LSQ engaged Ari Kaplan Advisors to benchmark a range of metrics and perspectives from leaders at various organizations— including CFOs, executive directors, and accounting managers with influence over their law firms' finances. Surveyed leaders reported preparing for several developments by monitoring cash flow and embracing options to strengthen liquidity. In this first part of our analysis on law firm economics, we review our survey findings related to the collection of payment for services rendered. Part two of our series covers cash flow, alternative fees, and liquidity.
Getting Paid is Moderately Challenging, But the Difficulty May be Increasing
Beyond cash flow concerns and client service, 57% of respondents emphasized that getting paid is moderately challenging in 2020. 7% described the challenge as significant and 30% called it low. “It has become more of a challenge as a result of COVID-19," said a director for a 600-plus lawyer firm. “It has become more challenging to get paid in the COVID-19 environment due to the delay. If clients are feeling a financial pinch, the bill from their attorneys is the last one they will typically pay," said an executive director for a mid-sized firm.
For some, the crisis has not affected their financial health. “We thought that getting paid would change in the current market, but COVID-19 has not materially impacted collections. Since we do a little bit of everything, it helps us in different economic climates," revealed the executive director for another mid-sized firm.
Still, the longer the crisis lingers, the more likely it is that it will present payment obstacles for firms. “The economy dictates the challenges of getting paid," advised the COO for a firm of 200 lawyers. “Once the middle of March hit, it has gotten harder to get paid," added the CFO for a 250-lawyer firm. “It is more challenging now than it was four months ago, but not that much more," offered a specialist for a 170-lawyer firm. Ultimately, “Nobody wants to hire a lawyer and pay legal bills," advised a small-firm executive director.
More Firms Are Focusing on Improving Collections Due to the Coronavirus
To establish a baseline, most leaders surveyed noted that their law firms collect payment within a month or two of issuing a bill. On average, 67% collect within 30–60 days, while 23% receive payment beyond 60 days. 10% collect in fewer than 30 days. “Some pay within 30 days, others pay between 60–90 days, and still others pay quarterly," said a director for a 55-lawyer firm.
Timing guidelines may present client-mandated barriers to early payment. “We have some clients that will only allow you to bill quarterly and then will take another quarter to pay," said the billing manager of a 21-lawyer firm. “You have clients that are your staples, who pay within 30 days, and then, there are other clients who set rules about paying later, which is becoming more standard,” added the director for a firm of over 500 lawyers. “We don't even start looking at receivables until they hit 90 days,” remarked a CFO for a 20-lawyer firm that waits three months before following up on its invoices.
63% of the respondents reported that they receive up to a quarter of their fees in more than 60 days and 20% highlighted that up to half of their fees take more than two months to arrive. The time it takes to receive payment and the amounts that are paid late may rise regardless of firm size. “We measure this on a monthly basis and it has slowed slightly in light of COVID-19, but we are ahead of last year,” advised the manager of a 65-lawyer firm. “In the COVID-19 environment, we are seeing more clients paying later because they are trying to hold onto cash flow, so it is definitely going to hit everyone hard," added a director for a large firm with hundreds of lawyers.
Others reported being more proactive as a result of the crisis. “The pandemic has motivated the timekeepers to record their time daily, which is helping collections, and we are beginning to reach out to clients when bills are 15 days late," said a specialist for a 170-lawyer firm. “The firm is using the pandemic as a catalyst to improve our billing and collection protocols, but it is just good business and should have been done anyway,” the individual added.
Ultimately, “It will be curious now because for some of the smaller businesses, who are being hit by COVID-19, shutting down, and losing customers, we are concerned about how far down their legal bills will fall as compared to rent, utilities, and food. That is now the great unknown," cautioned the CFO for a firm of 75 lawyers.
Electronic Billing Directly Impacts Collections
In addition to being more proactive, several firms reported leveraging technology for billing during the pandemic, with 80% reportedly using e-billing. “We started sending invoices electronically and the firm has been very diligent in following up on receivables during COVID, both of which have made a difference," noted a coordinator for a 250-lawyer firm. “It depends on the client and whether it is electronic or print because electronic bills are paid faster," the individual explained.
A few respondents did, however, express frustration with electronic billing. “There is a huge difference in approving electronic invoices as paper can be paid in 30–60 days, while an electronic invoice frequently rejects components, which adds significant delays. In some cases, one error can cause the software to reject the entire bill and force us to repeat the process," said a director for a large law firm with over 500 lawyers. “There has been a gradual shifting with more clients using online billing systems. Sometimes, that electronic process streamlines the approval and other times, the companies are so large that the process becomes more confused and requires resubmission," said the CFO for a 130-lawyer firm.
