Past Due: The Discomfort of Collections in Law Firm Billing

A study of challenges and opportunities facing the business of small law firms in billing realization.

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Executive Summary

Most small law firms wrestle with past due accounts. More than 73% of small law firms surveyed say they experience past due client accounts at least some of the time. More than half (52.9%) say between 10% and 39% of their total client base is typically past due.

Client financial hardship often the source, but so too are business processes. Small law firms overwhelmingly (82.5%) cite client financial struggles as the principle reason clients allow law firm invoices to elapse past due. However, there were notable indications to suggest client communication, value appraisal and sluggish law firm business process are significant contributing factors. Nearly half, (45.6%) put the chances of collecting on invoices that are outstanding for 90 days or longer at “unlikely” or “very unlikely.”

Write offs and billing discounts pervasive. A majority of law firms surveyed (71.2%) report providing discounts or writing off legal work even before invoicing clients. Interestingly, an analysis comparing law firms that “always” and “never” provide discounts appears to show a correlation to past due accounts: Those law firms that reported never providing discounts on legal fees also reported substantially lower percentages of clients who allowed legal invoices to become past due.

Invoicing and billing takes eight hours per month. Most small law firms (61.5%) reported spending about eight hours per month on their billing process. In addition, nearly a quarter said they spend up to 16 hours per month, which provides a useful benchmark for about how much time small law firms should spend on billing. Interestingly, more than half of law firms (58.3%) felt they were already spending too much time on the billing process.

Despite tools, small law avoids client analysis. More than 80% of small law firms report having a standardized billing process and use technology to manage invoices. A majority of law firms (66.7%) also use software with integrated invoicing and billing – tools that often come with reporting features for analyzing a client base – but do not seem to be using those features to identify trends or distinguishing factors between clients that pay legal fees on time and those that do not.

Sentiment: Lawyers dislike asking clients for money. Open-ended comments express the notion that lawyers enjoy practicing law but find financial conversations uncomfortable. For example one lawyer at a small law firm cited “the discomfort of past due billing discussions,” and that seeking payment for legal services rendered “makes me feel greedy…even if I know I've earned the fees charged, it is still an unpleasant task.”

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Past due legal bills are a fact of the law business

Asking a client for money can be uncomfortable but the data suggests following up is a routine part of the business of law. More 73% of law firms survey say clients accounts are past due at least some of the time.

For some law firms, the challenge is greater than others – nearly one-fifth (19.4%) of law firms report clients are

past due “most of the time” or “always” which is an astonishingly high figure. On the other end of the range, 26.8% report clients are “rarely” or never” late. Later in this report we’ll explore why.

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How healthy is a law business with 20% of its invoices outstanding?

What percentage of a law firm’s client base is past due? About half (46%) say its less than 10% however the more than half (52.9%) of law firms are managing client accounts where between 10% and 39% are past due.

To place this into financial context, consider the cash-flow

impact on a law firm where 20% of its client accounts are past due. For some law firms, the problem is even higher as 9% of law firms reported 40% or more of their client base is typically past due on legal fees.

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Client financial struggles or process improvement?

Overwhelmingly (82.5%) law firms point to client financial struggles as the primary reason client legal bills become past due, but there are indications several other factors come into play. Law firms cited communication (21%), value (21.4%) and law firm sluggishness in publishing invoices in a timely matter (15.2%) as part of the problem. Notably, twenty-two percent of respondents answered the

optional open-ended answer on this category and those responses are shared on the next page.

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Past Due Clients: Law Firms in Their Own Words

The following is a representative sample of the 22 responses to the open-ended answer option on the previous question.

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“Attorneys have a problem asking for money after the retainer and throughout the process of working,” wrote one paralegal in the open-ended comments section of the previous question.

However, this respondent also indicated a sense of entitlement stemming from clients. “Clients have a view that every attorney is rich…clients think ‘I paid enough.’”

“Forgetfulness” was another term that was frequently cited in open-ended responses, as well as a client attitude that might be well characterized as laissez faire in paying for legal services rendered.

“Client doesn't prioritize legal bill as something to pay,” wrote another respondent.

Law firms that perform legal services on behalf of other business also cited corporate vendor payment processes or policies. For example, “The client's bill approval process is too complex and not efficient,” said one respondent. “Corporate clients whose internal bureaucracy slows

things down,” according to another.

