Firms billing more often to combat slow-paying clients

Billing: Minimising lock-up a key priority

Many law firms plan to bill and collect more frequently to combat clients taking longer to pay as they try to reduce lock-up, a report has found.

Researchers also said it was “more pressing than ever” to develop better financial understanding throughout firms in a bid to return to profitability.

They said while 2023 was “pitched to be a bad year for law firms”, and demand did decline, “the downturn was less severe than expected”.

However, profit was down and “high costs, demanding clients and people retention challenges are creating an extremely challenging business model for law firms”.

Researchers described the “clear weakening in profitability” as “far more concerning” than the slowdown in growth.

Profits “flatlined” at the UK’s elite corporate law firms; Clifford Chance, Allen & Overy and Linklaters all saw revenue grow in the last financial year but partner profits “stall”.

Tech firm BigHand based its Annual Law Firm Finance Report for 2024 on 800 responses from finance executives and managing partners at law firms in the UK and US with at least 100 lawyers.

Just over half of firms said billable hours would remain “the primary lawyer KPI” [key performance indicator], even though the “increasing client drive for strategic advice and value for money builds on the trend we have reported in recent years for greater client demand for financial transparency”.

On lock-up, researchers said that with “improvements to both working capital and efficiency absolutely vital during times of economic uncertainty”, minimising lock-up remained a key objective.

Three quarters (77%) of UK firms reported that improving lock-up was a key part of their plans for the next 18 months.

“However, with widespread feedback that clients have been taking longer to pay, whether due to difficulties, drawn-out deals, or as a money-management strategy, firms need to urgently adapt strategies if they are to realise this objective.”

Six out of 10 law firms said write-offs had increased over the past year and they expected them to increase further in 2024.

Meanwhile, almost half of firms (47%) said “missing/late time entry and poor-quality timecards” influenced profitability – a big increase on the figure of 26% in last year’s report.

A quarter of firms admitted to “poor scoping of work with clients” or not agreeing on the scope of work.

In response, almost two-thirds said they planned to bill and collect more frequently, while just under a third planned to increase frequency of communication. Half of firms planned to train lawyers to have more commercial awareness.

Researchers said that, in the current market, “with competition overlapping between big law and the mid-market”, it was the clients who held all the cards.

“Clients have both raised expectations and become far more stringent in their approach to acquiring legal services.”

Inflationary pressures may be easing, but “the same cannot be said of client expectations” and the ability to provide “a little more information, more often throughout a matter” was not enough.

“To return to profitability it is now more pressing than ever to develop better financial understanding throughout the firm and provide the right level of timely financial information.”

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