The Hidden Cost of Bad Clients, with Jeff Krause

Episode Notes

Transcript

Stephanie Everett:

Hi, I’m Stephanie.

Zack Glaser:

And I’m Zack. And this is episode 5 93 of the Lawyerist Podcast, part of the Legal Talk Network. Today, Stephanie talks with Jeff Krause about bad clients

Stephanie Everett:

And the hidden cost of those bad clients, right?

Zack Glaser:

Yeah. Firing them. I mean, he did Moneyball, your firm, right? So we’re talking about the data behind bad

Stephanie Everett:

Clients, and we get into all that too and remind people about the Moneyball of the movie or my version of the movie that I apparently get wrong every time. But we Brad Pitt. I remember him,

Zack Glaser:

Yeah, yeah. And there’s Jonah Hill.

Stephanie Everett:

Oh yeah.

Zack Glaser:

I don’t know that I’ve fully seen the movie.

Stephanie Everett:

You should. There’s a great, actually, because you said, do we talk about how to fire clients or people and the answer’s no, but there’s actually a great scene in that movie where Jonah Hill has to fire one of the baseball players for the first time and he’s freaking out because he’s got to go fire a professional baseball player

Zack Glaser:

And he’s just a little data guy.

Stephanie Everett:

And Brad Pitt in his very cool, sophisticated, nonchalant way is just like, here’s what you’re going to do, Zack. It’s been a pleasure working with you. We’re moving in a different direction. I’m going to need your playbook. You’ll see the front office, they’ll have all the administration for you, and he’s just like, it’s quick. You get it up, hit ’em up front. This is what’s happening. Boom. It’s actually a great scene. People should watch this before you have to fire an employee. I’m serious, because don’t bury the lead. Tell people right up front, this is what’s going to happen. And you don’t want to Anita to drag out the conversation. They don’t want to sit through it. You don’t want to sit through it.

Zack Glaser:

It

Stephanie Everett:

Needs to be quick and you get on and get out

Zack Glaser:

And you can be empathetic. You can be thoughtful and still be that. Honestly, I think there’s empathy in getting that

Stephanie Everett:

Quickly. Yes, there is empathy. No, that person does not want to sit in that conversation with you for any longer than they have to. It sucks.

Zack Glaser:

They may not like you very much anymore and they’d like to get out of,

Stephanie Everett:

Yeah, you don’t have to be a jerk about it, but being quick about it to your point is nice and empathetic. You just want to take it from someone who’s had to fire some folks in my lifetime.

Zack Glaser:

And I think more importantly, the thing that does scare people, getting back to what you talking about is the quote firing of clients as well. How do you do that? That’s not

Stephanie Everett:

Easy. I’m going to need your playbook. We’re done. No,

I mean it’s silly, but most people do. I mean, yes, but the same thing with clients. We did an episode once, this is kind of related, but call back to former episodes. Apparently I did an episode with a woman who talks about the science behind delivering bad news and she actually did all this research. We’ll find the episode and reference it in the notes. I can’t think of that lady’s name right now, but I thought it’s a great book and I was excited to interview her. I really liked the book because it’s all about how do you deliver bad news to someone and not lose their trust because you just got a bad result in their case and you need to tell ’em. And she talks and she did all this research. They actually ran clinics and law schools and showed what is the best way to deliver bad news to clients. So a little tangent there for you that I didn’t know we were going to talk about, but that’s also another great episode apparently. This is just episode Stephanie wants to talk about today.

Zack Glaser:

That is episode 3 84 0 4 you found? Yeah. Delivering bad news to clients with Marjorie

Stephanie Everett:

Aaron. Yes, that is her name. I love that. Yeah, and check out the book too if you really want to go deeper into it. I think those are the kind of skills that they should be teaching us in law school that they don’t. Right. Did anyone tell you it’s so important. You need to be able to deliver bad news to your client and still have them trust you. I remember once a quick story and we’ll be done, but I had somewhat of a famous client, which is funny. I also dreamt about that client last night, so I don’t know where this is going.

Zack Glaser:

We were going to have this conversation

Stephanie Everett:

Today. Exactly. And we lost emotion, but I knew we were still going to be fine in the case, but in the moment it felt very, and I think I did give a sports analogy like, listen, I don’t remember exactly now what I said, we’ve lost this, but we something

Zack Glaser:

We’re going to win the war.