Several respondents also pointed to poor law firm billing processes. A representative (verbatim) sample of these answers included:

Invoices not sent regularly.

Poor tracking of fees and services.

Bills sent too infrequently and often reflect larger than expected invoice for client.

Inconsistent billing...too caught up in practicing law so I don't do consistent billing.

Case is over and people choose not to pay.

The attorney did the work without taking a large enough retainer up front.

Technical errors in bill format for complex billing guidelines.

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The slim chance of past due collection

About half of small law firms (45.6%) put the chances of collecting fees for invoices that 90 days or older at “unlikely” or “very unlikely.” About one-third (35.3%) are somewhat more optimistic – reporting it’s “somewhat” likely they will be able to collect on past due invoices.

Finally, another fifth (19.1%) are quite optimistic putting the odds of collecting a bill more than 90 days late at “likely” or “very likely.”

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Client analysis and problem solving

Since realization is such an important part of business, we wanted to understand what law firms were doing to address the problem of collecting past due legal bills.

One technique is to analyze the client base to look for trends among clients that are in good standing or to identify underlying causes of clients that are routinely late. Understanding the client base places a law firm in a better

position to pursue clients with tendencies to remain in good standing. However, the majority of small law firms (72.2%) are not performing this analysis and it may represent an opportunity for small law firms to improve the strength of their business and new business development pipeline.

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Discounting invoices a common practice

A majority of law firms (71.2%) offer discounts or write off work performed prior to invoicing clients. About fifteen percent reported doing this often and more than half (55.7%) reported doing this sometimes. About one-third (28.8%) said they “rarely” or “never” discount work. Later

in this report, there’s an interesting twist when comparing past due accounts among firms that “often” and “never” provide discounts.

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Law firm discounts boils down to value

Rationales vary for discounting legal fees however there were two answers that seem starkly at odds.

A majority of firms (70.2%) say they discount invoices for relationship building purposes. On the other side, about one-third (29.1%) say they write off work in an effort to bring past due clients into good standing. While both strategies are examples of relationship

building, one path is rewarding their ‘good’ clients while the other is rewarding ‘bad’ clients.

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Discounts may play a role in timely payments

One of the most interesting findings from one cross-tab analysis was the parallel between discounts and past due clients. Those law firms that reported they never discount legal fees also reported substantially lower percentages of clients who allowed legal invoices to become past due. While the bulk of respondents answering this survey

tended to fall somewhere in the middle (absolute numbers are depicted on the Y axis), the stark contrast that results from comparing opposite ends of the range was compelling.

Percentage of past due clients

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How process-oriented are law firms?

Most small law firms (86.1%) say they have a standard billing process, but just about half of those have put that process in writing. Just 13.9% say they have no formal processes to standardize billing practices.

For the independent or solo attorney, an undocumented

process may work just fine, but in working with law firms we’ve found that problems begin to develop when a law firm grows. A law firm that grows from one attorney to five attorneys can easily find itself in a position where the billing process is being performed five different ways.

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How much time do law firms spend on the billing process?

Most small law firms (61.5% ) spend about eight hours per month on their billing process. About a quarter (24.3%) say they can spend up to 16 hours per month.

For many, even just one or two days per month on the billing process feels like too much time: More than half of law firms (58.3%) felt they were already spending too much time on the billing process.

This data point provides a useful benchmark for small law firms – that one or two working days per month is about what it takes for most law firms to complete their billing process.

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Most small law firms are using billing software

The vast majority of small law firms – nearly 80% use a software program to manage billing. A clear majority (66.7%) also indicated their law firm uses legal specific software and 64.6% said those programs included integrated accounting and billing.

Often software designed for law firms includes reporting features for performing financial analysis.

When law firms report, as they did on a previous question in this survey, that they have not analyzed their client base, they may have already purchased tools that automatically provide such reports and glean insights from them.

N = 246N = 309

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Final thoughts: Lawyers in their own words

The final question of the survey was an open ended question that asked: What one aspect if billing the law firm wished it could improve. The question earned 133 open ended responses. The word cloud nearby provides an analysis of the words most commonly used – where the larger the word appears, the more frequently it was cited.

