Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. Today, we look at how law firm management can help partners make the collections process less confusing and damaging to a firm’s bottom line.
At least here in Chicago, the golf season is coming to a close. Which means there will be less confusion and argument among friends about who owes how much. Golf bets are notoriously ill-defined, and too often the winners don’t get paid.
Getting paid for legal work should not be like winning a golf bet.
Sometimes it might feel that way though. Asking clients to pay up can be uncomfortable. Explaining to management that a bill will go uncollected is probably even more so.
But, really, Big Law collections are worth talking about—even if the market for legal services seems to be humming along nicely in 2019.
The solid performance of law firms (at least until a possible recession) was drilled home last week with a report from Wells Fargo Private Bank’s legal specialty group. The survey of 132 firms said revenue grew 5.3% through the first half of the year. Wells Fargo became the third major industry analyst to conclude that while law firms might not shatter revenue records this year, they are putting up very respectable numbers. Citi Private Bank’s survey said revenue grew 4.1% from a year ago and Thomson Reuters Peer Monitor Index said demand among the Am Law 100 rose 1.6% quarter-to-quarter.
Unfortunately for firms, what the three studies also had in common was bad news about collections.
Wells Fargo said realization rates fell half a percent from the prior year. Thomson Reuters said firms collected 89.2% of the bills clients had agreed to pay, which was at least the third consecutive quarter of declines. Citing a lengthening collection cycle and pressure on margins, Citi noted that “collecting on increased inventory levels will be key.”
Sure, the quarterly changes are small. And there have been rate increases counteracting the drop in collections. But declining realization is a long-term trend that has a pernicious, often unspoken impact on law firm finances. I wrote earlier this year that discounts and write-offs could have impacted as much as $4.4 billion in Am Law 100 revenue last year. That would be enough to cost every Am Law 100 partner $200,000 in annual profit.
There’s been a large drop since the end of 2007, when the collected realization rate for Am Law 100 law firms was more than 92 percent, according to data from Thomson Reuters’ Peer Monitor Index. In the first quarter this year, the biggest firms collected just shy of 80% against their standard rates, index data says. One slight bit of good news: That figure rose in the second quarter to 80.4%, according to a Thomson Reuters spokesman.
Tom Clay, a principal at law firm consultancy Altman Weil, said much of this collection leakage results from poor communication and billing practices between partners and clients. Lawyers and clients need better planning when a matter begins and when a bill is sent out, he said.
Too often, Clay said, partners fail to discuss with clients what they expect a matter to cost, what might drastically alter the scope of an engagement, or how quickly they expect to be paid. They then fail to manage the hours associates or other partners work on matters, which can lead to writing off large portions of a bill, he said. Increasingly, that rigor is being imposed on law firms by way of outside counsel guidelines. Failing to adapt work practices to those can also be costly.
“It really is two major parts of the financial management systems that are still not well-done and rigorous simply because most lawyers don’t want to be held accountable,” Clay said. “So you can keep raising rates, but if you can’t bill it and you can’t collect it? It’s ridiculous.”
In an effort to combat write-offs and unpaid bills, some law firms have limited partners to only trimming 5% of a bill, Clay said. Others transfer the cost of unpaid associate hours to partners—punishment for failing to properly manage a project.
Ultimately, lawyers would get paid more if they did a better job of describing the rules upfront and tracking their work as matters progress.
“This isn’t sexy stuff,” Clay said. “This is fundamental, nitty-gritty hygiene.”
Bringing some of that rigor to golf wagers wouldn’t hurt either.
Worth Your Time
On Law Firm Secretaries: Morgan Lewis is offering a buyout package to all its U.S. secretaries. The firm said it has no “current plans” for layoffs if too few secretaries take the deal, which reportedly allows them two weeks’ salary for every year of employment.
On Legal Tech Investment: Investment in legal companies this year has already topped the $1 billion seen last year, Bob Ambrogi writes. It’s only September, and he says more than $1.2 billion has been poured into more than 40 companies.
That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.