Law firms have reported strong financial performance over the last 12-18 months in respect of both revenue and profits. Further challenges posed by Brexit aside, the sector is well placed to keep up this momentum in the medium term.
How important is lock up and cash to fee earners of law firms? The answer to this, at least in the past, would seem to be not too much. Lock up has always been an unwelcome item on the agenda for fee earners. The unsolicited guest at the dinner table. The cast-aside task niggling at one's conscience, but provoking, at best, a cursory head glance; a sheepish acknowledgment.
That was until the Spring of last year when all things changed, at least temporarily. The uncertainty that accompanied Covid-19, and what it held for all sectors, prompted a different response to lock up. Cash moved higher up the agenda and law firm culture seemed to change. Partners and fee earners were chasing and getting the cash and this made a big difference to their firms’ lock up days.
The change clearly shows that when it counts, the sector can drive change. But can this focus on lock up be sustained? Can law firms drive further improvements in working capital management?
The case for change
Like all industries, the legal sector is not removed from change and firms are responding. Investments are taking place into new technology, along with operating and delivery models.
ESG capabilities are being boosted. All of this needs to be funded, and building the case to change lock up around such elements is motivating. Equally a number of more sector specific areas that require funding that can be tied very closely to lock up improvement are set out below:
- Timesheet technology - Software that tackles late and inaccurate timesheets by analysing and ‘learning’ the way each lawyer works to create detailed timesheets of their weekly working hours automatically, leading to quicker and more accurate billing.
- Predicting cost - Technology that forecasts project costs supports fixed fee offers to clients who are more sensitive to billable hours. Again, this should support routine and accurate monthly billing.
- Tax reforms - Government regulatory changes could see tax liabilities, which businesses and their partners are currently able to defer by having a later date for the end of their accounting year, be brought forward leading to a significant cash outlay that again requires funding.
The best things in Lock Up are free
Law firms will need cash in order to fund future investments. Surely the best place for this is to change working capital management practices. Reducing lock up and improving that cash flow would be a free source of funding.
We set out below five positive things that some law firms have been doing to promote improvements in working capital management:
- Penalising sloppiness relating to timesheet and billing inaccuracy. This is wielding the stick in the right way, putting a simple task higher up a fee earner's agenda. Rather than naming and shaming, practice level fines that impact bonus pots are typical.
- Managing Partners and practice heads that reinforce the message and lead from the front is essential - it cannot only be finance team led.
- Practice and firm-wide Lock Up leaderboards tap into the competitive nature of a firm and supports change.
- User friendly collections interfaces are effective. The leading front end collections software make life easy for Finance and Fee earners alike to follow up on overdues with tailored strategies and are relatively simple to implement.
- Electronic Data Interchange (EDI) supported billing can be worth the investment for large clients. The key is choosing the right provider who is experienced both in the legal and client sector.
Sustaining positive working capital momentum that has been achieved over the course of the last year would be a terrific turning point for the legal sector and would open up considerable opportunities to lead from the front as the world looks to charter a new course.
*The views expressed are the author’s and not ICAEW's.