By Learon J. Bird, CFA, J.D.
Affiliate Financial and Damages Expert with Financial Evidence Group
As I, once again, prepare to teach Negotiations courses as an adjunct for a pair of Portland law schools, I reflect on one of the negotiations some of my fellow attorneys and consultants tell me is the most frustrating – negotiating client write-downs after an engagement is complete.[1] These take a variety of forms, but the ones I have seen most frequently include: clients who analyze every time entry in an hourly engagement, pushing back on any with details they don’t perceive as beneficial; clients who ask that all time for internal meetings be written off; clients who ask that all time for junior analysts/associates be reduced; and clients who request global 10% write-downs (why is it almost always 10%?).
I thought of a recent conversation I had with a partner at an accounting firm on the impact of client requested write-downs within their firm. She indicated that her clients almost never ask for write-downs, while several of her colleagues routinely provide them, reducing the realization rates of their entire team. When I was a junior legal associate, any write-downs of my time had a direct impact on my year-end bonus. There was nothing more frustrating than doing my job perfectly, then seeing my realization rates take a hit because the engagement leading partner (“ELP”) wrote down my billable time. Later, when I started leading client engagements and handling billing questions, I came to understand the draw to readily acquiesce to a client request for a write-down. It keeps the client happy and avoids the discomfort of disagreeing with a client.
So why is it that some consultants and ELPs are rarely asked to provide write-downs while others routinely receive these requests? Just what are the best ways to minimize client requests for write-downs?
Managing Expectations and Clear Communication
In my experience, managing client expectations is the key to minimizing, if not avoiding altogether, requests for write-downs. It is useful to proactively address several issues prior to delivering the bill to a client, whether it be a monthly bill or the final bill: (1) Ensure that the client is informed of all the individuals (including title and billing rate) who will be working on the engagement, (2) Ensure that the client is in agreement with the statement of work, including the scope of services to be provided, and make it clear that any scope-creep will be documented and will require (at a minimum) confirmation of the expanded scope via email, (3) Ensure that the client understands that internal meetings will occur and why they are needed, (4) Ensure that the client understands the value of having junior members of the team working on the project, (5) Have members of your team input their time entries daily, and (6) Provide regular and routine updates on the project(s), including billings and time expended. Yes, taking these preventative steps may seem inconvenient and tedious, but like many good habits, practice makes perfect and the reward of being fully paid is well worth the effort.
1. Ensure that the client is informed of all the individuals (including title or position and billing rate) who will be working on the engagement.
In providing the client with a clear view of the team that will be staffing their matter, it gives them an initial opportunity to ask questions of your firm’s staffing model and allows for a barrier-free opportunity to explain the cost-effective value that junior colleagues provide.
2. Ensure that the client agrees with the statement of work, including the scope of services to be provided, and make it clear that any scope-creep will be documented and will require (at a minimum) confirmation of the expanded scope via email.
Too frequently I have seen projects, particularly in fixed fee engagements, in which clients ask for “just one small addition” or in which a client failed to disclose an issue that significantly impacts the amount of time required for an engagement. ELPs too frequently allow their firm to absorb these extra costs, rationalizing that it is a small cost to keep a client happy. The problem with this approach is that clients know that they can keep their costs down by using this ‘nibbling’ strategy, undermining the value of your skills and services without considering the impact on your realization rates. Instead, it is advisable if not prudent to treat requests as routine, indicating your willingness to perform the additional work, or handle the discovered issue, and swiftly providing the client with an estimate of the additional time that will be required and clearly explaining how that will impact their bill. If you leave the decision of whether to expand the scope for the client to make, or leave some aspects of the project unperformed, the client will make the choice that is best for them, typically with no offense given or received.
3. Ensure that the client understands that internal meetings will occur and why they are needed.
Rarely is it efficient for the ELP to do all the work on a project. That means there will be internal meetings as work is delegated, staff is supervised, and the delegated work is reviewed. I have not worked with any clients who pushed back on this process, so long as it was explained in advance. In instances when a client is unfamiliar with firm project staffing, this can become an issue. I have been involved in projects in which a client indicates they have a policy that billings for internal meetings will be rejected. While it seems like it could be an impasse – the client refuses to pay for internal meetings, but internal meetings must happen – there are ways to work around the issue. I have observed partners who would instruct their staff to avoid the word “meeting” in their time entries, instead having time entries describe the subject of the time, not the specific activity. Other partners will instead limit internal communications to email, avoiding internal meetings altogether. If client expectations are known before the project begins, the firm can successfully work within the restrictions set by the client.
4. Ensure that the client understands the value of having junior members of the team working on the project.
Junior associates typically take longer to find the answer to a tricky issue or draft a document than a more senior associate. This is more than offset by their lower billing rate. That said, it is hard to imagine that a senior partner who has been appearing in court for 20 years will be as effective in searching Lexis for case law regarding esoteric points of law. It can cut down on client push-back if they understand that the value a junior associate brings to an engagement exceeds the cost - before their name appears on a bill.
5. Have members of your team input their time entries daily.
One of the more challenging parts of private practice for young associates to master is the requirement of entering their time along with descriptions of how their time was used. I have seen this same issue when reviewing partner time entries. When time entries are made each day, instead of waiting until the end of a week, or the end of a month, the accuracy of the entries is drastically improved. Having time entries submitted daily can help the ELP communicate budget concerns as soon as they become apparent and ensure that bills are sent regularly and timely.
6. Provide regular and routine updates on the project(s), including billings & time expended.
Just like in our normal lives, there is nothing worse than an unexpected bill. Providing regular and timely bills to clients benefits both parties - it bolsters your realization rates while the clients are better able to manage their budgets and don’t feel the ‘sticker shock’ that comes when a single large bill arrives months after the services are provided. Regular billing also creates a feeling of an ongoing professional relationship – and most people will prioritize a relationship when it is expected to last, even when part of the relationship is writing a check.
Conclusion
There are a number of steps to take before and during an engagement to reduce, if not eliminate, the write-down requests you receive. When the requests do come, it will be a less common occurrence and, as I discuss in the forthcoming second part of this publication, you will have options other than holding firm or capitulating. Focus on interests (yours and the client’s) – Is the relationship worth working for? Is there something apart from a discount that will keep the client happy? Is there a concession you can obtain which would offset the discount?
There is always a path forward - it just won’t be as simple a conversation with your client as a quick “yes.” In the words of the founder of Hootsuite, “In the end, anything that can transform a[] roadblock into an opportunity is probably worth a second look.”[2]
[1] For the purposes of this publication, I refer to a client requested reduction of a bill as a “write-down”.
[2] For one example of how a company handled a pricing negotiation that was at an impasse, see the experience of Ryan Holmes, the founder of Hootsuite, as he was nearing an impasse in negotiations with a vendor. When they hit an impasse over who would pay the credit card fees, his team agreed to pay the fees on the condition that “Upon every $100,000 in revenue generated, and at the discretion of Hootsuite, Vendor will take two Hootsuite representatives out for a steak dinner, at a price not more than $450 including tax and gratuity.” As Mr. Holmes reports, this “Steak Clause” proved to be a tremendous business tool. Ryan Holmes, How To Win A Difficult Negotiation With "The Steak Clause", June 16, 2016, available at https://www.forbes.com/sites/groupthink/2016/06/16/how-to-win-a-difficult-negotiation-with-the-steak-clause/?sh=4a70ab9e389d.