Stephanie Everett:

Exactly. And she just came at me hard and was like, don’t give me that pithy analogy, whatever. She really didn’t like that. And I was like, whoa. I was like, I just got shot down by my teenage person. She was famous, a singer, and I listened to this person ate a lot when I was in high school. So my teenage self was a little crushed in that moment because she totally did not like the way I delivered bad news to her. And she told me and I was like, that was harsh. But then later I was right and we did win the case and she did realize and she did apologize, and I got to go to one of her concerts freeing in the front row. So my teenage self was vibed. I still love her apparently, and I dreamt about her last night. I dreamt that a show. I was in a room with her and her and the band and one of their songs came on and I looked at them and I was like, is this weird? Would you hear your own songs playing? Anyway, okay, sorry, podcast listeners for the ramblings of Stephanie. Don’t know what’s happened on this intro.

Zack Glaser:

Well, now we’re going to get into your conversation that is less rambling with Jeff.

Jeff Krause:

My name is Jeff Krause I am a strategic consultant with Affinity Consulting. I have been working with law firms in a variety of capacity since 1998, a few years out of law school. Everything from helping firms with it. I mean, I always said I help firms choose the right technology and use it the right way was sort of my personal tagline. But as part of that, I also started to see where firms work struggling with things from profitability and process and all kinds of things. So over the years we’ve also began helping firms with things like that as they came up and that’s really where the Moneyball and some of these things we’re going to talk about today came from.

Stephanie Everett:

Well, welcome back to the show. For those who are longtime listeners, Jeff was with us back at episode 474, I looked it up. So where we first introduced this concept of Moneyball for lawyers and those who probably more people are familiar with the movie than the book at this point, but the idea of using numbers of using stats and data to manage your business, is that a good nutshell version?

Jeff Krause:

That is a good nutshell, but it’s a little more than that. I mean, it’s a lot more than that, but it’s a little more than that. I like to say in that it’s about looking at the right numbers, the ones that matter. We have a tendency to look at things and focus on things that maybe don’t make that much of a difference, plus looking at some things differently that maybe others are not looking at and that can give us a competitive edge.

Stephanie Everett:

I like that. I think in the movie, what I remember is they really started focusing on singles and getting on base and lots of people in baseball had been looking at stats for years. It wasn’t that they were the first people to think about numbers, but they suddenly said, wait, we need to care about on base, getting on base more times than home runs. That was my big takeaway. I’m probably murdering the movie.

Jeff Krause:

And they looked at it and they said, we are at overall a competitive disadvantage. If we are just looking for the same things that the rich teams are looking for, we can’t compete. So what can we look at that will give us an edge that perhaps they’re not? That was a big part of

Stephanie Everett:

It. Oh, I love it. That’s a great little recap and encourage folks to go listen to that episode 4 74. If you want to dive in more, what we thought we’d do today is kind of take a piece of that as a little bit of the follow-up, which is really thinking about clients and maybe asking ourselves some hard questions about who we’re serving and why and which clients really belong in when you set this up for people when you talk about it. Well, maybe just that, how should we dive into this topic of clients and picking the right clients for our firm?

Jeff Krause:

I would say that first of all, it goes back to one of the original concepts of my Moneyball for lawyers and that sort of understanding what goes into client generation and revenue generation and profitability. And I always start that conversation when I talk Moneyball with anyone with something I call a profit formula. It’s sort of the five things that determine client’s, revenue and profitability, and ultimately it all comes together to determine how profitable you are. Those five things are, first of all are leads. It’s people who’ve expressed some interest in working with you. Not everyone who drives past your billboard on the freeway. It’s someone who it prompted them to call you and say, maybe you can help me. Second is conversion rate. And think of it as a percentage. If you had 100 leads and 25 of them become clients, you have a conversion rate of 25%.

So leads times your conversion rate equals your number of clients. That’s the simplest way to, that’s the first part of the formula there. Once you have a number of clients, then what comes into play is how many times they work with you. Sort of like it’s a way to kind of calculate lifetime value. If you think about it, how many matters do they come back and work with you again, we all know it’s easier to work with and start a new matter, if you will, with an existing client than a brand new one. We didn’t have to go through all of the marketing and that sales process of converting them. It’s much easier to just get returning clients. So number of transactions is sort of that next thing and then how much they spend each time, the average value of a matter with that client.

