Opinion: Taking on clients at your peril

By James Boyd, finance director, Cobbetts

Good quality people doing good quality work for good quality clients. It’s the ideal but as pressures in the marketplace intensify over the next two or three years, it will become more difficult than ever before to achieve.

The likely changes that arise with the commoditisation of legal work, fee pressures, and the Clementi reforms sets the scene for a highly competitive landscape that can only mean a number of the current firms in the top 100 surviving in three years’ time.

Therefore, to move up the value chain in this period requires the finance director and others to ensure that they fully understand the clients that each team within the firm is looking to acquire. They must also make sure a process is in place to make sure that the quality of work improves, and look at how to avoid potential liabilities that may arise from new work or new clients.

How often do we come across the situation where there is little you can do so late in the process when, say, a client refuses to pay a bill because there was not enough clarity in the terms of engagement or the client was really a credit risk?

To protect the business from such risks, it is essential that you have a process that involves elements such as a vigorous credit check, and a scoring system based on the client’s sector and type of work. Broader initial input of client assessment is needed from people who usually only get involved when things go wrong – for example, the senior credit controller. Partners should also log any cross-selling opportunities at the inception stage ready for follow up.

This time spent up front is certainly better than the time lost and expenditure incurred when a problem arises, which can lead to anything from bad debt and discounted charge rates to low morale within the team and damage to the brand.

Cultural changes

Implementing the appropriate systems and processes to avoid such risks is easy – changing people’s working habits is the real challenge. To be effective, any initiative has to be simple and easy to use, and importantly reduce partner/fee-earner time. You need to:

Have a clear protocol – detail what is expected of a partner at client inception;
Look at using a costing model to properly price jobs that can be reviewed against actual outcomes to see where lessons can be learnt;
Hit partners in the back pocket – deferring distributions for non-compliance or excessive ‘lock up’ levels;
Build confidence – give partners training and skills
to be more explicit with clients at key moments of
client inception and during the case if the terms of engagement change;
Peer pressure – look at ‘sticks and carrots’ that affect a number of partners on a group basis rather than on an individual basis. Those performing will soon persuade those who are not;
Regular review of clients – check annually to see if a client’s financial position has changed;
Client committee –have a body of people that looks at clients at inception, meets regularly and gets involved when things go wrong. Also look to review clients on an exception basis who fall below a certain scoring criteria;
Improve project management – by spending more time clearly specifying the terms of engagement and costing the job properly, it will ensure that work is delegated at the right levels;
Honest and unambiguous terms of engagement – having clarity from the beginning will help manage expectations on both sides and result in happier clients;
Remuneration committee – make sure the behaviours required above are aligned and reflected in the remuneration process.

For larger firms it may also be worth considering involving the internal audit function to do spot checks on parts of your systems and on lateral hires who have to adapt to new processes and bring across new clients. You should also perform a regular review of client spread across a practice area, and monitor trends and shifts in potential risk. This is certainly not advocating a ‘Big Brother’ approach but about providing comfort and security to the wider body that their investment in the business is well protected.

So next time you hear: “I have this exciting job with a client who hasn’t got the financial backing yet but they will come good,” and become locked into years of litigation, think about the time and costs you are going to incur, which may have been avoided with a little more effort asking a few pertinent questions to start with.

As increasing competition prevails, firms will need to look at how they grow and prosper. Attracting clients and work is crucial but it should be handled in a measured way, and finance directors and managing partners need to ensure that more time is devoted to protecting their investment and goodwill.

James Boyd is finance director at Cobbetts. He can be contacted
at james.boyd@cobbetts.co.uk