Law Firms Concentrate on Getting Paid
Alana Roberts
Daily Business Review
Katzman Garfinkel has gotten serious about making sure the firm's attorneys keep track of outstanding bills.
The 37-lawyer firm adopted a new approach to collections this year in its computerized system that tracks billable hours, said Donna Berger, managing partner of the firm's Fort Lauderdale, Fla., office.
When an attorney or a staff member enters the number of hours worked on new assignments for existing clients, an alert pops up to highlight clients that are more than 60 days delinquent in payments.
"We started keeping a closer eye on the receivables," Berger said. "When you go to input billing and you see somebody is 60, 90, 120 days delinquent, you follow up with a phone call, or you maybe don't take on a new matter that's going to require a lot of labor. It helps significantly at least to know your attorneys and staff know what they're dealing with, that they're not operating in the dark."
Lax attitudes toward collections may have been acceptable at law firms during fat economic times, but those times are over, said Bill Brennan, a consultant with Altman Weil.
"Law firms are notorious in terms of waiting until the end of the year to concentrate on collecting receivables," he said. "Many law firms have gotten better at this in recent years. It's still a problem for many."
Many firms fell into bad habits.
"Lawyers train their clients as to when they want to be paid," Brennan said. "If every year they delay collection efforts until October and November, they are training their clients that they don't have to pay in the first half of the year, and they don't have to pay promptly."
But during slow economic times, the problem is more acute.
"During a recession, cash is king," he said. "Clients tend to hoard their cash, which means they delay payments to vendors, which include lawyers -- the result being significant slowdowns in collections for law firms, which can cause serious cash flow difficulties."
Laura Kaplan, regional market manager for Citi Private Bank's law firm group, said some firms are pushing for payments earlier than in years past.
"There are some firms starting their collection drives sooner," she said.
Tougher times are calling for tougher measures, said Alan Becker, managing partner of the 115-attorney Becker & Poliakoff based in Fort Lauderdale.
The firm imposed a 12 percent pay deferral on all attorneys. He said the firm imposed the two-month holdback in May to help meet its revenue goal of $62 million for 2008.
Firm leaders became alarmed when they noticed the percentage of outstanding receivables older than 90 days had jumped to 44 percent, Becker said.
Fourteen attorneys left the firm because of the holdback, but Becker said the program was successful in keeping the firm on track while also avoiding layoffs and borrowing to pay for recurring expenses like salaries and rent.
"We had to respond to that, which we did and very effectively so that by the end of July, that over 90-day [amount] had receded back to the lower end of our historical norm for 90-day account receivables, which is 38 percent," he said.
The firm had a concerted effort to get bills paid.
"You hope that attorneys will always be cognizant of what their clients owe," Becker said. "We had one of the partners meet personally with each of the attorneys to discuss their high accounts receivable and what plans they were making to call the clients and make arrangements to be sure it was paid."
Berger said her firm decided to require fee retainers for clients with poor payment histories and some new clients.
John Sumberg, managing partner of Miami-based Bilzin Sumberg Baena Price & Axelrod, said his firm is asking for more retainers from new clients, is more carefully screening new clients and is more vigilant about tracking payments.
"We have spent a lot of effort on client intake, really reviewing the clients and screening them, and I think you have to increase that vigilance and those efforts in these economic times," he said. "We don't let clients get behind and then try to round them up."
Dan Casey, managing partner of the Miami office of K&L Gates, said his firm has not faced a surge in clients with outstanding receivables but watches its money.
"We try to have periodic cleanup periods for clients that might be lagging a bit, and I try to do it quarterly," he said. "If in fact there's someone [where] we have fallen off their payment radar screen, we try and make sure that we touch base with them periodically and make sure there are no problems with their perception of our services and explain to them that we need to be paid like anybody else."
Casey and Sumberg said they have no formula for pursuing collections.
"Our analysis is more detailed than simple formulas," Casey said. "There's no one size fits all. We monitor it pretty much weekly. We know where every dollar is outstanding and why."
Sumberg said his firm typically follows up with clients with bills outstanding longer than 30 days, but he said the firm deviates for some clients.
"It's not like we have a target," he said. "Each situation is different."
Kaplan said her bank's law clients increased the use of their lines of credit in the first quarter compared with a year before. She said the demand is likely due to slower-paying clients and a need for stopgap funds.
"Borrowing is up significantly, which tells us two things: Firms are investing tremendously in new cases, which we know isn't necessarily the case, or collections aren't coming in," she said.
But she said she's not concerned at this point.
"As a lender you start to become concerned when your clients can't pay back their debt or when the pay-down takes longer than it used to. We're in no place where we're uncomfortable."
More frequent billing is appreciated by some clients. Charles Grimsley, general counsel of Miami Gardens, Fla.-based United Automobile Insurance Group, said he prefers to be billed on a monthly basis to allow him to keep a closer track of fees.
Joseph Altonji, a consultant in Hildebrandt International, said clients in places like Florida have felt the weight of the slower economy more acutely because of the intensity of the state's housing downturn.
"Florida has some issues because of the real estate challenges down there," he said.
Real estate plays a prominent role in the practice group mix of Katzman Garfinkel, Becker & Poliakoff and Bilzin Sumberg. But Sumberg said that doesn't mean real estate clients are riskier than others.
"It's not that simple because we have a clientele of very sophisticated, very strong real estate investors, developers, entrepreneurs who I'm not worried about at all," he said. "It's just not as simple as saying you've got to worry about the real estate industry. You really have to take it client by client."
Law firms are at a disadvantage if they push for payments while increasing their hourly rates, and they are facing pressure from general counsel to implement alternative forms of billing, Brennan said.
But south Florida general counsel say they've had mixed responses to requests for alternative forms of payment.
Grimsley said his firm, which handles auto insurance claims, pushed for alternative billing in the past by offering a flat rate for litigation work and tying fees to case resolutions. But he said the company hasn't done that in three years.
"Law firms are reluctant to do it because it may be difficult to get a lawsuit resolved in an expedited manner," he said.
Grimsley's company works with 12 firms and uses six of them on a regular basis. The law firms typically seek rate increases every couple of years. When they do, he scrutinizes bills and refuses to pay for charges that he deems unacceptable.
"I generally go along with it unless there's some other aspect to it that I might want to address with them," he said.
Grimsley recently refused to pay a $10,000 bill for document organization work performed by paralegals. He said the work should have been performed by legal secretaries billing at half of the $80 an hour rate he was charged. He said the firm complied with his demand.
"Law firms don't want to antagonize the general counsel of a long-term client with whom they have a long-term relationship," he said.
Brennan said law firms around the nation are likely to see only modest gains in billing rates because of client resistance.
"I think that the rate increase in 2009 will be modest compared to the prior five years," he said.
A National Law Journal survey of law firm leaders indicated average billing rates for partners and associates grew 7.7 percent, and firmwide median rates jumped 7.1 percent in 2007 compared with 2006. The survey also showed 75 percent of respondents increased their rates last year, down from 79 percent the previous year.
Bruce Jordan, senior vice president and general counsel of Coral Gables, Fla.-based Fresh Del Monte Produce, said his company is seeing the increases. The company works with 30 outside firms worldwide.
"However we also seek to negotiate discounts with the firm and try and maintain the discount," he said.
*reprinted with permission (2008)
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