Redwood Analytics

We've heard from a lot of clients recently on the subject of collections and cash flow.  It seems like everyone is talking about it, probably because they are concerned that they are going to be caught on the wrong side of the equation.  Having a fair amount of insight into the financial statistics of more then a few law firms, I have to say that I definitely understand why law firms are nervous.  I, and others, have written numerous articles on the dangers of aging inventory and the issues of poor cash flow management.  In my job as a consultant I have advised clients with these problems in their firms' business models.  That part is easy.  The part that is much harder is coming up with viable solutions.  Telling law firms to simply bill and collect faster is, well, too simple.  Sure a firm can more often then not send bills out the door faster, but how do you improve the pace of collections?

The obvious solution is to do what other businesses do during times like these, tighten up the credit they extend to their customers.  For law firms, that would mean demanding payment in a much more timely manner then they have in the past.  The problem with this solution, as most in the industry will tell you, is that in the legal world it is a buyer's market due to a glut of supply and diminishing demand.  In this economic climate, clients are looking for more favorable terms, not less, and if they are not given what they want, the possibility of them walking out the door is definitely an option.  So what to do?

One solution is to give a little to get a little.  What are clients looking for right now?  Better deals?  Of course.  Dependability?  Yep.  Consistency in prices?  Yes.  Firms are looking for consistent, high levels of service without nasty surprises of high bills that they didn't expect.  Sounds a lot like an alternate fee arrangement to me.

Alternative fee arrangements can mean many things, but for my purpose I will limit it to fixed fee/success fees.  Consumers like alternative fee arrangements such as fixed fees because they shift risk to the law firm and allow the consumer to forecast costs.  Historically, the billable hour pricing model has been somewhat of a "black box".  Money goes in and outcomes come out.  The more time it takes the more money the process takes.  Consumers are questioning more and more whether this process is efficient.  In fact, many argue that the billable hour is the antithesis of promoting efficiency.  I am not going to get into that argument today, but suffice to say, the billable hour pricing model is definitely more risky to consumers then to the law firm.

So, the question now becomes, why would law firms want to take up alternative fee arrangements if it means a more risky situation?  The answer is they aren't necessarily being given a choice.  In order to get much of the work they desire firms are being forced by clients to be more creative and get them more for less.  So what should law firms do?  Well, besides getting better at understanding the amount of time and resources it takes to provide the outcomes the clients want and the unit cost of those resources (both of which can be done by analyzing past situations), a law firm needs to look at where they can minimize the risks of this type of work.  One of those places is in managing inventory and cash flow.

If you, as a law firm, are giving clients more favorable terms for pricing and consistency of cost, why not turn around and use some of the leverage available to you to focus on dictating more favorable terms on payment plans?  Clients are looking for the ability to budget cash outlays; you can use this to your advantage and manage your cash inflows.  Too many law firms are hesitant to push their clients on payment issues until it comes down to crunch time and are then willing to accept payments before the end of the year at much less than 100% of the value, simply to get the dollars in the door.  Obviously deals will vary case by case, but by taking the opportunities that present themselves in these situations, firms can have a win-win scenario: winning engagements, keeping clients happy, and managing the lifeblood of the law firm. 

In the end, consumers are getting savvier and are looking to control costs in all arenas.  Those firms who take advantage of the situation and look for the opportunities that avail themselves will be successful.  It is the difference of 2 swimmers in the ocean who see large waves coming.  The first swimmer looks at the waves and hopes that he can struggle to shore.  The second swimmer grabs a surfboard and takes advantage of the opportunity.  Yes the swimmer turned surfer may not have a smooth ride all the way in, but I like his chances a lot better than the first individual, and either way, the waves are coming.