Here is a sample of verbatim responses which in many ways effectively captures the sentiment around law firm billing:

• Streamline it, make it faster, easier, more efficient while maintaining high level of accuracy.

• The discomfort of past due billing discussions. Makes me feel greedy to call a client about a past due bill or to issue a written past due statement. Even if I know I've earned the fees charged, it is still an unpleasant task.

• Someone else who will do the billing because it takes all the fun out of practicing law to have to bill every minute.

• At my firm, the attorneys have to make collection calls to any clients that are late paying. I would prefer to have a staff member take care of that. I find it damaging to my relationship with my clients, and distasteful.

• I would love not to have to bill clients at all.

• Streamlining the process so it doesn't take so many steps, and so long to complete. For my solo firm I can easily spend an entire business day billing clients.

• Discounting bill rather than being paid what I am worth I'd make it easier for clients to pay me in ways that were convenient for them. Maybe it's more convenient for one client to pay me in small weekly installments, while it's easier for another to pay me a flat fee at the end of an engagement. I'd like to be able to be more flexible and allow the best payment structure for the client.

• Smart attorneys get the money up front. A wise mentor once told me when I was an intern, once you do the work the client is not going to pay. ‘If they can not pay you when they need you the most, they are not going to pay you when they no longer need you.’

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Are you peeking behind the curtain?

There’s nothing here!

Survey Methodology and Demographics

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Survey Demographics and Methodology

This study aimed to understand challenges and opportunities facing small law firms during the process of billing and invoicing. The survey was conducted online from July 23, 2014 to August 1, 2014 and distributed to the readership of a 3rd party media publication dedicated to helping lawyers build better practices. Respondents were required to identify as a practicing attorney or a legal professional supporting a U.S.-based law firm. Three hundred and nine (N=309) attorneys or legal professionals, from more than 16 practice areas, with broad representation from 47 different states and Washington, D.C., participated in the survey. Respondents were provided an incentive – a chance to be entered in a random drawing for one of 13 prizes – to complete the survey.

Demographics at-a-glance:

• Primarily respondents from small law. 95% of respondents reported working at firms with 10 or fewer attorneys; 75% of respondents identified as working at firms with 1-2 attorneys.

• Most respondents identified as practicing attorneys. 89% of respondents identified as a practicing attorney; paralegal (5%) and marketing or business development (1%) were the next largest categories.

• Wide array of practice areas represented. A small plurality (17.5%) of respondents hailed from family law practices; the top five areas represented included general law (12%), litigation (11%); criminal defense (8%); and corporate and securities law (7%). Notably 12% chose other and a sample of specialty areas listed included social security, tenant-landlord law and legal malpractice and ethics.

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Survey Demographics: Respondents by Role

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Survey Demographics: Respondents by Law Firm Size

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Survey Demographics: Respondents by Practice Area

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Survey Demographics: Respondents by Top 10 Geographic Location

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Additional Resources

• The LexisNexis PCLaw Resources Page:

• Blog post: Discounting Legal Fees Sends the Wrong Message

• Blog post: Top 10 Law Firm Collections Challenges and How to Solve Them

• Blog post: Infographic Friday: Billing Rates Up 4%, But So Are Discounts

• Blog post: Six Business Metrics Every Law Firm Should Measure

• Blog post: Seven Tips for Improving Law Firm Billing Efficiency

• Blog post: 3 KPIs to Make a Law Firm More Profitable

• Blog post: Inefficiency: The Silent Law Firm Killer

• Podcast: Un-Billable Hour: Law Firms, Invoicing and Collections

• White paper: Seven Secrets for Climbing Out of the Underearning Rut

• White paper: Driving Profitability Forward

• White paper: A Practice Owner’s Hierarchy of Tasks

• Case study: “PCLaw saves us up to 60% of the time it used to take to get bills out each month.”

• Industry survey: LexisNexis® Law Firm Billable Hours Survey Report

• Infographic: Where Do the Billable Hours Go?

• Social Media:

• Blog: Business of Law Blog

• LinkedIn: LexisNexis PCLaw LinkedIn Group

• Twitter: @Business_of_Law

• Facebook: LexisNexis Business of Law

• Google+: +businessoflawblog