With the potential delay to client payments and a reduction in billable activity during this period of economic turmoil, law firms across the market will be forced to take immediate action to maintain their cash reserves.

One of the most acute and urgent issues facing law firms in this climate of economic uncertainty is cash flow.

The UK is poised for the weakest economic growth in the developed world in 2023, according to new forecasts from the Organisation for Economic Co-operation and Development. With inflation set to reach 10% in the last quarter of 2022 (far higher than average wage rises), the resulting consumer behaviour could severely impact law firms’ cash reserves.

2022 is already proving to be a tough year for many law firms, with income falling by an average of 4% across 25+ partner firms.

As Louis Young, MD at leading litigation funder Augusta commented, “The legal industry in the UK had already started to see growth fall off before the pandemic hit. Partners are under acute pressure to monetise invoiced work, however, it may now be harder than ever for firms to extract timely cash payment from clients.”

Reducing lock-up is key to improving cash flow

Reducing lock-up will always be one of the most significant ways for law firms to free up cash.

Across the legal sector, year-end lock-up increased again in the last year, to an average of 137 days (from 125). This reflects the fact that the number of days taken to collect debts increased from 58 days to 65 days, and the average time taken to bill WIP also increased from 67 days to 72 days.

For firms involved in areas like complex medical negligence claims, lock-up can be substantially higher.

Reducing lock-up even by a marginal amount can have an immediate and positive impact on firms’ cash positions. Not only does reducing lock-up free up cash now, instilling better financial practices means firms will be better prepared for the lengthy period of economic uncertainty following the Covid-19 crisis.

A 2021 PwC report advises that, “efforts to improve WIP are often based around two key areas: contractual changes to enable more frequent billing; and efforts to automate invoice submission through technology.”

Fee earner productivity

The results from the Law Society’s LMS Financial Benchmarking Survey 2021 revealed that on average, firms use 90% of fees earned by a fee earner to cover their costs.

The breakeven point is set to increase, and, despite the impact of Covid-19, salary costs continue to rise. Overheads in many firms have already been cut back as far as possible.

As the LMS survey explains, “Fee income is driven by a combination of fee earner numbers per partner (fee earner gearing), chargeable hours recorded (productivity) and recovery rate achieved per chargeable hour.”

While fee earner gearing is an important metric when the industry is growing, Covid-19 meant that firms have had to look much more closely at fee earners’ capacity for chargeable work and the availability of that work. It stands to reason that the greater the productivity and recovery of fee earners, the higher the income.

Fees per fee earner is a key issue for all firms to focus on, and alongside this there needs to be close monitoring of productivity and recovery rates. If fee earners are not fully time recording both chargeable and non-chargeable time, then it is very difficult to know whether work is being carried out efficiently and profitably.

A 1% improvement in productivity represents just one additional 6-minute unit per fee earner per day.

How to reduce lock-up at your firm

Billable activity and profit need to be converted into cash quickly during these uncertain market conditions. As Smith & Williamson found, reducing lock-up requires a combination of a change of culture and investment in the right technology. Here’s how law firms can reduce their lock-up period.

Understand your data and set targets

The first step to improving lock-up is to understand your own data, set clear targets and monitor performance. The goal can be simple, for example: the time it takes clients to pay invoices after issuing them. Some technology tools give you access to this data in real-time.

Change business practices

While there are some quick wins to be had using technology, ultimately to reduce lock-up you need to change firm culture. Your action plan may include the following:

  • Educate your partners on the importance of lock-up management in a post Covid-19 world.
  • Develop a new culture around time recording. Set time recording targets as part of associates’ appraisals, and continue to withhold drawings if cash collection is not sufficient.
  • Improve client communication. Ensure you are keeping them updated regularly on WIP vs your quote.
  • Consider staggered invoicing. If a piece of work is going to cost a client £15,000 over six weeks, consider sending three bi-weekly invoices of £5,000. Small changes to standard practice, such as raising bills as soon as the work is complete, can make a big difference to how soon your firm gets paid. Moving away from billing at month-end to billing across the month can also result in clients paying a full month earlier. A client who is happy with the outcome of a case may well pay more quickly if they receive the bill promptly.

Use technology

There are now a growing number of technology tools which can help you reduce your lock-up period. These range from lawyer-facing technology like billing software and time recording, to client-facing technology, like online payment tools.

Legl found that 50% of clients pay their invoice outside of office hours, and that when firms include a link to pay online with their email invoices, clients paid on average within 8 hours. Offering clients the option to pay online means firms get paid faster, while giving their clients a more frictionless and modern payments experience.