Year end is critical for law firms looking to collect on bills, but the process is becoming less tidy and quick as clients are more likely to challenge what they’ve been asked to pay.
Firms have seen lagging collection times as corporate clients increasingly speak up in efforts to control spending and even use automated systems to check every service and item that firms charge.
“Law firms have been telling us that the slowing in collections is less about a slowdown in the firm sending out bills and increasingly more about the client slowing payment,” Gretta Rusanow, head of advisory services for Citi Private Law Firm Group, told Bloomberg Law.
The latest law firm industry survey from Citi and Hildebrandt Consulting found that the collections cycle from law firm bill to client reimbursement has lengthened this year.
Corporate clients have been cracking down, holding firms to the letter on issues like paying for legal research or the number of attorneys working on a matter. And they routinely reject a charge that falls outside their guidelines.
“If a firm’s bill keeps getting rejected, the firm on average can lose 20 percent of its original billing amount,” Gabriela Isturiz, the co-founder of Bellefield Systems, an electronic billing company with some 800 clients, including big firms like Nixon Peabody and Alston Bird, told Bloomberg Law.
This lag time also creates a headache for firms as they make compensation and budgeting decisions, which are often based on revenues and profits.
Tailoring Bills to Clients
Firms with dozens or even hundreds of clients bump up against the need to tailor their bills to fit client requirements, which can vary greatly. Corporate clients often have their own billing review software, but generally law firms are behind in adopting electronic systems to automate their compliance and hasten the billing process.
“It’s typical for large in-house law departments to have legal operations and procurement determining pricing, engagement and the rules around what will and won’t be approved for payment,” said Rusanow.
Corporations love electronic compliance systems because “they promise better budgeting, more organization and insights, and better understanding of legal department spend,” said Isturiz, who also co-founded eBillingHub.
Mark Smolik, general counsel for DHL Supply Chain, said electronic compliance has brought keener scrutiny to outside legal services.
“Legal used to be a bit off limits, and there was no control whatsoever,” he told Bloomberg Law. “But now we know exactly what we are getting if there is a bill for $1,000 an hour.”
Competition among firms and with alternative legal providers has given corporate clients increasing control over the way firms conduct legal matters. And by laying down strict rules, clients can save considerable money on their legal bills.
Enforcing the corporate guidelines for legal spending “can reduce a company’s costs by as much as 25 percent,” Isturiz noted.
Legal Services as a Business
And more corporate law departments are expanding, with nearly 40 percent employing someone to manage operations, according to a 2018 Altman Weil survey.
Clients look at legal services more like a business, said Toby Brown, chief practice management officer at law firm Perkins Coie.
“There’s a set of corporate guidelines coming across my desk almost every day,” he said. “More clients are asking for budgets. Some are asking that we meet certain deadlines for turning in the invoice or have a percentage discount taken off the bill.”
But in the current rosy market where law firm business is growing — at least for now— slow repayment may not as pressing as it would in tighter economic times.
“Some firms are still printing invoices for partners to edit in red pen before they are submitted to clients,” said Isturiz. “The firms are not always consulting the guidelines so bills are getting kicked back for non-compliance, payments are delayed, bills are appealed, fees reduced and write-offs are the result.
“It’s a drain on law firms, and it directly affects collections and top-line revenue.”