Managing WIP, or “work in process”, is one of the most important tasks for any law firm. To many, WIP is just another number waiting to be billed. We, however, see it as the difference between a successful firm and a very successful firm.
What is WIP?
Understanding WIP is the first element of using it to your benefit. Consider manufacturing companies for a second; here, WIP is a part of the company inventory or conversion cycle. Raw materials are stored at the manufacturing site where later they become finished goods and are then sold, but there is a void between raw materials and finished goods; this is WIP.
Maintaining WIP costs money, takes up space, limits other investment opportunity, and, even worse, it can represent an unfinished good of an already obsolete product. Now, add in the dynamic of supply and demand and your WIP could represent raw materials bought at a higher price than current market value.
In essence, whether you sell products or services, WIP plays a vital role in profitability. Inventory is most profitable when costs are low and when distribution has little lag. It’s no different when practicing law.
How does the management of WIP save your firm time and money?
Each employee is a capital asset; when an employee engages in their services they are creating WIP and should be billing for this time accordingly. At the end of the project the services complete the final good which is usually delivered to the client in a professional opinion. Then the bill goes out. Next comes your favorite question, “Why is my bill so high?”
This questions results in countless emails, phone calls and write-offs. Even with well descript time entries, employees can be left scratching their head wondering what they did last month. This process is a giant loss; even if you don’t write some time off (which you likely will), you’re paying your associate to scratch his head and bribing the Office Manager with coffee and promises of Hawaiian Friday’s. This can be avoided; the answer is WIP.
Managing Work in Process
Step 1 – Use an accounting system designed for your industry; for law firms a good option is PCLaw which is a fully integrated time, billing, and accounting software. It acts as one software suite where employees enter their time, accounting bills time, and management can track time in respected categories. Additionally, financial statement activity is maintained in the same system to prevent clerical errors between billing and reporting functions.
Step 2 – With an accounting system in place, properly managing WIP can eliminate some of the problems above. For instance, most proposals include a detailed scope and project budget. WIP is used to help determine throughout the project whether or not you are on budget. This should be communicated to all employees of the project as well as all client decision makers. This is the second step at managing your WIP, setting milestones and expectations. Next, the difficult part comes, meeting expectations and maintaining the budget.
Step 3 – The next step is to budget project management time and schedule status meetings at the beginning of the project. Now that you have the capability to report on WIP in real time, run the report and then get in front of your employees and clients to discuss the findings as the project progresses. Even better, if you are ahead of the curve for the project and you can discuss other value-added services you can provide while maintaining your budgeted amounts?
Step 4 – Finally, when the project is completed, you have a leg to stand on when the bill is delivered. Either you came in on budget or your overages were discussed with clients in advance. Either way, all parties are informed throughout the process and expectations are almost always met.
Maintaining your WIP goes well beyond just happy clients and cleaner bills. When another project comes to your firm with similar scope, you can assemble proposals with greater ease and accuracy. This gives management the opportunity to assess new engagements for profitability prior to committing, while also mitigating loss in opportunity costs. Having informed clients and a properly maintained WIP can even go as far as resulting in better firm A/R collections and greater profitability.
I understand a good majority of this information is easier said than done, but the more you know about your firm’s financials, the more you know about running a profitable firm; and a profitable firm is a happy firm. Are you happy?