So if you take the number of clients times, the number of times they come back on average and then the average dollars per matter, you end up with revenue, right? Again, it’s a really simple formula. And then the last piece is just sort of a generic word I’ll use that’s of margin. I kind of phrase that as, I know this isn’t like an accounting accountant definition of margin perhaps, but I look at it as the percentage of that revenue that you get to keep. It’s just kind of a simple way to look at it. So leads times conversion equals clients. Clients times number of transactions, dollars per transaction equals revenue, times margin equals profit. And one of the reasons I think I just love that formula, but one of the reasons for that is that we both talk to lawyers all the time and they say things like, if just had more clients, I’d be doing so much better if I had more revenue, if I was just more profitable. They’re looking at a result when they say those things, but those things, they’re the result of these other five things that you are doing. And if they could just take their mind away from, I just need more clients and look at how do I generate more leads or better leads and how do I convert more of them, they would’ve more clients, but they almost say it’s almost like they think there’s this client tree and you shake it and they fall off. No, you work for it through leads and conversion

Stephanie Everett:

And I think, and so thanks for that. That’s a great overview of the formula and where we’re going to focus today on which clients you should say yes to because I think, well, you tell us if we say yes to the wrong clients, how does that show up in the formula?

Jeff Krause:

So just in general, we will just say the quality of your client just as an easy way to say that, but client quality impacts all of those five things I talked about in terms of leads. Clients tend to refer others that are like ’em, so better clients will refer other better clients to, it’s as simple as that. And clients that this isn’t just about annoying clients. Some clients are entirely annoying, but it’s not just about that. But some of those clients who are problem clients will refer others just like them. You don’t want that in terms of conversion rate, better clients tend to be easier to convert everything from getting your engagement letter back to you on time, and they’re just better at doing those things. And when a client refers someone else to you, they’ve actually done a lot of the conversion rate stuff for you.

So good clients refer great clients and they’ve already convinced that other person that, Hey, you should work with this attorney matter or number of transactions, how many times they will come back. Again, good clients that you provide good service to, you’re the first one they think of. Just in general, a good client will remember you dollars, they have a massive impact because that’s one of the places where just sort of poor quality clients impact your bottom line because they are the ones who demand discounts. You prepare their bill and you say, wow, they’re not going to like that. So we kind of write it down a little bit. Maybe they’ll be more willing to pay this one, they haven’t even seen the bill and we’re giving them an additional discount, and they’re also the ones who don’t pay on time or at all. So now we end up writing them off.

So they have a huge impact on that bottom line and just margin one way to look at margin, it’s my expenses and that the percentage I have of expenses and whatever’s left is what I get to keep, but there’s sort of some intangibles in margin and it’s like you could be spending your time on better things if you weren’t wasting time on certain clients. So you’re paying staff to work with these clients who are wasting their time or being even abusive to them. Sometimes in the worst case is your staff could be working on more important things and that has this impact on margin. That’s kind of hard to quantify, but it is

Stephanie Everett:

There. I think so many of us are worried. We get a call from a potential client, we see some red flags or yellow flags. We were, I don’t know if we should take it, but the fear of when’s that next client going to walk in the door? When’s that next dollar going to walk in the door sometimes pushes us to say yes to work that we shouldn’t say yes to. And what’s so great about your formula is you see sort of the compounding effect of that. Yes. Right? Because now when you do say yes to the clients, we shouldn’t say yes to means you have to, especially if we’re discounting and they’re not paying us now, it’s like we have to get two or three new clients to replace that one. It’s not just that client that impacts, it impacts so many parts of the formula.

Jeff Krause:

What you just said there is sort of the biggest thing. And having that profit formula and plugging some numbers into that, you suddenly see that. You kind of know that, but when you have those numbers in there, it’s just become so apparent. If I’m just to throw some real basic numbers into the formula. So I get 100 leads, 25% become clients, my conversion rate, and so I have 25 clients, they come back twice on average, 5,000 each matter. So I have 250,000 in revenue and I get to keep 40% as my margin. So I have a hundred thousand in profit. Again, just simple numbers, easy to work with from my math impaired brain, but now let’s throw a client or I habitually take clients who demand discounts and so on. Just take one thing in that formula dollars per transaction and let’s reduce that to 4,500.

