Collecting on legal bills during the COVID-19 pandemic hasn’t been easy, but fueled by a desire to fill their coffers with cash, many firms are willing to give discounts in exchange for quick payment this year.
A report by legal analyst Ari Kaplan for LSQ, an invoice funding company in Florida, and shared exclusively with ALM, found that 57% of chief financial officers and other firm executives are willing to reduce bills if they are paid early. Kaplan interviewed chief financial officers, accounting managers and other executives at 30 law firms of various sizes.
“If clients are feeling a financial pinch, the bill from their attorneys is the last one they will typically pay,” the executive director for one midsize firm told Kaplan.
Mary K. Young, a consultant at Zeughauser Group, said law firms are often providing temporary discounts or allowing slower payments in order to maintain strong ties.
“For important clients, it’s a necessity to get out in front of that early so the relationship partner is having conversations with clients about what they’re seeing, their cash flow,” Young said. “These are strategic clients where you have a strong relationship.”
Kaplan’s report said 43% of the executives he spoke with often discount rates, 40% adjust their bills to preserve client relationships, and 27% reduce them to account for excess billed time.
Seeking Liquidity Now
Kaplan, of Ari Kaplan Advisors, said his report is based on interviews from May and June, after firms went remote in mid-March due to COVID-19. By then, Kaplan said, the law firm executives had focused on cash flow and collections, particularly because firms are typically cash-poor during the first quarter of the year.
“There was a greater focus on efficiency in billing and timekeeping,” he said. “They were trying to figure out how do we enhance liquidity in the market.”
Indeed, during the first quarter of 2020, collection efforts were low—as usual—but the second quarter saw a spike in collections, as firm partners offered discounts or other inducements to commit clients to pay during the unpredictability of the spring, said Tim Corcoran, a law firm consultant. When demand didn’t drop as much as anticipated, firms “let off the gas” in collections in the third quarter, returning to their old habits, he said, adding there could still be law firm invoices from July or August sitting on clients’ desk.
Corcoran said firms will likely return to pressing for client payments again after Thanksgiving, when firm leaders urge partners to make final collections in December.
John Teixeira, vice president of marketing at LSQ, said the company’s report “validate[s] the premise that law firms have a really long time between work in progress and payment.” He said firms often don’t get paid until five months after work is done, but his company aims to shorten that time.
While two-thirds of the law firm executives generally collect fees 30 to 60 days after an invoice is sent, that is changing as clients feel financial pressures caused by the pandemic, Kaplan found.
Kaplan noted that one large firm leader said more clients are paying later simply “because they are trying to hold onto cash flow, so it is definitely going to hit everyone hard.”
More than half of the law firm executives, 57%, said getting paid has been “moderately challenging” in 2020, according to the report, and the executives were concerned that challenge could worsen.
In deciding whether to extend payment deadlines, offer discounts or both, firms are segmenting their clients more this year, Corcoran said, meaning they are letting some institutional clients such as insurance companies and banks extend their payment terms, if need be. “If they’re delayed a bit, they’re not worried,” he said.
But for smaller clients and one-off matters, firms are being more aggressive, such as sending out more calls from a firm’s accounting departments, threatening to cut off work or cutting discounts to get paid, Corcoran said.
The current discounts are likely temporary, Young said. Unlike in 2008, when Great Recession-related discounts had a lasting impact for years, the current pressures are “something that will pass.”
Still, Young noted, just how long it takes to pass is unclear. It could be another six months, or it could be 2022 before rates and billing arrangements return to normal.
And there are some adjustments that may stick in the longer term. For instance, law firms are making permanent changes to increase efficiency of services, and they’re bulking up their pricing teams so they can be more deliberate and creative with fee arrangements.
“This has accelerated some trends that were already there,” Young said.
And some client relationships may change long-term as well.
Asked how much power they have in negotiating payment terms, two-thirds of respondents to the LSQ report said they have a moderate or low amount of leverage. One executive director told Kaplan that really the main lever for law firms is turning down business, and 40% of the executives said they declined some work because the payment terms were too long or the client had a history of paying too slowly.
“In today’s economy, it is OK to disengage with a client because it may not be economically feasible to work with the client,” a chief operating officer for a 200-lawyer firm told Kaplan.
All 30 firms told Kaplan they are closely monitoring cash flow. The CFO of a 75-lawyer firm said law firms “haven’t seen the worst of it.”
Citi Private Bank found in its survey of law firm performance in the first half of 2020 that revenue grew by 5.3% on average industrywide—but when broken out by size, small firms fared much worse than the largest ones. Citi said expense cuts in the first half were helpful to firms’ bottom lines, but many were still concerned about collections and realization in the second half.
Kaplan said the fact that some firms are lifting austerity measures may be a sign that collections as part of a firm’s financial position may be stronger than expected in the early months of the pandemic.
“It’s positive, but we will see toward the end of the year what the ultimate impact is as firms push through collections,” Kaplan said.