Almost All Respondents Work for Firms that Accept Credit Cards
The willingness to accept a small discount in exchange for expedited payment is validated by the use of credit cards, regardless of firm size or client base. In fact, 90% of the participants reported accepting credit cards, particularly for expediency in the current climate. “We accept credit cards for the convenience of our clients and in the COVID-19 era, when people are not out and about, it is even better and more convenient," said a manager for a 65-lawyer firm. “We have activated our credit card option due to the coronavirus," added a director for a firm of over 500 lawyers. “We don't want to take credit cards, but it is an industry trend due to the convenience," commented a coordinator for a 250-lawyer firm.
Notwithstanding the costs of using this payment method, most favor offering it. “It helps with collections to accept a credit card and is definitely worth the credit card fee to give someone who hasn't paid an opportunity to pay their bill," said one executive director. “I don't like the fees that we have to pay, but we do process a considerable amount of credit card payments," added another. “It does facilitate quick payment in many ways," concurred the COO for a 200-lawyer firm.
A Majority Find Early Payment Programs Appealing
More than half (53%) of the leaders surveyed work for firms that issue bills within 31–45 days. “Most of the bills are monthly and some are quarterly, but due to COVID-19, one client advised us that their net payment terms are now 180 days," reported the executive director for a firm of 59 lawyers. “We bill monthly unless the client expresses interest in something else, such as project billing that is completed at the end of the transaction," added the director for a 23-lawyer firm. “We are incredibly rigorous as an institution about cycle time and have been very diligent about reducing our work in progress," noted a CFO for a firm of 130 lawyers.
Given the time it takes to get paid, 57% would be willing to reduce their bills in exchange for faster payment and 40% are currently enrolled in an early payment program. “From a risk management standpoint depending on the credit-worthiness of a client, it may make sense to accept a reduced payment earlier. We are monitoring both clients and critical vendors given the shifting economy," said a specialist for a firm of 170 lawyers. “We generally take advantage of early payment. We will almost always take a 3–5% discount for early payment and will even negotiate when there is a large AR at year-end offering a higher discount up to 8%," said a director at a 55-lawyer firm.
Others noted that the uncertain economy is increasing their willingness to offer a discount in exchange for accelerated payment. “We are in such strange times and we are seeing bigger clients pushing for automatic 5–10% discounts," said the CFO for a firm of 200 lawyers. “We would consider it and if we had a historically slow paying client, it would be an incentive," said a CFO for a firm of 365 lawyers. “If times were tough, we would move in that direction," said a manager for a firm of 65 lawyers.
For many, a range of variables dictate whether they would consider participation in an early payment plan. “If it is a long-term relationship from which we get long-term work, we are open to that, provided they don't pay by credit card," said an executive director for a firm of 29 lawyers. “For 5% of the bills worth millions of dollars at the end of the fiscal year, there may be some flexibility," said the manager for a firm of over 500 lawyers.
Ultimately, the consensus seemed to be: “If you can remove the discussion of payment timing between the lawyer and the client, everyone will be happy. The longer the client takes to pay, the more likely you will be required to take a discount,” said a CFO for a firm of 130 lawyers. “If clients pay immediately, they are less likely to dispute small portions of the bill and we are more likely to continue to work with them,” added the accounting manager for a firm with almost 40 attorneys.
If Given, Discounts Are Minimal
60% of those who would give a discount would not offer more than 5%. “10% is the largest I have ever seen, but for many companies, the early payment option is not even negotiable so if you want their work, you need to accept their payment terms," advised the executive director for a small firm. Also, “The caveat would have to be that the bill would not be subject to any further review. If it was truly the client approving immediately, we would accept up to a 5% discount," said the CFO for a firm of 80 lawyers.
“Our lawyers are quick to markdown to get payment or to give a discount for timely payment," admitted an administrator for a firm of 20 lawyers. But, “We would not give more than 10% to incentivize someone to pay a bill they should be paying. In fact, this would not be a common practice," countered the CEO for a similar-sized firm. From a practical standpoint, “Any more than 10% would hurt the attorney's fee realization, which they prefer not to bring below 90%," offered a coordinator for a firm of 250 lawyers.
Although most of the participants preferred not to give a discount, they generally would do so, if necessary, and the uncertainty in the economy could make them more likely to do so. “It would be a dollar amount and called a courtesy discount, but that may change depending on what our AR will start to look like," said a CFO for a firm of 75 lawyers.
“If it is a problem client that is not paying, we would take a discount, and if we are faced with the difference between a problem client and writing-off our expenses, we are amenable to a discount," added a director for a firm of 23 lawyers. “The current climate may impact this so if a client can pay more quickly, we may consider it more in this environment. If we did do it, however, we would try to make it clear that it is driven by the crisis," noted the executive director for a mid-sized firm.
Bill Adjustments and Rate Reductions are Common
Regardless of who negotiates for payment, 40% of the respondents advised that they adjust the bill to preserve a client relationship and 43% noted that they often discount rates. 50% fail to collect less than 5% of their bills, 30% do not collect 5–9%, and 10% miss 10–20%.
“The lawyers that adjust their bill the most are driven by empathy for the client," said an administrator for a firm of 20 lawyers. “It would only be if the client was unhappy and we wanted to give an incentive to pay, especially if the client felt that someone was heavy on their time," added a CEO for a similar-sized firm.
