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Locking down lock-up - managing cash flows in law firms

Long delays in recovering fees has become an increasing a problem for law firms whose clients are caught in the credit crunch, most recently preventing FoxMandal Little in Delhi from paying some of its staff their salaries.

"Lock-up is a big issue for most firms these days in particular collections on long-overdue invoices," says Kerma Partners legal consultant Friedrich Blase in New York and adds: "It's become harder for firms to collect on the work produced."

Lock-up is a figure that combines work-in-progress (WIP) and debtor days, in effect giving a figure of how long it is before firms are able to bank the fees for the work they have done.

"Generally around the world as clients have got a bit tighter on cash they've been pushing up their payment and that creates back up problems on law firms," explains Alan Hodgart of legal consultancy H4 Partners. "Clients are just slow on billing."

He adds that if all the problems combine – slow billing from partners and associates, and clients holding bills back – you can hit lock-up of 6 months "without even trying".

"Firms should be running at about four months lock-up," Hodgart says, "but you do find through a combination of WIP and debtors, some US and UK firms are now running on six months."

A lock-up of six months effectively puts half of a firm's annual turnover out of reach and can lead to serious cash flow difficulties.

But driving the lock-up figure down is not easy.

"Basically law firms will work hard and push as hard as they can – but ultimately if the clients insists on pushing out the payments, there's only so much a firm can do," says Kerma Partners London consultant William Arthur. "You have to pull the levers that are available to you."

He explains: "It's not been easy and the issue has been as much as anything a behavioural issue, in far as getting partners and lawyers to do the right thing in setting up each matter and following up properly with the clients."

That includes putting pressure on individual lawyers and partners, perhaps in extreme cases even linking the billing cycle's length within a firm directly to partners' and fee-earners' remuneration, bonuses or other perks.

Hodgart suggests that one good way in which UK firms have managed to attack lock-up is by hiring internal credit controllers to chase clients' accounts departments for bills regularly after fees are invoiced. "Certainly that's been a major change in law firms – even eight years ago, partners would never hire a credit controller."

Luthra & Luthra used a combination of the above methods when it found its lock-up shooting up after the credit crisis and partners at several other Indian firms have confirmed to Legally India that lock-up increased since the start of the credit crisis.

"We noticed this thing about a year ago," relates Luthra & Luthra founding partner Rajiv Luthra. "It was a factor of two things – most boards of most companies have limits on who can pay how much – if you don't pay for three or four months, the bill has to go to the main board and that also ends up delaying the process a lot."

The firm therefore tried to bill more regularly and in smaller amounts.

Second, Luthra says that the firm also hired additional staff to deal with billings and accounts and instituted various other methods to encourage fee-earners to bill more regularly.

Handling lock-up is clearly one of the major challenges law firm managers face. And, in the absence of overdrafts or other finance from banks, it can become a serious problem for a firm - and its staff - if left unchecked.

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