It’s Q4 and for law firms, this means at least one thing: the end of year collections sprint is in full swing. This year just like the previous years, the pressure is on for law firm leaders as end-of-year collections continue to present a formidable challenge.
End of year collections are crucial for law firms because they allow them to maximize their revenue for the year, impacting profitability, partner distributions, and bonus calculations by ensuring outstanding invoices are paid before the year closes, which is especially important for meeting financial targets and managing cash flow throughout the firm.
The stats year over year, however, have not been positive. In 2023, the Am Law 100 experienced their lowest realization rates in five years—dropping to 80.93%, down from 82.2% in 2022 and 83.11% in 2021. Some firms even reported rates as low as 66.5%.
Here’s the thing: realization drops when collections cycle lengthen. The 2024 Citi Hildebrandt Client Advisory revealed that the collection cycle for law firms extended by 5% 2023, marking almost two years of steadily lengthening collection periods. This trend isn’t new. Thomson Reuters described the 2023 collections as "brutal," and projections for 2024 aren’t much better, with Williams Lea estimating an additional 3.7% increase in the length of the collection cycle.
Uncollected balances present a major hurdle at year-end, as a significant portion of revenue can remain tied up in unpaid invoices. This is compounded by difficulties in client communication, particularly when contact information is outdated or clients are unresponsive. The high volume of invoices generated in the final months further complicates the process, making it challenging to manage and follow up efficiently. Additionally, fee disputes can cause delays, as clients may question charges, leading to extended negotiations and postponing payments.
These numbers signal a critical need for law firms to rethink their strategies and adapt their processes to better manage end-of-year collections and maintain financial health.
In fact, at Oddr, we have been delving into some of these challenges and surveying law firms to get into the details of the process obstacles that might be at the root of all this – and here are some early results we are pleased to share.
A significant early result we are seeing is that the vast majority of firms (73%) are still manually billing clients by sending an email with a PDF attachment. Over 65% of these firms report struggling to know if the invoices have been sent and/or received by the client because once the PDF leaves the firm, the bill becomes a “black box” and the firm loses 100% visibility, cut off from knowing if or when the client even views the invoice--and nearly 55% have sent the wrong PDF to a client causing more delays and exposing the firm to risk.
Further, realization and collection cycles are inextricable. As the collection cycles lengthen (which is the case for over 30% of firms surveyed) because firms do not know what stage the invoice is in at the client, the discounting kicks in to accelerate payments.
And of course, all of this becomes severely compounded as the firm scrambles to get payment on aging invoices to close out the year.
To combat these process and revenue challenges, here are the top 5 actions firms can take to improve collections at the end of year:
1. Prioritize High-Value Accounts
Focus on the accounts with the highest outstanding balances or those that pose the greatest financial risk. This ensures that the firm maximizes its cash flow from larger clients first.
2. Implement Automated Reminders
Use automated systems to send out reminders for overdue payments. This saves time and ensures consistent follow-up, helping to reduce delays in client payments.
3. Offer Flexible Payment Options
Provide clients with a range of payment options, including credit cards, ACH, or installment plans. Flexibility can encourage faster payments, especially during the holiday season.
4. Engage Clients Early
Begin proactive outreach with clients well before the year-end. Discuss payment plans or settlements early to avoid the last-minute rush and ensure both parties have clear expectations. Provide self-service portals for clients to be aware of their past and current outstanding invoices. This superior experience encourages clients to pay invoices promptly and on time.
5. Leverage Modern Technology
There is now software that helps firms gain visibility into the invoice status at the client to empower the firm to be proactive in communications throughout the year to cut off the end of year bottleneck to begin with. Being proactive with communications all year long will revolutionize the end of year collections frenzy. On top of this, firms can now mine each client payment history to inform the firm of the expected payment date for every invoice, track anomalies, and target communications to prevent discounting.
End-of-year collections can feel like a relentless race against the clock, but by adopting a proactive and strategic approach, law firms can mitigate many of the challenges that come with this annual scramble. The data is clear: manual processes and lack of visibility are hindering firms from achieving optimal realization rates and timely collections. Implementing the right technology and strategies—such as prioritizing high-value accounts, automating reminders, offering flexible payment options, and engaging clients early—can transform this critical period from a stressful sprint into a manageable and efficient process.
The stakes are high, and the impact on profitability, partner distributions, and overall financial health is significant. Now is the time for law firm leaders to evaluate their current practices and consider modern solutions that streamline collections and strengthen client relationships. By leveraging these strategies, firms can not only improve their year-end outcomes but also build a more resilient, client-focused approach to collections that benefits them year-round.
