Patrick Wackerly is a Portfolio Manager with responsibility for originating, executing and monitoring post-settlement legal finance investments.
In research, law firm leaders express concern about Q4 collections in the pandemic. Is this consistent with your experience in the market?
Yes, year-end collections are top of mind for most firms—and rightly so. According to Burford’s latest research, about half of in-house lawyers expect legal budgets to shrink because of the pandemic, and 59% say they will push for pricing discounts from outside counsel. Even without a recession, firms typically spend the last few weeks of the year encouraging clients to pay, sometimes resorting to discounts. In a recession, these challenges become even more common and urgent.
How will 2020 collection rates influence law firm success in 2021? Do you feel that they will have a bigger impact than in past years?
Law firms, like any other business, need capital to operate and grow. Whether firms want to invest in marketing efforts, open new offices, expand to new geographies or hire new partners, they need significant cash to pursue growth activities. Unfortunately, slower collections in 2020 can delay or derail these projects. With competition among firms intensifying, small differences in collection rates are likely to have an outsized impact not only on law firm operations next year, but also on competitiveness in the years ahead.
You have referred to collection issues as a cash management challenge. Can you explain what this means and why it so significant?
Law firms are a knowledge business: They operate on a cash basis, and their primary capital is human capital. Given that human capital can leave the firm at will, short-term cash management can have a long-term impact on firm health if revenue targets aren’t met. Thus, in today’s hot lateral market and competitive recruiting environment, cash management is necessarily a critical component of talent development and retention—collections happen to be a relatively controllable part of cash management thanks to the availability of year-end financing options.
What solutions have law firm leaders been seeking to offset recessionary collection challenges? Have these measures been successful?
Law firm leadership is focused on salvaging what is salvageable in 2020, but they’re not acting in desperation. Specifically, firms are shying away from client discounts as the band-aid solution, as law firm leaders understand that this incentivizes repeat bad behavior. Instead, many firms now demonstrate interest in finance solutions geared at collections challenges. And Burford’s year-end financing option has been receiving significant demand for several reasons.
- Year-end financing from Burford is neither a loan nor debt collection tool: The arrangement is a true sale with transfer of title.
- Burford stays hidden from the client: The law firm bills the client as usual, remitting payments as they are received.
- Burford takes the risk that the client doesn’t pay: The agreement is structured as a purchase, which allows the firm to book the advanced cash as revenue.
- Burford’s solution saves the firm time and money: By offering a one-stop-shop advance against an agreed-upon receivable basket, Burford can provide discounts at rate of around 5% (far cheaper than most direct client discounts).
At most firms, 2020 won’t be a banner year for revenue and profitability, but it doesn’t have to be a down year either—Burford’s year-end financing solution can help.
What advice would you give to law firms working to better manage cash in a downturn?
Our answer is simple: Don’t try to do it all yourself. As lawyers, your time and energies are more valuably spent practicing law and winning business. Where possible, look to value-adding partners to shift risk and generate capital. Year-end collections is a small but important component of cash management—and it doesn’t have to be hard.