Big Law’s Collections Practices Are Leaking Major Revenue

Law firms all across the Am Law 200 and below are losing between 15% and 25% of their total potential revenue to inconsistent and informal collections practices, industry sources say, and the problems are varied enough between both firms and individual partners that there is no “one size fits all” approach to improvement.

Due to a series of revenue leakages at every step of the billing process, which compound at the collections phase, firms of all sizes, including some Am Law 50 firms, lose substantial revenue to improper timekeeping, self-imposed discounts, late payment from clients and more.

Being more selective with clients and practice areas is one of the main steps firms are taking to address their revenue leakage from collections, sources say.

Big Law’s collections problems are even more apparent this year. Overall realization rates dropped slightly from Q1 to Q2 this year, according to Thomson Reuters’ Law Firm Financial Index, published last week.

The collections cycle in the first half of the year lengthened by 1.1% relative to the first six months of last year, according to data from Citi’s Global Wealth at Work Law Firm Group.

Gretta Rusanow, head of advisory services in Citi’s law firm group, confirmed that some of that may be because clients are holding onto cash as a money-management strategy in a higher-interest-rate environment.

The growing complexity of e-billing systems, as well as a build-up associated with transactions that have been “on ice” due to market volatility and seesawing tariffs, is also contributing to the longer collections cycle. ”If the bill doesn’t get paid until the deal closes, you have this build-up associated with deals waiting to start up again, and waiting to close,” Rusanow said.

Longstanding Problems

While some collections may be on hold because some deals aren’t closing this year, law firms have also been losing revenue due to a string of long-term issues that experts in the industry say many big firms have yet to resolve.

David Schaefer, managing director of legal industry consulting firm Calibrate Strategies and former deputy chairman at Loeb & Loeb, said issues with collections often pile up and cause major revenue leakage when left unaddressed.

“It’s like walking into a room in your house and you see that little brown spot on the ceiling, you know?” Schaefer said. “You think, ‘Yeah, maybe there’s a leak in the roof. I should have that checked out one day.’ And maybe you don’t notice it, but it’s getting a little bit bigger. It’s hard to really tell. And then all of a sudden, a piece of your ceiling comes down.”

Every firm has a unique set of circumstances guiding its billing and collections processes, but sources say the vast majority of firms are generally dealing with the same archetypal issues that are causing revenue leakage in the hundreds of thousands of dollars.

Chief among those consistent issues is poor “billing hygiene” by attorneys, according to Brad Rogers, chief executive officer of billing services firm Zenvoice. Rogers said many law firms struggle to accurately bill for their services because partners and associates fail to properly record the hours worked on a given task.

Additionally, the billed hours are often discounted by the firm itself before they are sent to a client for collections, sources say. These discounted rates are often further reduced as clients negotiate after receiving their bill, Rogers said, adding that many times there are discrepancies in firm invoices that clients are left to find in a “cat and mouse game” that costs time and money to resolve.

“Send clean bills in the first place,” Rogers said. “Second, eliminate the days’ sales outstanding, or the delay between setting an invoice and getting paid.”

Holding Partners Accountable

Long delays in payment from clients are also a frequent problem for firms, sources say. Schaefer said that firms regularly wind up accepting less than the total outstanding balance on a bill for a client when the end of the year rolls around and partners are looking to get paid in a timely fashion.

Partners can also be part of the problem when it comes to collecting from clients, according to Zeughauser Group consultant Kent Zimmermann. Law.com recently reported that some firms have been holding back raises for partners for among other things not meeting collections goals.

Zimmermann said that partners need to be “held accountable” for submitting bills to clients in a timely fashion and making sure those bills are paid expeditiously.

“In some firms, partners are not held accountable enough for making progress on outstanding collections during the course of the year,” Zimmermann said. “Some firms have too light a touch on that, or virtually no touch on that. They’re permissive of partners who have large outstanding AR [accounts receivable]. That would be a major inefficiency.”

Shoring Up Collections

Many of the inconsistent and informal collection protocols that even the biggest firms sometimes follow can be traced back to when they were founded, Gradient Legal Consulting managing partner Ed Estrada said.

“When you think about like old-time law firm partnerships 50 years ago, they would do the work, they’d send it out, and they would probably get paid, you know, fairly promptly,” Estrada said. “It was kind of a personal relationship. But they didn’t have a professional collections team. They didn’t have a professional billings team. You’ve seen that carry through to some of today’s highest performing firms, even in the Am Law 25.”

A major step toward shoring up revenue leakage would be for some firms to create an official collections department internally rather than leaving it to partners, Estrada said.

Some firms are already taking steps to cut down on revenue leakage from collections inefficiencies, but “the best days are still ahead” for the legal industry in that area, Zimmermann said.

“There’s room for improvement [in collections] in a very large group of firms, that’s for sure,” Zimmermann said. “Some firms are making progress. The ones that are making progress are generally decreasing the percentage of collections that they have at the end of the year.”

He added that there is no “one size fits all” way to address collections inefficiencies, but being more selective with clients and having a firmer hand on the collections process internally are steps some firms are taking to start.

Coverage-related practices for insurance companies and single-plaintiff labor employment matters tend to come with more headaches at the collections phase, Zimmermann noted.

Schaefer said that the decision on which practices to pull back on or dive deeper into is based on “profitability and not just realization.” The profitability consideration factors in long delays in payment, discounts and other factors in addition to the expected dollar amount associated with the work, Schaefer said.