Almost all larger law firms are increasing billable hours targets for their lawyers but write-offs are also on the rise, a report has found.
Almost half of firms (48%) had increased write-offs by more than 10%, “playing into the hands of clients” by failing to demonstrate the work they carried out.
“Without any doubt, the fast-rising level of billing write-offs should be sounding alarm bells.
“The break-down in communication between law firms and clients is a serious concern – one that will not only lead to rapid erosion of profitability but could also herald more significant business loss in the longer term.
“Many firms went above and beyond to support clients during the pandemic – but the current economic situation, especially rising costs, means that clients are not returning the favour.”
Tech firm BigHand based Maintaining profitability in a global recession on 800 responses from chief executives, managing partners and senior finance executives at law firms in the UK and US with 100 or more lawyers.
Almost all (98%) of UK firms said they had increased target billable hours for lawyers, 47% by over 10%.
However, almost two thirds (64%) said write-offs were increasing, almost half (48%) by more than 10%.
The biggest source of profit leakage for law firms was from standard rate fee discounts, followed by write-offs and discounting to collect payment.
Researchers said that, in many cases, firms were “playing into the hands of clients by failing to adequately demonstrate the work undertaken”.
They could improve both profitability and client relationships “by robustly addressing the causes of profit leakage, rather than focusing so heavily on increasing billable hours”.
A quarter (24%) of UK firms confirmed missing time or late entry of time, with almost as many (21%) saying the same on disbursements. As a result, they left themselves “wide open to client demands for discounting and write-offs because they cannot prove the work done on each matter”.
A fifth of UK law firms responded to this by training fee-earners in pricing practices or recruiting a pricing specialist (17%). The rates were slightly higher for US firms, but their rates of missed entries were also higher.
Most UK law firms (58%) had recruited more financial analysts, while almost all (93%) had data scientists in place.
However, researchers said solving the problem would require more than a dedicated data scientist and financial analysis teams.
“This is information that needs to be embedded within lawyers’ day-to-day operations, not held within a data science ivory tower. It needs to be up-to-date, accessible and, critically, understood.”
BigHand said firms were “beginning to provide real-time information support to lawyers, including real-time automated reporting per matter”.
A third (32%) of UK firms did this, compared to 42% of US firms. The situation was reversed when it came to financial dashboards, with UK firms slightly ahead on 34%.
UK firms were well behind on data visibility, with only a quarter (24%) saying they would improve it to gain insight into the issues that were leading to profit leakage, compared to 36% of firms in the US.
The research added: “While firms now have more data than ever before, today it is still not driving essential change. It is not being provided real-time or in a way that can be easily used by lawyers to support decisions and client discussions.
“Operational process change that addresses working capital and profit leakage is a start, but firms need to accelerate the cultural change process.
“Data visibility is not enough; action is also needed to underpin that change, enable lawyers to have a better commercial understanding and achieve timely and relevant client communication.”