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Lawyers tend to make a decent living off their fees… eventually. And for a lot of you out there, that “eventually” is a pretty long time. In fact, based on the latest Clio Legal Trends Report, more than half of small and mid-sized firms have bills outstanding for over three months.
And that’s not just bad for a lawyer’s finances, it’s bad for a lawyer’s client relationship.
The Clio Legal Trends report takes anonymized data from its sizable client base (at least those who opt-in to the program) to deliver a wealth of knowledge about the state of the industry every year. This year’s edition introduced a new concept for law firms to track: lockup.
Borrowing from the accounting field, lockup reflects revenue that sits either unbilled and uncollected at any given time. Clio measured three forms of lockup: realization lockup (work that’s been done but unbilled), collection lockup (work that’s been billed but uncollected), and total lockup (the sum of the other two. To get technical about it,
• Realization lockup = (work in progress ÷ previous fiscal year’s collections) × 365 days
• Collection lockup = (accounts receivable ÷ previous fiscal year’s collections) × 365 days
• Total lockup = realization lockup + collection lockup
The total lockup figures reflect a slow collecting industry, with the median lockup just north of three months. Terrifyingly, around a quarter of these firms experience lockup of around six months or more.
That’s no good for cash flow. By way of example, the report notes that a firm with $500K in annual billings sporting a 50-day lockup would have $68,500 more cash on hand at any given time.
To some extent, collection lockup is a matter of keeping up-to-date retainers and easy billing solutions allowing clients to get bills fast and pay conveniently. Which, in some ways makes this graph scarier since Clio customers are a self-selecting group of tech-savvy people more likely to have ebilling options to speed things up. So presume the rest of the market skews a little bit further to the right on this graph.
But collection lockup is also influenced by realization lockup.
This is where lockup can hurt a lawyer’s client relationship. In the opening keynote, Clio CEO Jack Newton cited the classic Foonberg Gratitude Curve.
It’s in a lawyer’s best interest to keep the bills hitting the client’s inbox as close to the “legend” status as possible. A client who has a bill in hand while still enjoying attorney honeymoon is way more likely to pay than one staring at an invoice of several thousand dollars two months later.
And the client that settles up completely before slipping far beyond the legend stage also, by definition, never makes it to “That SOB is suing me for fees.”
Generally speaking, keep all the folks who think you’re an SOB on the other side of the table.
Joe Patrice is a senior editor at Above the Law and co-host of Thinking Like A Lawyer. Feel free to email any tips, questions, or comments. Follow him on Twitter if you’re interested in law, politics, and a healthy dose of college sports news. Joe also serves as a Managing Director at RPN Executive Search.
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