And just when you thought there were no more numbers to develop . . .

There actually are. However, this time you can analyze and produce a set of numbers that will allow the leadership group of your law firm to improve your law firm’s image with your clients and increase client satisfaction. The issue: disbursement realization!  

With careful analysis of each of your disbursement categories, you can develop a more equitable client disbursement strategy that allows you to rationally and properly allocate disbursement costs to your clients and their legal matters, thus eliminating clients’ ever-increasing complaints about “nickel and dime” billing.

What steps would you have to take? An important starting point in any disbursement review is to quantify hard disbursement carrying costs. Firms need to accurately “age” hard disbursements by calculating the time elapsed between vendor invoice date, vendor payment, client billing, and client payment. This represents the new concept of disbursement realization. This data needs to be computed at the transaction level and should be compiled at several levels–especially practice group, client, and billing attorney–to effectively detect use, billing, or payment patterns that may be impacting your firm’s finances.

Once your firm has gathered this data, it can be used to model your hard disbursement carrying costs. First, determine the “weighted average” for hard disbursement days outstanding, using days unpaid and invoice amount. Then apply your firm’s current cost of money against the average outstanding hard disbursements balance for the aforementioned days outstanding. (If your firm uses capital to pay hard disbursements, you may wish to substitute an opportunity cost in place of the cost of money.)

It is also suggested that your firm take this research one step further and develop a long-term model for hard disbursement carrying costs by factoring in interest rate fluctuations and firm growth rates. (Our research indicates that the ten-year average for the Fed prime rate is approximately 7.75%.)  The significance of all this research is that it provides your firm with a quantitative basis for analyzing the efficacy of implementing a hard disbursement carrying cost recovery solution. These relatively new products integrate with billing and finance software, allowing firms to bill for the actual carrying costs incurred when paying hard disbursements on behalf of clients.

There are several ways in which IT and finance can team up to evaluate soft disbursements. Much of this effort relates to determining actual costs for such expenses as photocopies, fax, and phone. Working with vendors, both facilities management and telecomm, to more accurately calculate costs for these charges is a good place to start. Additionally, analyzing charge-back capture rates and soft disbursement write-offs is an integral component of any soft disbursement analysis project.

Your firm should review some of the national data that is available regarding the average costs to firms for services such as photocopying and faxing, as well as the typical rates that firms across the country bill for these soft disbursements. Comparing your firm’s data to these national averages is valuable for two reasons. First, it will allow your firm to gauge your standing relative to other firms in a very important category of client satisfaction, appropriateness of soft disbursements. Second, it will help you evaluate your current contracts with your vendors.

Finally, an additional area where IT and finance can cooperate relative to disbursement analysis is in general ledger structure. Many firms have found it valuable to define disbursement general ledger at the disbursement code level. Doing so provides a level of granularity that can be beneficial in ongoing financial analysis and reporting.

Once you have all of these numbers analyzed, you can approach your firm’s leadership group to discuss “packaging” overall changes in your client disbursement policy so that your firm presents to your clients a balanced chargeback system between your hard disbursements and your soft disbursements. It is equitable because now you would be asking your clients to pay for only the soft and hard disbursement charges that are incurred on their behalf instead of some blended charge that is not tied to each individual client legal matter.

For instance, you could lower some of the charges within the soft disbursement area and inform your clients that your new disbursement policy will ask clients to pay for the carrying costs that your firm incurs for their use of your cash or line of credit to pay for their hard disbursements. This latter number is so significant that even if you offered a substantial reduction in some of the soft disbursement charges your firm would save significant overall dollars if the clients were paying for the carrying costs of their own hard disbursements.

Yes - another set of numbers to develop. However, the literal millions of dollars involved in paying the carrying costs of your clients’ use of hard disbursements on any given business day are worth the analysis.

About our author . . .

Marilyn Chenault Minot is Chief Executive Officer of Disbursement Management Associates (DMA).  DMA provides software licensing that allows law firms to maximize their cash flow and improve client satisfaction.  She can be reached at marilyn_minot@dmalaw.com.