Let’s reduce it by 10%. All of a sudden my revenue’s 10% lower and my profitability is 10% lower. If I want to get back to where I originally was with 250,000 in revenue and that 100,000 in profitability, I actually have to find three more clients. So instead of 25 clients, I need to be at 28. And if you plug those numbers in the formula, you will immediately see that I have to make it up somewhere and where am I going to do that? So you started that discussion, we have this thought of where’s the next client coming from, but you got to find three now you take a bad client because you’re worried about where’s the next client coming from, and now I literally have to find three more to make up for taking this one bad one.

Stephanie Everett:

That is

Jeff Krause:

The numbers show you that.

Stephanie Everett:

Yeah, no, that’s a good point. I think when you see it in black and white, it makes more sense, but I think conceptually we’re all like, ah, I know I shouldn’t take this, but I just will. I say yes for these reasons

Jeff Krause:

And while we’re on that particular subject of putting those numbers in, let me flip that around. Let’s say that I raise my rates by 10%, so now instead of 5,000 per matter, it’s 5,500. I can lose some clients. I no longer need 25 clients. I need like 22.7 or something like that, but I can lose some clients and still be where I was on that revenue and profitability. So you can think about it in I don’t have to work as hard to get where I was originally by simply raising the rates. And if you think about it, which clients are going to suddenly leave you when you raise your rates, most of your best clients that you’ve been providing great service to are not.

Stephanie Everett:

Yeah. What about if we have, I know we always talk about grading clients, and so you go through your list and figure out who are your A’s and B’s, maybe who are your C’s and D’s and F’s, hopefully you don’t have too many of those. Who should you be saying no to? What are your thoughts on those mid-level clients? Is there a way to sort of move them up? How do we get them to grade better so that because we already did the hard work, the marketing work and converted them to clients, so before we just kick ’em to the curb, what can we do to rehabilitate those clients?

Jeff Krause:

And when I talk about moving clients up or out, it’s really not about moving them out so much as can we move them up. So yeah, I should have said that at the beginning. It’s not really about firing clients. This is more about what can we do to make that relationship that we have with those clients better. It primarily comes from setting expectations. There’s the old expression that we get what we tolerate, and if we are letting clients argue about the bill constantly and not pay on time, we allow them to just kind of call us constantly and then we put that on the bill, that phone call 0.25, whatever it is, and we allow them to argue about that and dispute that all the time and so on. We are basically setting the expectation with them that that’s okay, that it’s okay for them to do that.

And when we take that away and we upfront set those expectations, calls are 15 minutes 0.25 because I have to drop everything I’m doing. I have to record some to-dos and some tasks about our call. You might think it only took five minutes, but I have to completely go off my other tasks, take the call and now do some follow up that takes 15 minutes, even though you think we only spent five just being clear about how we are going to bill them, what they get billed for and so on goes a long way. The clients will tend to stop doing some of those behaviors. We don’t like when we just make it clear that they shouldn’t be doing those. Another thing about that is a lot of the clients who don’t want to follow those expectations will just sort of self fire or whatever that term would be, self terminate. They will just say, well, look, if I can’t just kind of call you anytime night and day that I feel like it and you’re going to take my call and not charge me for it anyway, then I’ve got to find a lawyer who will and great, it’s not me. Go find that lawyer who will.

Stephanie Everett:

I agree with everything you’re saying, and I feel like it’s probably important that we talk about a little bit of maybe an uncomfortable tension here, which is on the one hand, we’re pushing firms to be choosy about who they surf, which I am on board for a hundred percent. And on the other hand, we still live in a system where there’s a lot of people who are, the legal market isn’t serving them either. They can’t afford us. I mean, there could be lots of reasons that they’re not getting this help, and so I appreciate raising our rates and being picky and this tension of how do we also make sure that people who need legal help get that help? And so I wonder, I thought maybe you and I should talk a little bit about how we can hold those two truths together.

