New research from BigHand and Iridium (recently acquired by BigHand) has revealed the full extent of law firm profit leakage and firms lack of long-term cash flow process and real-time data to make sustainable change.
The research comes after BigHand’s recent announcement that it has acquired Iridium Technology and can now provide a single platform for law firms financial and operational data.
In August 2021, BigHand launched a survey and gathered 800 responses from senior legal finance roles, Managing Partners and LPM from law firms of 100+ lawyers in the UK and North America. Following on from the Pricing and Budgeting report in October 2021, this new report is focused on law firm cash flow trends, including:
• Aged WIP vs aged debt and law firm priorities to reduce working capital
• Identified areas of cash flow leakage affecting profits
• People and profitability – how law firms are building commercial cultures
• Financial data visibility and business intelligence technology
Firms have reported strong profitability following the pandemic, but as costs start to rise, firms’ ability to understand and address leakage will be key to achieving financial goals. The findings show that 98% of UK and NA respondents can identify areas of leakage that influence the firm’s profitability – from missing or late time entry, to lack of matter budgeting, not using the right level of resource to complete phases and tasks and discounting.
Firms are missing profit opportunities by prioritising revenue growth and failing to use information to unlock cash throughout the client engagement. The priority for firms is to improve the visibility of financial data (29%), underlining a growing recognition that firms need better, faster, trusted insight into KPIs if they are to achieve any long term, sustainable reductions in lock-up / inventory.
The findings also show the impact of the pandemic on working capital. In the UK 48% confirm aged debt has the biggest impact on cash flow, whereas aged WIP (48%) has the biggest effect for NA firms. These findings underline challenges not only in traditional cash management, but also new issues created by the pandemic.
When it comes to change, some plan to introduce more frequent billing (32%) more frequent collection (27%) and adjustment to billing terms (25%). More significant cultural change is on the cards too, with lawyers expected to improve billable time entry (26%). In addition, firms plan to create new processes for write-off approvals (29%). Furthermore, 31% plan to improve client communication throughout the matter to limit surprise bills and avoid the payment delays and write-offs associated with disputes.
Combining new financial expertise with fee-earner incentives is helping firms make the cultural changes required to achieve a more profitable business. However, lawyers still aren’t empowered with the information required to support their financial goals, with only 21% of partners and 13% of associates with access to billings information. This lack of up-to-date information for lawyers constrains both individual and firm-level ability to maximise profits.
The detailed report demonstrates how real-time business intelligence is now an imperative with 70% confirming plans to implement advanced legal BI over the next two years – a statistic that rises to 83% of CEOs. This reinforces the strategic importance of getting the right tools in place if firms are to truly achieve the cultural commercial shift required to increase profitability and deliver client value.
To find out more or access the full report, click here.