Redwood Analytics

One of the biggest surprises to me when I began studying law firms was the lack of importance clients placed on paying for work.  I had always assumed that lawyers were the last people on earth you'd want to stiff, and had always paid any legal bills very quickly.  Some of this stemmed from a finance professor I'd had in college who told us that in "in bankruptcies, the lawyers always get paid first," and some of it stemmed from an assumption that lawyers would make my life difficult if I didn't pay for their services in full and in a timely fashion.

As most you are aware, I could not have been more incorrect.  Lawyers have absolutely no problem waiting 60 or even 90 days for payment, and if a client gets a call at that time, it's perfectly to say "I lost the bill, can you please resend?" or let the lawyer know that there were problems with the bill and that you weren't comfortable with the amount.  All this after the firm typically took 45 to 60 days from the time the work was performed to get the bill out the door. 

It is a very good thing that law firms are typically highly profitable organizations with excellent margins, as they have not been particularly adept at managing or expediting cash flow.  However, as utilization has declined, margins have been compressed, credit has been tightened, and a few large firms have imploded, firms have prudently begun to take a harder look at receivables.  Some are even going after "deadbeat clients" in a way that would have been construed as undignified, or at least a waste of time, not long ago.

It is often said that cash is now king, and while that is true in many ways, in our view cash has always been king for firms, and it is the reduced tolerance for risk, the hording of cash by their clients, combined with a flat or reduced top line, that is causing firms to look harder at the inventory management.  We see nothing but positives from this step, and while necessity is the mother of invention, we see this trend as having been a long time coming.  Redwood Analytics has studied billing and collections patterns at law firms since it was founded, and has at the heart of its analytic framework the following pillars:

• As inventory gets older, it becomes less valuable.
• There is a real cost associated with receivables and WIP, which increases with time.
• Significant increases in profits per partner can arise from small improvements in time to bill and collect.

We could expand this discussion to include the time it takes to record hours, but that's for another day.  While the current downturn appears to have sparked the focus on receivables, we're happy to see that firms are looking more seriously at grabbing the low hanging fruit available to increase revenue and profit.