The latest industry research into law firm cash flow, recently released from BigHand, has revealed the full extent of law firm profit leakage and a lack of long-term cash flow process and real-time data visibility.
98% of firms confirmed they experience leakage that influences the firm’s profitability, from missing or late time entry, to lack of matter budgeting, not using the right level of resource to complete phases and tasks and discounting. Further to this, lawyers are not empowered with the information required to support their financial goals, with only 21% of partners and 13% of associates with access to billings information.
The report pulls from a survey of 800 respondents in senior legal finance roles in the UK and North America, and looks at upcoming cash flow priorities for firms around minimising profit leakage and working capital, improving billing collections and creating a culture of profitability backed by data.
Managing Profit Leakage
When it comes to controlling law firm profit leakage, the report shares the latest trends on what firms will prioritise in the next 24 months, with the headlines including:
- 29% plan to improve the visibility of financial data for lawyers
- 25% will review billing write-offs /downs and improve billable time entry
- 24% plan to review collection write-offs / downs
- 23% will review standard rate discounts
- 23% plan to put in monitoring systems to track leakage status
These process improvements look set to achieve a consistent, firm wide approach to financial client interactions and should unlock additional profit, but the speed with which firms make these changes will be key to gaining a competitive edge.
Clients want certainty – 82% of firms have witnessed an increase in client demand for financial transparency since the pandemic began. Invoices are under scrutiny with clients pushing back on what was worked, by whom, and how long it took. In short challenging invoices is the new norm.
Given the push back from clients, it is interesting to note the impact of the pandemic on cash recoverability. 48% of UK respondents said Aged Debt / AR has the biggest effect on the firm’s cash flow, while 42% said it was Aged WIP. In North America, the situation was reversed, with 48% citing Aged WIP, 41% Aged Debt / AR.
These findings underline the challenges not only in traditional cash management but also the new issues created by the pandemic – from client financial demands to the disconnect of dispersed teams working from home, finance teams must consider that new factors are influencing working capital.
People and Data
The research confirms that law firms are adding the expertise required to achieve systemic change. Adding new strategic roles to the legal marketplace is a clear indication of the shift from the ‘practice of law’ to the ‘business of law’. The results confirm:
- 64% have hired new dedicated financial analysts
- 66% of firms have hired new dedicated Pricing resources
- 25% plan to recruit a pricing specialist in the next two years
While the introduction of finance experts indicates the direction of travel, access to the required financial data is not where it needs to be.
- Only 21% of partners and 13% of associates have access to billings information.
- Just 23% of partners, and 12% of associates have access to cash recoverability data, or profitability data.
This begs the question, how are firms going to improve profit margins if individuals are not supported with actionable information? Lawyers should have access to this information at the touch of a button. From KPIs including fees, time, collections and profitability to individual client/ matter information, this is the data required to drive a commercial focus and improve lawyers understanding of profitability.
It seems firms understand this priority, however:
- 70% of firms confirm plans to implement an advanced legal business intelligence solution over the next two years.
- This rises to 83% of CEOs, reinforcing the strategic importance of getting the right tools in place if firms are to truly achieve the sustainable cultural commercial shift required to increase profitability and deliver new client value.
How does Technology help? As the research illustrates, there is a connection between the access and understanding of financial data, and a firm’s ability to improve their collections numbers, as well as control profit leakage.
A firm can add new people and change processes to help drive a desired behaviour. However, a key element to make those changes work – is adding the appropriate technology. Critically, better, faster, trusted financial information will enable law firms to deliver the additional client value that will be increasingly central to competitive differentiation and building strong, enduring relationships.
[ Artificial Lawyer is proud to bring you this sponsored article by BigHand. ]