Accounting for that potential of excess billed time was the reason for adjusting the bill for 27% of the respondents. “It is a mix between the ability to pay, objection to the worked amount billed, and to preserve the relationship with the client," said an executive director for a mid-sized firm. “We usually adjust the bill based on excess time because value is important to demonstrate," added a manager for another mid-sized firm. “There has to be integrity there and if you find that something was not done correctly, you need to correct it," concluded a specialist for a large firm.
With respect to discounts, “In the last decade, the business model has changed substantially due to a variety of factors, including a much more astute buyer of legal services and bringing more transactional work in-house,” observed the CFO for a 130-lawyer firm. “All the reports show a steady flattening of the demand curve for legal services with an increased supply, which will lead to a conversation about discounts, especially for commoditized matters, including employment, immigration, and other areas,” the CFO added.
For some, the discounts are automatic depending on the client, such as a municipality, or to maintain a long-term relationship. For others, it may be based on volume or to entice a new client. Regardless, “In the COVID-19 environment, attorneys are offering more discounts," stated a coordinator for a 250-lawyer firm. “We discount rates out of fear that the firm will lose the client. If we don't give the discount, we fear that our peers will do so," admitted the director for a firm of over 500 lawyers.
Despite the challenges with getting paid and the delays in payment, only 10% of the respondents charge interest on past due fees. “It is much less common because clients are more astute and refuse such interest charges," said a large firm CFO. “Theoretically, the firm would say that it does charge interest on past due fees. However, no client is typically charged for those fees," added a manager for another large firm.
That point was quite common in that many participants noted that their firms may include a provision for late fees in their retainer letters, but very few, if any practically impose them. “We say we will, but we do not," commented a director for a firm of 100 lawyers. “It is a source of discussion because our invoices allow for it, but we have never enforced it. We also don't want to be the people who are charging interest on people who cannot pay the initial bill anyway," said a manager for a small firm. A peer at a slightly larger firm echoed that comment: “Typically, for the people who can't pay us, we feel tacking on more money is adding to the hardship and at the end of the day. We feel like we would be writing off more money."
Payment Terms and Cadence Can Impact the Client Relationship
Although law firms include an array of options and restrictions in their retainer agreements, 67% reported a moderate or low level of leverage in negotiating payment terms with their clients. “In the good old days, you told the clients your rates and you led the charge, but with strict billing guidelines, everything is tight so you don't have much leverage to negotiate unless there is something unique about a case or a matter. The leverage you have is to not take the business," said an executive director. “We are pushovers,” joked a manager for a firm of over 500 lawyers. “There is no give and take. If it is a wholly unreasonable term, there might be pushback, but if it is reasonable and similar to what other clients request, we will accommodate the client.” Ultimately, “We have a good relationship with our clients and work with them on payment terms," concluded another executive director.
Still, 40% of respondents work for firms that have had to forego business because the payment terms were too long or the client paid too slowly. “In today's economy it is ok to disengage with a client because it may not be economically feasible to work with that client," said a COO for a firm of 200 lawyers. “We have cut some clients off because they just paid too slowly and were not able to keep up with the work we were performing and owed money for past work," added a manager for another large firm.
One director promoted the value of patience. “We would not let a client go because of payment terms. As long as they would eventually pay, we don't have a problem." Another firm was able to overcome its collection challenges by requiring payment in advance. “We converted them to an evergreen retainer situation where we do not perform any work until the retainer is received," said a large firm specialist.
Most Billing Professionals, Rather Than Lawyers, Are Comfortable Following Up on Past Due Bills
Law firms are proactive about following up on past-due invoices, yet the consensus was that lawyers are less inclined to do so. “Every one of our lawyers would probably tell you they are uncomfortable with following up on past due payments, but the firm generally does not have a problem with that," said a director for a large law firm. “Some lawyers are uncomfortable following up with clients about past due payments as they do not want to impair the relationship with the client. They would prefer for a collections professional to manage that process," added an executive director for a mid-sized firm. “One of the worst conversations a lawyer can have is asking a customer to pay its bill; so the billing team removes that awkwardness from the lawyer's role. If you can remove the discussion of payment timing between the lawyer and the client, everyone will be happy," highlighted the CFO for a firm of 130 lawyers.
For many organizations, this activity is a centralized function. “The firm used to prohibit the accounting team from contacting the clients and write-offs were higher, but that process has been institutionalized and has shifted the culture to characterize clients as firm clients and not individual clients,” said the CFO for a 365-lawyer firm. “I feel uncomfortable when attorneys want to do it,” joked another CFO for a firm of 80 lawyers. “Following up about a past due payment is good client service because in many cases, I will follow up with a client only to discover a problem that the client may not have been aware of or that we were not aware of. It is often more like talking to a friend than a client and it makes the relationship better when you are proactively following up on invoices," concluded a specialist for a large firm.