Knowsley Management Services
Legal Practice Management Consultants
I trust this edition of KMS “Robservations” finds you in good health and prospering…and fully aware that we’re about 30 working days from Christmas!
In this email I have briefly covered a few more issues that are impacting lawyers in small-medium firms in Australia and New Zealand…
I hope you find the content of interest and value to you in your practice…
KMS Common-sense Law Firm Marketing… Seven more short sharp thoughts from the trenches…
Proportionate legal fees…is this really a new requirement?
The introduction of the Legal Profession Uniform Law affecting legal practitioners in New South Wales and Victoria (approximately 70% of Australian lawyers) from 1 July 2015 has brought with it many changes, some of which may not be readily apparent to practising lawyers.
One key area of interest is costs, and some elements have been introduced that should be of interest to practitioners in other Australasian jurisdictions, notably the concept of costs having to be both proportionately and reasonably incurred, and proportionate and reasonable in amount.
Not unexpectedly, these additional requirements are on top of the “age-old” requirement that costs are “no more than fair and reasonable in all the circumstances”.
An important question to be asked is whether the “proportionate” requirements are really additional, or whether they are simply an emphasising of two factors that previously went to assessing “fairness and reasonableness in all the circumstances”?
Further, in either case, what do the “proportionate” requirements actually mean?
This is especially relevant in light of the fact that the LPUL does not contain a provision similar to that in the English Civil Procedure Rules (introduced as an amendment in 2013) that states that, “…costs which are disproportionate in amount may be disallowed or reduced even if they were reasonably or necessarily incurred”. (my emphasis).
Interestingly, as far as I can determine from my research, Costs Assessors in New South Wales are allowed to take into account pretty much anything already, in determining whether a fee is fair and reasonable!
As matters progress, and things eventuate that impact potentially on “disproportionateness” of your costs, you will be wise to make continuing full and effective disclosure so the client has full control over the key decisions in electing to go forward, or otherwise!
All decisions the fully informed client makes need to be made clearly, in writing in my view, and retained for reference in a dispute or, if truly unavoidable, cost assessment.
That leads us naturally to a wider consideration of Costs Disclosure itself…
Genuinely good service to clients involving excellent disclosure that is effective (and also conforms) is the key to getting paid reasonably and on time…
In essence Disclosure is not required by the LPUL if Professional fees are expected to be less than $750, and a Uniform Standard Form of Disclosure can be used if those fees are expected to be under $3000.
Otherwise full Disclosure is required, amounting to providing the client with the basis on which legal costs will be calculated, and an estimate of the total legal costs.
As previously, expected significant variations from the estimate require updating the disclosure.
The client must be advised of the right to negotiate a costs agreement with the practice, receive a bill and/or request an itemised bill, and negotiate the billing method.
The practice must take all reasonable steps to ensure the client has understood and given consent to the course of action and the proposed costs.
Contravening the Disclosure obligations has very significant consequences. Any Costs Agreement entered into is void, the client is not required to pay the costs until they have been assessed, and disciplinary action may result.
Bills can be lump sum or itemised.
If a client requests an itemised bill the practice cannot claim a higher amount than the lump sum bill unless it disclosed its right to do so at the time the lump sum bill was given, and, the additional costs are determined to be payable after a costs assessment.
Interestingly we may be being driven back in the direction of most bills being itemised at the outset!
That would require either very high quality activity recording, or plenty of resources being devoted to itemised bill preparation.
Setting a fair and reasonable fee continues to be very much an art rather than a science. A proportionality test will of course not of itself simplify the art…
Many factors go into reasonableness, and the different factors should have different weightings according to the circumstances…proportionality has, to me, simply been re-stated as an important factor to be addressed.
The very nature and range of legal matters, that can only broaden as society continues to become more complex, makes a formulaic approach to proportionality fraught indeed.
Any simplicity and “certainty” achieved will be undone by rampant unreasonableness to the lawyer in particular circumstances, unless a test of over-riding reasonableness is re-introduced at the same time!
Lies, Damned Lies, and Statistics…
Keeping a proper handle on what working capital a firm needs, is an ongoing challenge, and naturally from time to time clients ask us at KMS what their average days debtors should be?
The difficulty in responding usefully with a simple number or a range is that the answer is inextricably tied up with the mix of work and clients in the practice.
It’s not too hard to establish a reasonable target range if your practice type allows for a sound combination of money in Trust up front for fees on a good proportion of the work, and reasonable payment terms, say 14 days, for the balance.
The occasional messy matter in which fees cannot be collected on time is not usually of large enough size to impact heavily on average age, despite tying up some of your precious working capital for longer than desirable.
Other factors impacting are, for example, when you render bills, what proportion you expect to get paid on normal terms, and whether you need to carry many matters for some time, building up Raw Work In Progress (and just as surely tying up working capital) but not reflecting in Debtors totals.
For example, in a plaintiff Medical Negligence practice, you may not render a bill until the case has been resolved and settlement funds are in your Trust Account, so funds are transferred as bills are processed, and average days Debtors is very low to non-existent.
By the same token, knowing how old Work In Progress is on average is a very important indicator. The key to reasonable working capital there is to optimise file velocity in the matters, correctly balancing speed with obtaining the very best client outcome.
One issue that regularly trips up managers in legal practices is that often practice management software does not calculate how long it takes you to get paid on average in a useful commercial manner…
Quite often the number provided by such software is simply a calculation of the average days outstanding of what has not yet been paid. I have even seen software that gives you the average days based only on what has been paid in the period in question!
This is seldom useful and can be downright misleading.
Recently I saw an example of “leading” software that calculated a firm’s average age of Debtors exactly this way.
If the firm had only $1,000 owing in Debtors, and that had been owing 120 days, the formula in the software quite rightly calculated that average days of Debtors still owing was 120 days.
This is useless information for a firm that bills many hundreds of thousands of dollars a month and otherwise obviously collects very well.
The indicator that is most important for this firm is how long it takes on average to get its bills paid…a very different number indeed.
The correct way to calculate that is to average the opening and closing Debtors for a period, and factor in both the fees rendered in that time and the number of calendar days in the period.
Any reader interested in the correct formula can click here for it to be emailed without obligation.
Alternative Fee Arrangements…the caravan rolls on…
There is a great deal of variation in views among commentators, consultants, and law firms in this important aspect of the process of delighting clients…
A recent very valuable contribution to the discussion, that amply demonstrates this variation, is Philadelphia-based LegalTrek’s e-book…
25 Secrets to Success with Alternative Fee Arrangements …click for free download…
If some of this content has been of interest and value, you may find other content here also…
KMS Blog: lawfirmprofit.blogspot.com.au
KMS Website: www.lawfirmprofit.com
LinkedIn Discussion Group… Excellent Management in the Small Law Firm