Jeff Krause:

So the first thing I would say is that when I talk about these clients who are not paying or paying on time and so on, I’m not talking about their ability to pay. I am talking about people who agreed to pay you and now don’t want to, or for whatever reason or just not, but I’m not talking about so much their ability to pay. I’m talking about the clients you chose to take where there was that red flag and you just did it. I would also say that there’s certainly the ability to carve out a place to take those underserved clients, but you have to kind of get your house in order to be able to do that. If you are, we talk about this profit formula and we say, this is the profit, this is your bottom line. If you can’t sustain the right level of profitability, you can’t serve anyone, including those who really need it and can’t afford it. On the other hand, if you can get your financial house in order, now you can carve out a place and you can say, look, I am, and I say this again, this is really going to express the tension that you were talking about here, but it’s a choice. You can choose now to forgo some revenue, forgo what would otherwise be profitable work. You can choose to forgo that and carve out a place,

Stephanie Everett:

Understand

Jeff Krause:

It’s a choice. I always say that though.

Stephanie Everett:

I think you do both. So I think you could have that higher, let’s call it the Cadillac offering that’s at a higher price point. And if you think about the work that would say no to that, the clients who should say no to that level of work, you can offer something different at a lower price point, but the scope has to be different. So you don’t build a Cadillac and just charge, I don’t know what the Toyota price, I don’t know, sorry, car people. But

Jeff Krause:

I’ve had a Camry for years and I love it. Yeah,

Stephanie Everett:

Okay. I mean, yeah, there’s lots of good cars and all cars now I feel like are expensive. We’re shopping for a new car, and I have a lot of sticker struck right now. But anyway, my point is, and we talk about this a lot when we do alternative fee pricing and how to think about the model, you just have to build the business model so that it works. And so you can offer a lesser, less expensive product, but the scope of the work needs to match the price so that you can do it profitably. Maybe you’re leveraging technology, maybe you’re leveraging the scope of the work. You’re not offering full service A to Z representation. You’re coming in and doing a piece of the case that the client really needs but can afford at this price. So I think your points, I don’t think it even has to be a choice. It has to be a choice. We have to be intentional about the business, but it doesn’t mean that, well, I’m just going to offer the same service and charge people less or pro bono, although they certainly can, and there is a place for that too, but it’s about being intentional, I think.

Jeff Krause:

Yeah, and that’s what I’m getting at in again, that profit formula and being able to put numbers in there, you can see it and now you can be intentional about how you’re doing that.

Stephanie Everett:

Yeah, and I think the other good news here too for folks is man, it’s just easier to run your business when you’re not chasing those clients who, like you said, agreed to pay us and then don’t want to or don’t want to listen to us. I mean, they could be bad clients for lots of reasons. I mean, it could be the ability to pay or the willingness to pay could just be like, Hey, these clients aren’t listening to us. They’re not following our advice. They’re not doing what we need ’em to do. It could be, I’ve even had people say, well, I want to have all my client meetings on Zoom, and these clients aren’t willing to do it. It’s like, well, maybe that’s not your ideal client if that’s how you’re trying to build your business. There’s plenty of people out there find the ones that want to work the way you do.

Jeff Krause:

I talk about in that profit formula so much about these numbers and using data, and certainly there are ways to kind of quantify all of these things, like how many time entries do we have for the client and how many small ones. There’s all kinds of ways that you can sort of quantify this. You can look at phone records, all kinds of things, but a lot of this actually goes back to those gut feelings that Moneyball would tell you to not base your decisions on. And the simplest way to look at this is the phone rings, I see the caller id, do I smile or do I cringe? I mean, which clients these are. You just know

Stephanie Everett:

If you were going to give some folks some homework and they just said, Hey, I only have time to do one thing in the next 30 days to start applying this to my practice, what would we tell ’em to do?

Jeff Krause:

I would start with that profit formula. I would put my numbers into that, and the reason for that, it’s going to help with these things, but it’s also going to help with so many other things. Just seeing those numbers, that’s the starting point. Not only will it help with this whole idea of which clients are profitable and which ones are the best ones to work with, but what is my lead generation doing? Where are my leads coming from? It’s going to tell you so much, and I would just simply start there. That’s the one thing, more strategic plan. There’s other things that I would do there, but that is the one thing that I would start with. It just tells you so much.

Stephanie Everett:

Awesome. Jeff, thanks for coming back and being with us today and getting us started being intentional, thinking about our numbers and using this profit formula. I think it’s a great way to kick off the new year.

Jeff Krause:

Great. Thanks for having me.

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