The challenges presented by the global pandemic have forced law firms everywhere to take a long hard look at the health of their cash flow, with particular attention on liquidity at this time.

Last week we addressed the current significance of cash in the bank, and how getting the basics right with service delivery and billing should be a top priority to achieve better cash realisation. Taking a step further, what other proactive measures can firms take to help their clients to settle their bills at a time when cash really is king?

What can be done?

A recent Gartner survey[1] of 99 CFOs and finance leaders revealed that concerns about the big picture implications of the pandemic have grown to tie cash flow worries as the top concern cited by respondents.

It’s easy to assume then, that legal finance teams will soon be tasked with implementing new ways to ensure law firm clients can settle their bills in a timely manner.

The best methods for this are being frequently debated in the industry. If clients apply pressure for rate relief in the near-to-mid future, law firms could consider any of the following options, and consequently add value to the client relationship:

• Alternative fee arrangements like fixed fees or capped fees
• Discounting standard rates, flat discounts or early payment discounts
• Upfront billing or billing on milestones
• Extended payment terms

These methods are not new, and now is a great time to be putting previous theory into practice. But law firms should be strategic with their approach to applying discounts to different client verticals and legal work types.

Questions should be asked such as, what do the clients themselves want? And do they actually know yet? What verticals need more help now, and which will need more help in the mid-term as the impact wave rolls through the economy? Which will recover fastest and restore back to previous ways of working? How are payment approval times likely to vary?  Sadly, the impact of the economic downturn on many businesses will also call for more rigorous credit checks to also be applied.

It’s clear that a tailored approach is needed but being ahead of the competition could be a key differentiator as the fight for new deals grows in intensity. Having clear-cut communication with clients is valuable too. Encouraging open conversations throughout a matter on current progress, scope creep, or any over-runs, rather than waiting to the end, will give the client more transparency, overall confidence and ultimately decrease the risk of write offs.

Your side of the deal

Alternative fees, discounting and extended payment terms are all enticing ways to win new business and ensure timely payment, but they cannot be considered in isolation. Monitoring profit leakage throughout a piece of work is also vital, as is having the discipline to ensure the leakage in minimal.

Applying rate relief is all well and good, but this should only be done if the work will still be profitable at the end – even if that profit is likely to be marginal given the current circumstances.

Factoring in any change to a commercial offering will have an impact on a firm’s cash and profit position, whether that’s the value itself, or the time to realise it. Consideration and analysis must be applied to ensure that what may seem like a great client incentive is not replicated widespread within a business to the detriment of the balance sheet.

If a piece of work is underpriced at the outset, poorly scoped with use of highly skilled staff for mundane work, and includes a certain amount of billing write-off, it’s pretty obvious that the work is unlikely to be profitable, and might even have the opposite effect on the bottom line.

To add to this, clients will inevitably apply pressure for billing transparency as a result of the economic downturn. To overcome these challenges, law firms need to ensure they have complete visibility and control of their working capital and costs.

In our recent survey of 257 senior law firm finance professionals, we found that in the UK, 37% cited underpricing work initially and poor scoping of work up front with customers (32%), as having a major effect on the firm’s profitability.

In the US, the results showed that billing write-offs/ discounts (44%), avoiding difficult conversations with customers for disputed bills (35%) and discounting to collect payment (35%) were all underlying process issues. These findings are even more relevant now. With more pressure than ever for cash realisation of bills – full financial transparency of pricing, scope, and payment is a must.

The underlying problem often comes back to a lack of up-to-date financial insight that is backed by reliable data. For law firms to successfully implement rate relief for clients, while ensuring work remains profitable and bills are paid on time, visibility of the fundamental data is needed to support collaboration across finance teams and lawyers, and should remain a top priority.  

Working capital visibility

In response to feedback from our clients, we have developed an easy to deploy Working Capital Edition of our flagship financial BI Solution - BigHand Business Intelligence. The firm-wide dashboards highlight the most important WIP and Debt metrics for better financial visibility to support business decision making.

To find out more about this new solution and how BigHand can get you up and running in a matter of days, visit: Business Intelligence Working Capital Edition

 

 

[1] Gartner, Inc. survey ‘CFO Actions in Response to COVID-19’