development
by Barbara Lewis MBA and Dan Otto MBA

Oftentimes, attorneys talk about the difficulty in getting clients to pay them.  Accounts receivable amounts may be high and average collection days may stretch into months.  If you face this problem, you may want to solve it by developing a risk analysis payment model for prospective clients. 

First, identify problem clients. These are clients who were write-offs or who have a substantial fee over 180 days in the accounts receivable aging.  Analyze various characteristics about each client, such as who referred them, were there co-signators on the engagement letter, did they immediately negotiate the fees, did they have a previous attorney for the same matter, did they have a court date set, was the total estimated fee high and numerous other factors.  As you analyze the bad debt clients, you should see a pattern emerge around similar characteristics…a real eye-opener.    

Then, identify clients who paid their fees on time. Examine the same dimensions and you’ll probably find discernable characteristics that differentiate the bad clients from the good clients.  Although certain characteristics, such as immediately negotiating fees, are intuitive to recognizing future problems with payment, others are not but have strong predictive power.   

You can easily develop a scorecard to assess the various characteristics that you’ve identified that are common among your nonpaying or poor paying clients.  As you conduct the initial interview, you can either ask specific questions or obtain a perception about your prospect that will aid in scoring the risk.   

If you want to get slightly more sophisticated, you can weight the various characteristics, so that certain questions are more influential than others.  To mechanize the process, you can develop a computer model that calculates a risk score in the format of a two dimensional matrix. 

A relatively high score, indicates a higher propensity for the client to default on his or her financial obligations to the attorney.  The result is that bad debt can be reduced by not accepting clients who score as high risk for problem or non-payment.  New clients can pay faster since their risk of default has been reduced.   

The purpose of the methodology is not an acceptance/rejection decision, but a risk reduction. A potential client with a high-risk score does not need to be excluded; however, necessary steps such as a higher retainer fee or weekly billing needs to be employed to mitigate the payment risk. 

There are five keys to the success of your scorecard or risk model. Choose characteristics that can be evaluated pre-engagement. Perform the evaluation on every potential client. Keep a record of the score and the collection outcome for each accepted client. Periodically, review the characteristics and weightings.  Use a metric, such as percent bad debt expense and/or accounts receivable collection days, to track improvements in your client selection and your collections.  

In addition to bad debt reduction, you can also establish collection policies to accelerate your cash flow.  Establish a benchmark by calculating the amount of time that it takes you to collect your fees.  Take the total accounts receivable, divide by your average monthly billing and multiply that amount by 30 (days in a month).  This is the average amount of days that it takes you to collect your accounts receivable.  For example, let’s say your total accounts receivable is $100,000.  You divide that amount by your average monthly billing amount of $10,000, which is 10.  Multiply 10 by 30 and the collection days are 300.  If this amount is over 70 days, you are above the national average.  

To ensure that clients are willing and able to pay, don’t hesitate to ask for a substantial fee up front.  Otherwise, you may end up “loaning” your clients money or performing services pro bono and never being paid.